India could be a lead manufacturing destination because of the low costs of production and other factors. But it needs to focus on product development and innovation. This can run parallel to the Make in India campaign
The Prime Minister’s Make in India programme and the initiatives for improving competitiveness and ‘ease of doing business’ are indeed the right steps to take for the growth of Indian industry. After all, the ‘Make in China’ policy has made the Chinese economy grow at over nine per cent for the last 30 years.
Trying to emulate the Chinese growth, all countries today, big and small, are following a similar strategy and trying to attract investments in manufacturing. Different countries have different strengths. India’s greatest strength is its large and rapidly growing domestic market. The reality is that market conditions have changed completely in the last 30 years. In the current environment of extreme competition with an increasing shift towards anti-globalisation, outsourcing of manufacturing gravitates towards the least-cost destination and flies off when these costs increase. Hence, companies starting to manufacture in India are unlikely to pay any more than the basic minimum in wages prevalent in India — or anywhere else for that matter.
This is not to say that such manufacturing should not be welcomed; some income is always better than no income. But a dynamic and capable Government like ours may need to pursue a more rewarding model in parallel with Make in India, one which will produce greater inflows, leverage India’s special strengths and keep future growth potentials in mind.
Today, the imperative need of developed economies is for their companies to offer newer and more inventive products. They need to be able to come up with such products on a regular basis to stay ahead, and to manufacture and distribute them efficiently across the world, ensuring that there is significant profit generated. The two main hurdles involved in coming up with offering such products are: Shortage of good ideas and the heavy costs involved in their development.
The pattern of costs of this development process is special. Usually these costs follow the U- shaped ‘Smiley Curve’. At the top left of the curve, there is the generation of an idea and the development of a high-level concept product or prototype; these are usually carried out in the company’s headquarters, often in the US. Slightly lower down the curve is the formulation of detailed engineering plan of the production on which to base its mass production. At the bottom of the curve is its actual production, packing and shipping usually carried out overseas in a relatively low cost location such as China; on the right of the curve, as the curve rises, are marketing, sales, distribution and retailing — again normally carried out from company headquarters in the US.
The two top ends of the curve are where the money is. It is here that the greatest value additions are created — at one end in conceiving the product and in branding it, and at the other end promoting, retailing and distributing it across
the world.
These ‘end-functions’ attract the highest costs and in the process add the highest value and ensure a substantial profit — for example, a profit of around $80 on the wholesale price of $224 of a product like the iPod. The total cost of parts for the iPod can be around $144 and its retail price $299. The actual manufacturing operations are usually done very competitively at very marginal profits to
the manufacturer.
India is intelligent, capable and mature. It needs to look closely at the two ends of Smiley’s Curve if it wishes to attract money. There is tremendous capacity here for adaptation, because of which the coveted Deming Prize of Japan for managerial innovation has been awarded to Indian companies so many times. Highly educated overseas Indians are frequently involved in the development of many ‘concept’ products around the world.
Thus, it would fit in well if the focus of the Indian Government is on the growing Innovation and Innovative Products Development activities of industry, and in facilitating international companies to come to India to carry out the functions typical to the two ends of the Smiley’s Curve — at a higher level of efficiency than at home.
This would be a win-win situation. Few countries would be able to compete with India. The company would be able to carry out new product development efficiently in India at a fraction of the usual cost — eventually starting manufacturing, sales and distribution here to take advantage of the higher product knowledge that will be invariably generated. Indian counterparts of the foreign firms will receive significant financial inputs for the development of the products —and not just minimum wages that are associated with competitive manufacturing.
As for local companies, they will acquire advanced skills in cutting-edge technology which, will ultimately get transferred to domestic industry, causing it to become even more innovative.
(The writer is Trade and Industry Advisor to the World Bank, UNDP, UNIDO and the Commonwealth Secretariat)