Is India poised to become the next global manufacturing powerhouse?
Recent statements and initiatives attributed to Prime Minister Narendra Modi have some companies and investors excited about India’s future as a global manufacturing hub. However, poor infrastructure and bureaucratic inefficiencies are an ongoing challenge to business expansion. Despite these headwinds, Baird Capital sees compelling opportunities in Indian manufacturing, and we believe the country has the potential to emerge as a major player in global manufacturing.
While India is the world’s largest democracy, its political structure creates bureaucratic challenges that often impede business development. After facing years of alleged government corruption, Modi’s India is attempting to transform itself into an attractive market through business-friendly policies and initiatives. Any discussion of manufacturing in India will invite comparisons to China, and it is important to acknowledge their political differences. Beijing possesses very concentrated power and can directly intervene to stimulate infrastructure and business development. By comparison, India is much slower in attending to vital priorities. Its parliament is far less coordinated and less able to directly intervene in the Indian business community. Its leaders must answer to multiple constituencies and navigate conflicting priorities, which can slow or completely derail reform, policy execution and investments. These inefficiencies could present a significant challenge to new business and foreign investment.
Infrastructure: A Persistent Challenge
Infrastructure development is critical if India is to emerge as a global manufacturing powerhouse. The country’s network of roads, railways and ports simply cannot support its rapidly expanding population and trade demands. In comparison to other nations, India has fewer vessels and shipping lanes to transport and receive imported and exported goods. Combined with lagging export expertise, this leads to elongated order execution times. Supplier-to-port transport can take as many as 30 days. Water transport can take up to 40 days. In addition, the end-market customs process is frequently delayed due to clerical, tax or importer security filing (ISF) errors. These inefficiencies require companies to plan extensively when sourcing in India. Without improved lead times and export process expertise, companies may ultimately turn to other emerging markets for their sourcing needs.
The Competitive Advantage of India’s Workforce
The relatively young age, low cost and high education of the Indian workforce present attractive cost and efficiency incentives for companies seeking suppliers in India. The Central Intelligence Agency estimates India’s total workforce at more than 487,300,000 (2013 estimate). Not only is a significant proportion of India’s workforce university-educated and highly skilled, the country also has the advantage of the English language – an essential tool in the global economy and a unifying force in a country with hundreds of unique languages and dialects. Because India’s young talent pool is less experienced than other global workforces, companies can access it at a lower cost. In fact, Indian labor costs roughly 1/3 of Chinese labor, which has been increasing 20–25% year over year for the past five to seven years.
In Baird Capital’s meetings and experiences with Indian manufacturers, their commitment to quality and efficiency stood out as a significant asset. Best practices for lean operations, process adaptability and continuous improvement are evident in many facilities and backed up by performance metrics. Management turnover appears to be relatively low and skilled workers are available in major cities. Communication is more efficient than it can be in other regions because English is so prevalent. In many ways, these practices are stronger in terms of implementation and impact than plants in other parts of Asia, including China.
Access to capital and working capital also presents several challenges to companies seeking sourcing opportunities in India. In this respect, China has the advantage – Chinese suppliers generally require far less payment up front. In India, manufacturers may require as much as 50–60% prior to the start of production. Combined with the very real possibility of significant shipping delays, this can have a significant impact on cash conversion cycles for companies sourcing in India. Companies evaluating Indian suppliers should carefully consider these capital demands.
Near-Term Opportunities and Promising Players
Despite persistent bureaucratic and infrastructure challenges, Baird Capital believes India presents a variety of attractive sourcing and investment opportunities. We see components manufacturing as one of the most compelling opportunities for a “manufacturing India.” And we don’t believe such a development would threaten the current reshoring trend we’ve observed in developed markets around the world. Because the production of finished goods entails higher inventory and shipping weight costs, it will always be cost-advantageous to assemble components into finished goods closer to their end market. Components manufacturing is a complementary strategy in that it can be more flexible in terms of cost and geography. In fact, the reshoring of finished goods manufacturing back to the United States and other Western nations enhances the appeal of components manufacturing for companies in India and other still-emerging markets.
Several sectors and types of companies would be well-suited to a manufacturing India. Companies with smaller volumes and frequent changes in orders (high-mix, low-volume) are consistent with India’s process-oriented mindset and would likely flourish in a manufacturing-powerhouse India. Younger companies and niche players with this mix would also be well-suited. Sectors that would complement a manufacturing-dominant India include specialty manufacturing and low-labor content spaces such as stamping and casting.
To Enter the Market or Not?
While there are promising investment and business development opportunities in India, investors should tread carefully if they plan to enter the Indian market in the near future. The Indian government must support and provide sufficient infrastructure to support business operations. If India’s leaders continue to support infrastructure improvements and adopt pro-business policies, we believe India will continue to be attractive to companies with a global mindset. The country could also emerge as a strong player in multi-country strategies.
At Baird Capital, we allow our investment processes to drive us to the best market for sourcing. Several of our current portfolio companies source in India, and we support their development by leveraging our global platform’s expertise, investment experience and relationship network. This structure provides us with local, on-the-ground perspective that enhances our team’s global expertise and enables us to drive value for our investors.