INTERNATIONAL BUSINESS

Understanding the Rise of

Manufacturing in India
by Vijay Govindarajan and Gunjan Bagla
SEPTEMBER 18, 2015

When many executives think about

manufacturing, China is the first country that
comes to mind. But there are other players
grabbing a bit of that spotlight like India.
Despite the conventional wisdom that says
Indias place in the global economy revolves
around digital bits and services rather than
material atoms, the country is starting to
attract more attention for its manufacturing
potential for a number of reasons: India is the
third-largest economy in purchasing power
parity after the U.S. and China, it has a large
population of engineers and factory workers,
its intellectual property is widely respected,
and it is easy to find English-speaking
managers there.

While Narendra Modis Make In India

initiative to promote manufacturing in India
was mocked by some, North American executives are increasingly looking to expand their

manufacturing supply chains beyond China. To decide if India is a good candidate for your
operations, its important to understand the opportunities of doing business in the country
as well as the challenges.

American success stories in India

While American companies are only starting to explore Indias potential for manufacturing,
were already seeing a few examples of how these efforts can be successful. For example,
Chicago-based Abbott, which operates in 150 countries and owns top brands such as Similac
infant formula, recently built a manufacturing facility in Jhagadia, Gujarat, in order to
compete in Indias large branded generics market. In 2014, its 14,000 employees in India
generated $1.09 billion in sales. This is largely because it manufactures products that reflect
the local environment (to deal with spicy Indian food, it sells the antacid Digene), and are
widely used there (to manage aches and pains, most Indians are prescribed Abbotts Brufen
when they want ibuprofen). It also adapts some its products to meet local expectations for
example, the plant caters to Indian mothers by manufacturing a version of the popular kids
nutritional supplement PediaSure that is flavored with saffron and almonds.

India was one of the first expansion markets for Abbott, after Canada and the U.K, and today
its the companys third largest market globally all six of the companys business units have
a presence in the country. Last year, we signaled that India is a key manufacturing
destination for us with a $75 million investment, Abbott Vice President Bhasker Iyer told us.
It is one of the fastest growing markets globally with a young population, strong
macroeconomic indicators, a huge consumption story, and a politically stable government
working to accelerate reforms. For a healthcare company, the reasons to be part of this vibrant
country are even more compelling its an opportunity to serve the unmet healthcare needs
of a 1.2 billion population.

ABBOTTS NEW $75 MILLION FACTORY IN GUJARAT STATE. COURTESY OF ABBOTT.

While Abbott does not currently export its products from India, the U.S. company Cummins
does manufacture its engines, generators, and turbochargers there to export across the globe.
India is hugely important to the companys revenue stream, and Cummins India is only one of
eight operations they have in the country. According to its latest investor presentation,
Cummins India exports grew at 14% annually over the last five years and now constitute 40%
of sales. The company has 20 manufacturing plants in India, compared to Abbotts three, and
one-sixth of Cummins 54,000 worldwide employees currently work there.

Another company planning to boost exports by manufacturing in India is GE. Among the nine
factories it has in the country, its new factory in the city of Pune serves as a global supply
source for a number of its diverse businesses, from aviation and turbo machinery to wind
turbines and diesel locomotives. In the future, manufacturing will be far more decentralized.
But decentralization poses a challenge to the concept of economies of scale, said Banmali
Agrawala, President for GE South Asia.]The Pune factory helps solve this challenge. The

company plans to send half of the output to GEs global factories and the other half to the
domestic market in India. And it was recently announced that CEO Jeff Immelt is headed to
India again this month, in part to assert support for manufacturing in the country.

GES NEW PLANT IN MAHARASHTRA STATE WILL EXPORT HALF ITS PRODUCTION. COURTESY OF GE.

While our success stories have focused on large companies, opportunities for manufacturing
in India are open to smaller entities, even ambitious startups. Former Texas Instruments
engineer Lou Hutter, now CEO of the startup Cricket Semiconductor, is raising $1B dollars
(largely from investors of Indian origin) to build Indias first analog chip fabrication (fab)
facility. Hutter and his partners hope to be located in the middle-sized city of Indore in
Madhya Pradesh, where the Chief Minister has offered free land and a stable supply of water
and electricity. Most fabs produce digital microchips that power modern electronics. But
these digital devices must also interface with the analog real world in useful ways. The
analog fab is much more aligned with Indias strength in automotive and industrial sectors,
according to Hutter.

Overcoming challenges
While these companies show the potential of manufacturing in India, they can also illustrate
the challenges western companies face when doing business in India. For example,
Cummins biggest obstacle was navigating a difficult land acquisition process and complex
government regulations. Land ownership is often opaque, and re-zoning from agricultural to
industrial use has been fraught with peril and delays.

The first step to overcoming these challenges is to understand India as a collection of states,
rather than one monolithic entity. Its the states that are working to help companies establish
their manufacturing facilities, and four have made significant recent advances. For example,
the state of Madhya Pradesh has implemented a single online registration for business
licenses to replace the complicated system businesses previously had to go through: 61
different registers operating under 13 separate federal labor laws. The state has also
systematized the inspection process. Before, a barrage of inspectors would show up at
companies without notice and slow down production; now the state has implemented
process where inspectors come once every five years, and have to give advance notice.
Meeting these challenges also requires a ground-up evaluation of your companys needs in
order to match them to Indias opportunities and current capabilities. If you dont have inhouse knowledge or resources, you may wish to consult state-based officials or engage a third
party advisor.

Another challenge is that historically, India has regulated companies ability to fire factory
workers, making it especially difficult for larger companies. While this was aimed at
protecting jobs, one unintended consequence was that many factories stayed small to avoid
increased regulatory burden and many others try to show their workers as contract labor.

Western companies also dont have to build their own manufacturing facilities; they can rely
on Indian factories. While advising American corporate clients, one of us (Bagla) found that
Indian suppliers can be globally competitive in manufacturing items as diverse as manhole
covers, automotive components, and even personal care cosmetics, which shows how Indias
manufacturing sector is advancing beyond bits.

The takeaway
Just two decades ago, most Western executives thought of Ireland or Central America as the
place to outsource software and business processes; today, we believe that Indias knowledge
worker base rivals those two destinations combined. We dont expect Indian manufacturing
to go head to head with factories in China, Japan, the United States, or Germany any time
soon. But top executives who wish to diversify their supply chains should no longer only
consider India as a supplier of software and call center services. Manufacturing is the next
frontier in India, and companies such as Abbott, Cummins, and GE have already proven that
the countries resources hold tremendous potential.

We believe that western CEOs should follow Jeff Immelts lead and begin including India as
part of their global supply chain. While there is no single formulaic answer to manufacturing
success in India, patience and a trusted local partner or advisor to guide western executives
efforts are necessary as well as an understanding of the challenges.

And from Indias perspective, manufacturing is probably the only way to lift half a billion
more of its population out of poverty. If Prime Minister Modi is able to inspire those around
him to unlock Indias land and labor for manufacturing, domestic and global corporations will
accelerate this transformation.

Vijay Govindarajan is the Coxe Distinguished Professor at Tuck School of Business at

Dartmouth and a Marvin Bower Fellow at Harvard Business School. He is the lead author of
Reverse Innovation (Harvard Business Review Press, 2012).

Gunjan Bagla is Managing Director of Amritt Inc, a California consultancy that advises
American companies on doing business in India and the author of Doing Business in 21st
Century India (Hachette, 2008).

This article is about INTERNATIONAL BUSINESS

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6 COMMENTS

Rick White

12 hours ago

Very good article that illustrates the possibilities of manufacturing in India and the efforts being made with
both the central and state governments to make it easier to invest FDI in manufacturing. Challenge is for new
companies to have the patience to build the capabilities and supply chain of the Abbots, GEs and automobile
industry. Too many get frustrated with the lack of immediate success. Companies must understand that it is
much more of a marathon to success than it is a sprint with immediate impact--but with that approach can be
very successful and companies should not shy away from India.
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