GLOBALISING INDIAN

MANUFACTURING
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CONTENTS

EXECUTIVE SUMMARY ....................................................................................................................... 3

1. INDIAN MANUFACTURING - AN OVERVIEW ......................................................................... 5

1.1 Role of manufacturing in the Indian economy................................................................... 5

1.2 The sub-sectors that stand out in India's manufacturing sector..................................... 6

2. EXPORTS: THE FIRST STEP TO GLOBALISATION ................................................................ 7

2.1 India's growing manufacturing exports .............................................................................. 7

2.2 The main export markets: US, Western Europe, and the Middle East ........................... 10

3. GLOBALISING INDIAN MANUFACTURING ............................................................................. 12

3.1 The advent of SEZs: The leap to global markets................................................................ 12

3.2 Scale and innovation: Pillars of an effective global presence........................................... 14
3.3 Initiatives by Indian Manufacturers to internalise global best practices ........................ 15
3.4 Collaborations by Indian manufacturers with global players ........................................... 16
3.5 India and the global manufacturing value chain ................................................................ 17
3.6 Playing host to the world: Foreign investments in manufacturing .................................. 19
3.7 Government support to make Indian manufacturing world-class................................... 21

4. OPPORTUNITIES IN GLOBALISING: BRIEF INSIGHTS ......................................................... 22

4.1 Pharmaceuticals: Moving on to high-end drugs and clinical trials ................................ 22

4.2 Engineering goods: Building on existing strengths to go global ..................................... 22
4.3 Automobiles: Global hub for auto majors; new markets through innovations............... 23

5. CONCLUSION ....................................................................................................................... 24
EXECUTIVE SUMMARY

The Indian manufacturing sector has been on a strong growth spree for the
past decade. While the domestic market has been a key component of
growth, it is the global market that seems to have captured the imagination
of both domestic manufacturers and policymakers. Aided by strong reforms
post the liberalisation of early 1990s, the sector has been witness to rapid
innovation, participation of multinational giants in the domestic market,
global moves by Indian counterparts, and most importantly - rapid
movement up the value chain in sectors ranging from automobiles to
pharmaceuticals.

Exports are arguably the first step towards a global presence and India's
manufacturing sector is no exception. While textiles, and gems and
jewellery have been the country's strength, Indian firms have also been
exporting a wide variety of engineering goods and other high-tech products.
As Indian firms explore greater opportunities in both global and domestic
markets, they have constantly innovated - both in products and processes.
They have also not been hesitant in making acquisitions in foreign markets.
In their quest for a greater global presence, Indian manufacturing firms will
benefit from:

• Special Economic Zones (SEZs): SEZs offer various benefits to

exporters like tax incentives and infrastructure. Since the advent of
SEZs, India's exports - both manufacturing and overall have posted
strong growth
• Scale and innovation: While Indian firms retain their cost
competitiveness in a number of product lines, they have begun to
innovate and scale up in others. Indian firms have been increasing R&D
expenditure and technical collaborations with foreign firms

• Global Best Practises: To enhance their competitive edge, Indian

manufacturing firms have been increasingly resorting to international
best practices. These include advances in both technology and
processes

• Move up the value chain: Indian firms have moved up the global value
chain - from mere producers of intermediate goods to high-end
products. Engineering goods and automobiles are two key success
stories
For the above things to fall in place, foreign investments into the
manufacturing sector are critical. Over the years, increasing attractiveness
of the Indian market has lured investors from across the world. The country
was among the top five preferred destinations for Foreign Direct
Investment (FDI) from Asian, European and North American investors as
per The 2010 A.T. Kearney FDI Confidence Index. As manufacturing gathers
pace, FDI inflows are bound to increase further.

The Indian government has proactively aided the sector. A slew of

measures have been initiated at both the macro and micro level. Greater
investments in infrastructure and further reforms will aid this further,
making Indian manufacturing a global brand in itself.
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1. INDIAN MANUFACTURING - AN OVERVIEW

1.1 Role of manufacturing in the Indian economy

Manufacturing holds a key position in the Indian economy, accounting for nearly
16 per cent of real GDP in FY12 and employing about 12.0 per cent of India’s
labour force. Growth in the sector has been matching the strong pace in overall
GDP growth over the past few years. For example, while real GDP expanded at a
CAGR of 8.4 per cent over FY05-FY12, growth in the manufacturing sector was
marginally higher at around 8.5 per cent over the same period. Consequently, its
share in the economy has marginally increased during this time – to 15.4 per cent
from 15.3 per cent. Growth however has remained below that of services, an issue
that has not escaped the attention of policy makers in the country.

Strong growth has been accompanied by a change in the nature of the sector –
evolving from a public sector dominated set-up to a more private enterprise-
driven one with global ambitions. In fact, according to UNIDO, India (with the
exception of China) is currently the largest producer of textiles, chemical products,
pharmaceuticals, basic metals, general machinery and equipment, and electrical
machinery. In the coming year, the sector’s importance to the domestic and
global economy is set to increase even further as a combination of supply-side
advantages, policy initiatives, and private sector efforts set India on the path to a
global manufacturing hub.

Exhibit 1
Size of the manufacturing sector in India
9000 16.4
8000 16.2
7000 16.0
6000
15.8
5000
15.6
4000
15.4
3000
2000 15.2

1000 15.0
0 14.8
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Manufacturing sector (size in INR billion, constant prices)
Share in real GDP (%)
Source: RBI, Aranca Research

Globalising Indian Manufacturing 5

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Exhibit 2
Growth in real GDP, manufacturing, and services (%)
15
%
13
11
9
7
5
3
FY06 FY07 FY08 FY09 FY10 FY11 FY12

GDP Manufacturing Services

Source: RBI, Aranca Research

1.2 The sub-sectors that stand out in India’s manufacturing sector

Among sub-sectors in manufacturing, the top five are food products, basic metals,
rubber and petrochemicals, chemicals, and electrical machinery. Together they
account for over 66.0 per cent of total revenues in manufacturing. However, these
verticals rely primarily on domestic demand for a major part of their revenues. On
the other hand, metal products, textiles, and transport equipment dominate the
export scene with a share of almost 70.0 percent of manufacturing exports (2010).
Nevertheless, on a size basis, they make up only about 30.0 percent of total
revenues in manufacturing.

On a performance basis, there are a number of individual sub-sectors within

manufacturing that have outshone overall growth for the sector. An analysis of 121
sub-sectors by the Confederation of Indian Industry (CII) highlights this point. The
report reveals that in FY11 only five sub-sectors reported declines with most of
them recording strong growth; notable ones include machine tools, ball and
roller bearings, textile machinery, and utility vehicles – all of whom recorded
either ‘excellent’ (above 20 per cent) or ‘high’ (10-20 per cent) growth.

Globalising Indian Manufacturing 6

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Exhibit 3
Growth trend of 121 manufacturing sub-sectors

Growth FY11 FY10

Excellent (>20%) (41) (34)
High (10-20%) (26) (30)
Moderate (0-10%) (49) (23)
Negative (<0%) (5) (25)
Source: Confederation of Indian Industry (CII), Aranca
Research
Note: Figures in brackets indicate number of sectors

Exhibit 4
Key sectors fall in ‘excellent’ and ‘high’ growth areas

Machine Tools 51.0%

Ball and roller bearings 33.0%
Air conditioners 29.4%
Vehicle industry 28.2%
Textile Machinery 25.0%
Tractors 25.0%
Tyre Industry 24.0%
Utility vehicles 17.6%
Home and Personal care 12.0%

0% 10% 20% 30% 40% 50% 60%

Source: Confederation of Indian Industry (CII), Aranca Research

2. EXPORTS: THE FIRST STEP TO GLOBALISATION

2.1 India’s growing manufacturing exports

India’s manufacturing exporters have played a key role in promoting the sector’s
prowess to consumers across the world. While on one hand sectors such as
textiles, and gems and jewellery have been India’s brand ambassadors in global
markets since ancient times, the country has also made its presence felt in key
industries such as engineering goods and chemicals. In fact, analysis of India’s
export data for FY11 reveals that engineering goods had the highest share in
manufacturing exports (40.4 per cent), followed by gems and jewellery (25.2 per
cent) and chemicals and related products (17.2 per cent). Overall, total
manufacturing exports in FY11 grew to USD168.0 billion from USD115.2 billion in
FY10. The sector’s exports grew at a CAGR of 19.6% during FY03-11.

Globalising Indian Manufacturing 7

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Exhibit 5
Manufactured Goods Exports (USD billion)
180
160
140
CAGR: 19.6%
120
100
80
60
40
20
0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Source: Directorate General of Commercial Intelligence and Statistics,

Aranca Research

Exhibit 6
Components of FY11 manufactured good exports

1% 0% Engineering Goods

2% Gems and Jewellery

14%
Chemicals and Related
Products
41%
Textile and Textile
17% Products
Leather and Manufactures

Others
25%
Handicrafts*

Source: Directorate General of Commercial Intelligence and

Statistics, Gem & Jewellery Export Promotion Council, Aranca
Research. Note: *excluding Handmade Carpets

Globalising Indian Manufacturing 8

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Within manufacturing exports, engineering goods was one of the fastest growing
– the segment recorded a CAGR of 26.0 per cent during the period FY01-FY11.
Other sub-sectors with high growth rates include gems and jewellery and
chemicals, which grew at a rate of 18.6 per cent and 17.3 per cent respectively.
Within engineering goods, transport equipment led the field with a CAGR of 34 per
cent (FY01-FY10), followed by electronic goods (24 per cent) and machinery and
instruments (22 per cent). In the chemicals sub-sector, growth in exports was
primarily led by pharmaceuticals – exports rose 18.0 per cent during the stated
period.

Exhibit 7
Engineering goods exports
80 100

70 80
60
60
50
40
40
20
30
0
20

10 -20

0 -40
FY05 FY06 FY07 FY08 FY09 FY10 FY11

Value (USD billion) Growth - right axis (%)

Source: Directorate General of Commercial Intelligence and Statistics,

Aranca Research

Exhibit 8
Gems and jewellery exports from India
45 50%
40
40%
35
30 30%
25
20%
20
15 10%
10
0%
5
0 -10%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12P

Value (USD billion) YoY growth

Source: Gem & Jewellery Export Promotion Council, Aranca Research

Globalising Indian Manufacturing 9

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2.2 The main export markets: US, Western Europe, and the Middle East

The main export market for Indian manufacturing goods are the US and Western
Europe. Within Western Europe, Germany and UK are two of the most important
export markets. The Middle East is also a key destination for Indian goods with
the UAE in particular a major market for Indian gems and jewellery, engineering
goods and chemicals. The following exhibits highlight the main markets for
different Indian manufacturing products (in FY11).

Exhibit 9
Readymade garments (export share by country; FY11) %
U.S.A
U.K.
Germany
27.7 25.4 U.A.E.
France
Netherlands
0.2
1.2 Italy
2.1 11.3
3.6 Canada
3.8
6.0 9.4 Japan
9.3
Russia
Others
Source: Directorate General of Commercial Intelligence and
Statistics, Aranca Research

Exhibit 10
Chemicals and allied sectors (export share by country; FY11) %
U.S.A
China
16.8 Germany
U.K.
4.5 Netherlands
3.5
U.A.E.
3.1
59.4 3.0 Brazil
2.7
2.2 2.5 Russia
1.8 Italy
0.4 Hong Kong
Others
Source: Directorate General of Commercial Intelligence and
Statistics, Aranca Research

Globalising Indian Manufacturing 10

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Exhibit 11
Engineering goods (export share by country; FY11) %
U.S.A
U.A.E.
10.0 Singapore
5.9 Germany
4.3 U.K.
3.5
2.9 Sri Lanka
2.8 Malaysia
63.7 2.7
0.9 2.5 Italy
Bangladesh
0.8
Hong Kong
Others
Source: Directorate General of Commercial Intelligence and
Statistics, Aranca Research

Exhibit 12
Gems and jewellery (export share by country; FY11) %
0.8 0.4 U.A.E.
0.8 Hong Kong
2.4 1.1 6.6
U.S.A
1.1
Belgium
6.2
Israel
43.3
Singapore
13.3
Thailand
U.K.
Japan
24.0 Switzerland
Others
Source: Directorate General of Commercial Intelligence and
Statistics, Aranca Research

Globalising Indian Manufacturing 11

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3. GLOBALISING INDIAN MANUFACTURING

3.1 The advent of SEZs: The leap to global markets

The Indian manufacturing industry started with globalisation on a modest note in

1965, when the government advocated the Export Promotion Zone (EPZ) model to
encourage exports. Asia’s first EPZ was set up in Kandla in 1965. Seven more
zones were established thereafter. However, the zones did little to boost exports
due to multiplicity of controls and clearances, the absence of world-class
infrastructure, and an unstable fiscal regime. This led to the setting up of Special
Economic Zones (SEZs) in India which addressed the short comings in the EPZ
model and added new features like:

 No minimum export performance stipulation

 Units situated in SEZs are allowed to sell 100 per cent of their production
in the domestic market upon payment of full duty (unlike a ceiling of 50
per cent of exports for EPZ units)
 Retention of 100 per cent export earnings by SEZ units in Exchange
Earner’s Foreign Currency (EEFC) account (unlike 70 per cent for EPZs)
 Simplified customs and central excise procedure in SEZs

Currently, there are 143 operational SEZs in the country, concentrated mainly in
Andhra Pradesh, Tamilnadu, Karnataka, Maharashtra, Gujarat and Kerala.
IT/ITES related SEZs represent a major share of SEZs; followed by multiproduct
and other sector specific SEZs.

In India, SEZs have played an important role in facilitating exports, thereby

enabling the country to be a part of globalisation. During FY06-11, exports from
SEZs increased at a CAGR of 69.1 per cent to USD68.4 billion; annual growth for
FY11 was 43.1 per cent. Of this, 61.7 per cent share belonged to the manufacturing
sector. This sector contributed 92.4 per cent of the total exports from central
government SEZs in FY11. For state government or private SEZs established prior
to the SEZ Act (2005) and SEZs notified under the SEZ Act (2005), manufacturing
contributed 47.2 per cent and 58.3 per cent, respectively, to the total exports.

Globalising Indian Manufacturing 12

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Exhibit 13
Exports from SEZs in India (USD billion)1
75
66
60
46
45

30
21
14
15
3 4 5 7
0
FY09
FY04

FY05

FY06

FY07

FY08

FY10

Source: Directorate General of Commercial FY11

Intelligence and Statistics, Aranca Research

Exhibit 14
Share of manufacturing in exports from SEZs (FY 11)

Exports from

SEZs notified under SEZ Act, 2005 58.3%

State govt/pvt SEZs (est Pre-SEZ

47.2%
Act, 2005)

Central govt SEZs 92.4%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Source: Directorate General of Commercial Intelligence and Statistics,

Aranca Research

1
Conversion rate used is USD1 = INR46.11

Globalising Indian Manufacturing 13

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3.2 Scale and Innovation: Pillars of an effective global presence

In the past, India’s manufacturing exporters thrived primarily on the back of low
input costs. However, the low-cost story no longer is the prime driver of growth
due to rising wages, high energy costs, and increasing cost of capital. Given this
scenario, Indian manufacturers need to scale up and innovate their way through
competition. On an encouraging note, evidence of both is on the rise. Recently,
Indian manufactures have become more confident and have taken recourse to
inorganic expansion through ambitious global acquisitions. The key aim has been
to augment scale, make a presence in foreign markets, and access better
technical and management expertise.

Exhibit 15
Recent overseas acquisitions by Indian manufacturers
Year Acquirer Target Deal value (USD)
FY12 GVK Power Hancock Coal 1.26 billion
FY11 Tata Chemicals Ltd Cheshire Salt Holdings 13 billion
FY11 Mahindra & Mahindra Ltd Ssangyong Motor Company Ltd 463 million
FY11 Reliance Industries Ltd Pioneer Natural Resources 1.15 billion
FY08 Tata Motors Ltd Jaguar Land Rover 2.3 billion
FY06 Tata Steel Ltd Corus Group 7.6 billion
Source: Directorate General of Commercial Intelligence and Statistics, Aranca Research

According to MAPE Advisory Group, early indications are that the international
experience of Indian companies in carrying out deals has been quite good. Tata
Tea has successfully managed to integrate Tetley's operations with its own, and
has also restructured the acquired company's balance sheet. The buy-out of UK’s
BMS Laboratories has helped Dr. Reddy's in scaling up its European business to
the USD35–40 million range in FY06 from the target's business level of less than
USD10 million in FY02. Wockhardt's acquisition of Wallace Labs and CP
Pharmaceuticals in the UK and Esparma in Germany has helped the company in
building a profitable USD150 million-plus European franchise. The total
investment for these three transactions was less than USD40 million. Ranbaxy's
success and early mover advantage in the key US market has been credited to its
acquisition of Ohm Pharma in the mid-nineties. A similar example can be cited of
Sun Pharma‘s acquisition of Caraco in the US.

For e.g. Bharat Forge’s global success has been on the back of efficient
integration of multiple, global supply chains. The company has brought together
the supply chains of several loss-making organizations to create one single
coordinated, global, profitable system.

A study by Deloitte (2006) on Indian manufacturing firms and multinational ones

operating in the country highlights innovation as an underexploited strategy in the

Globalising Indian Manufacturing 14

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sector. The report points to R&D as an area of improvement, especially given the
strong growth potential for the sector. This is especially so given average annual
revenue growth of 20.0 per cent for the companies benchmarked by Deloitte.
India also has a marked competitive advantage in innovation with costs in the
segment about one-third of that in developed markets and amongst the lowest in
the world. Since the Deloitte report, Indian manufacturing firms already seem to
be marching ahead on innovations. According to Battelle, in FY11, India is
estimated to have made the eighth-largest annual R&D investment in the world
and its share in global R&D spending is estimated to have risen to 2.8 per cent in
FY11 from 2.6 per cent in FY10.

Exhibit 16
Recent investments in R&D by key players
Date R&D investment (implemented and/or announced)
IS R O announces setting up of spacecraft R&D center in
May-11
Chitradurga
Hi t ac hi to invest USD400 million to set up an R&D center in
Apr-11
Bangalore
Als t om earmarks USD39 million to establish R&D center for
Aug-10
power products
B r i dgewat er opens Center of Excellence for telecom software
May-10
R&D
Jan-10 Huawei allocates USD500 million investment for R&D center
Oct-09 Hyundai sets up R&D center at an investment of USD25 million
Tat a DoCoM o sets up R&D center for value-added services
Oct-09
(VAS) and mobile applications
L G Elec t r oni c s doubles its annual R&D investment outlay to
Jun-09
USD83 million
Source: India's Ministry of Science and Technology, India Electronic News,
Moneycontrol, Economic Times, Appliancemagazine.com, Business Standard,
company websites, Aranca Research
ISRO: India Space Research Organisation

3.3 Initiatives by Indian manufacturers to internalise Global Best Practices

Best Practises - Certifications

To enhance their competitive edge, Indian manufacturing firms have been

increasingly resorting to international best practices. For example, in the auto
industry, Indian firms have won a number of quality certifications by using
practices like 5S, Total Productive Maintenance (TPM), Total Quality Management
(TQM), and Just in Time (JIT). Consequently, the country is home to the highest
number of ‘Deming Award’ winners in the auto components sphere, outside
Japan.

Globalising Indian Manufacturing 15

………………………………………………………………………………………………………………………….........

Best Practises-Processes

In the auto components sector, Original Equipment Manufacturers (OEMs) have

also aided in achieving profitability and sustainability of suppliers and dealers
through guidance on financial aspects the business. Short-term financial aid is
often provided to financially vulnerable dealers and suppliers impacted due to any
slowdown in growth. At the same time guidance by OEM’s regarding production
schedules helps in reducing inventory pile ups with dealers, thereby avoiding high
inventory-carrying costs.

Best practises however are not restricted to a sector alone – they can be applied
across industries. Most of these practices involve sustainable cost reduction,
material sourcing, and purchase of capital goods, production scheduling,
transportation and delivery of products, warehousing, and ensuring product
quality. A few steps taken by some pulp and paper mills to adhere to global best
practices are noteworthy:

 Andhra Pradesh Paper Mills Ltd: Installation of Down Flow Solids

Cooking System
 Tamil Nadu Newsprint and Papers Ltd: Installation of ECF Alkaline
Extraction Filtrate Recycling, and chlorine removal (a low cost option)
from the ‘recovery cycle’

Notable steps have also been taken in the aerospace industry where all the
production divisions of HAL have ISO 9001-2000 accreditation, and 16 divisions
have ISO-14001-2004 Environment Management System (EMS) certification.

The Maruti Initiative

Maruti Suzuki, the leading car manufacturer in India, has set up a process to
identify business risks faced on an ongoing basis. This helps the company keep
abreast of ongoing changes in business environment. Risks are categorized as A,
B and C based on severity of the risk and the level at which it can be addressed
and monitored. Within each category, risks are further identified as
socioeconomic or environmental. Maruti Suzuki has also adopted the
Japanese ’Kaizen' philosophy, using it extensively for cost minimization, efficiency,
and productivity improvement. In the past, it has helped leading car producer to
offer quality cars, spare parts, and after-sales service at cost-effective rates.

3.4 Collaborations by Indian manufacturers with global players

Indian firms over the years have increased their collaboration with foreign ones as
they seek to upgrade their products and compete in both domestic and external
markets. Some of the key benefits of collaborations are as under –

Globalising Indian Manufacturing 16

………………………………………………………………………………………………………………………….........

 Gaining faster access to new technologies or markets

 Accessing technological expertise located beyond the boundaries of the
firm
 Leveraging the comparative advantage of each other
 Increasing the firm’s openness to its environment and stimulating
innovation
 Sharing the risks of R&D beyond the resources of any one firm

Technology imports through collaboration with foreign firms have enabled Indian
firms to bridge the technological gap and thereby expedite global integration. In
this context, liberalisation of the Indian economy is a watershed event. For
example, the total number of collaborations in 1991-2000 surpassed that for the
four decades (taken together) prior to that. Although examples abound of such
collaborations, those in two sectors are noteworthy.

In the auto components industry, in-house designing and testing capability is a

pre-requisite for being selected as a direct supplier to automotive companies and
large Tier-I suppliers. Liberalisation enabled the start of widespread collaboration
of Indian firms with global automakers and their suppliers. Such measures also
help Indian auto component producers to enter the global auto component value
chain.

In the construction equipment industry, high technology barriers had restricted the
growth of domestic firms in the pre-liberalisation era. Local firms used to
manufacture basic equipment using limited licensed technology from
international players. However, liberalisation allowed these companies to form
Joint Ventures with global majors who allowed them access to their technology. It
thus enabled local firms to build equipment with international standards and
thereby reduced the sector’s dependency on imports.

The Indian pharmaceutical industry is booming with new technology and advanced
drugs that meet industrial standards. This has been possible partly due to foreign
collaborations which have resulted into R&D centres with state-of-the-art
equipment. Foreign collaborations have also enabled Indian firms such as Biocon
Limited and Hetero Drugs Ltd to enter the international market.

Given the requirement of state of the art equipment and weaponry in the Indian
defence sector, the government is focusing on collaborations and joint ventures
with foreign original equipment manufacturers. For example, India is currently
partnering a Russian company, United Aircraft Corp. in developing the export
version of the fighter aircraft Sukhoi T-50.

3.5 India and the Global Manufacturing Value Chain

Prior to the 1980s, global manufacturing was dominated by large firms such as
GM, GE, IBM, Fujitsu and Hitachi. Majority of their manufacturing activities

Globalising Indian Manufacturing 17

………………………………………………………………………………………………………………………….........

happened within country and firm boundaries using proprietary architecture.

However, over time companies have increasingly become vertically segmented,
with each segment managed by a different company, perhaps in a different
country. This has led to a growing proportion of international trade occurring in
components and other intermediate goods. This fragmentation of production has
twin advantages for companies – they can diversify their risk by collaborating with
local enterprises (especially in emerging economies), and more importantly, pick
dynamic enterprises in partner countries to improve overall bottom lines.

Indian manufacturers have been moving up the global value chain, moving on
from mere producers of intermediate goods to high-end ones. The large share of
engineering goods in India’s manufacturing exports is a testimony to that.
Technological development is the key to tap opportunities higher up the
manufacturing value chain. Towards this end, Indian firms have been expanding
in-house research while moving on with acquisitions of global firms. Domestic
firms have also been taking cues from multinationals operating in the country.

A few sectors nevertheless are witnessing the emergence of sub-contracting. The

generic pharmaceutical sector is one example where firms such as Piramal
Healthcare and Jubilant Life Sciences are among the top ten global players in
contract manufacturing. According to Dun & Bradstreet, Indian pharmaceutical
companies possess the highest number of US FDA approved manufacturing
facilities outside the US. In addition, they lead in the filing of drug master files
(DMF) with the US FDA. This has facilitated the domestic pharmaceutical industry
to attract contract manufacturing opportunities in the rapidly growing generics
market, thereby moving up the global pharmaceutical manufacturing value chain.
Indian firms have also been entering into contract manufacturing of patented
drugs. Apart from pharmaceuticals, a clutch of other globally competitive Indian
firms (many in the auto industry) have moved into the global supply chain. For
example, Sundram Fasteners makes generator caps for General Motors while
Moser Baer is a global manufacturer of data storage media such as DVDs and
CDs.

Globalising Indian Manufacturing 18

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Exhibit 17
Up the global value chain: Path of progress followed by the Indian auto components sector

INDIA-BASED
GLOBAL SUPPLIER

DOMESTIC TIER 1
SUPPLIER

A global
DOMESTIC TIER
A large India- supplier
2/3 SUPPLIER
based auto operating
components across multiple
SMALL LOCAL Take advantage product types
manufacturer
ENTREPRENEUR of low-cost and
can focus on the
manufacturing in geographies
rapidly growing
A niche, small India in order to can serve as an
Indian OEM
entrepreneurial support domestic integrator and
market, exports
venture can focus on Tier 1 suppliers preferred
and the domestic
product innovation, and the domestic supplier to the
aftermarket
leveraging India’s aftermarket OEMs
abundance of high-
skilled labour at low
costs

Source: Aranca Research

Notes: OEM means Original Equipment Manufacturer

3.6 Playing host to the world: Foreign investments in manufacturing

Over the years, the increasing attractiveness of the Indian market has lured
investors from across the world. The country was among the top five preferred
destinations for Foreign Direct Investment (FDI) from Asian, European and North
American investors as per The 2010 A.T. Kearney FDI Confidence Index. In The
2012 A.T. Kearney FDI Confidence Index, India is positioned second in the world
with many developed and emerging countries lagging behind.

Exhibit 18
2012 FDI Confidence Index - Top 10 countries
Rank Country
1 China
2 India
3 Brazil
4 United States of America (USA)
5 Germany
6 Australia
7 Singapore
8 United Kingdom
9 Indonesia
10 Malaysia
Source: A.T. Kearney, Aranca Research

Globalising Indian Manufacturing 19

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Exhibit 19
Top 10 regional preference of investors (2010 – FDI confidence index)
Asian European North American
Rank
investors investors investors
1 China China USA
2 Vietnam USA China
3 USA India India
4 India Germany Brazil
5 Hong Kong Brazil Mexico
6 Indonesia Romania Poland
7 Brazil Italy UK
8 Australia France Canada
9 Thailand Poland Australia
10 UAE Russia Germany
Source: A.T. Kearney, Aranca Research, Note: Font in bold indicates
countries in the same region

At a more micro level, FDI inflows into key sub-sector of manufacturing have also
posted strong growth. The exhibits below highlight cumulative FDI inflows into
key sectors of the Indian economy and their shares in overall inflows.

Exhibit 20
Cumulative FDI inflows into key sectors (from Apr 2000)
12

10

0
FY08 FY09 FY10 FY11 FY12^
Computer Software & Hardware Telecommunications*
Housing & Real Estate Construction Activities#
Automobile Industry Power
Source: Department of Industrial Policy & Promotion; Aranca Research
* paging, mobile, basic telephone services; #includes roads and highways;
^ FY12 - (April - Feb)

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Exhibit 21
Share in cumulative FDI inflows (Apr2000-Feb2012)

Chemicals
Petroleum & Natural gas
Metallurgical Industries
Automotive
Power
Housing & Real estate
Computers
Construction
Telecommunications
Services
%

0% 4% 8% 12% 16% 20% 24%

Source: Department of Industrial Policy & Promotion Ministry of Commerce

and Industry, Aranca Research

3.7 Government support to make Indian manufacturing world-class

Recognising the potential of the Indian manufacturing sector and to make the
country a global hub, the government constituted the National Manufacturing
Competitiveness Council (NMCC), which includes industry leaders, academicians
and government executives. Apart from working with the industry and the central
government to address long-term problems facing the sector, the NMCC also
works with the individual states. The NMCC’s document on a national strategy for
manufacturing advocates a growth rate of 12–14 per cent for the next 10 years and
lists comprehensive action points towards this goal. The Council’s main objectives
include:

 Improve efficiency of operations and competitiveness of the Indian

manufacturing
 Provide better quality goods and services at affordable prices
 Increase India’s share of global trade and create more jobs

In keeping with the objectives of the NMCC, the government is also planning to
set up National Manufacturing and Investment Zones (NMIZs) to encourage
investments and thereby boost the share of manufacturing in GDP to 25 per cent
by 2022. While recognizing the fact that a major chunk of investments will be
flowing from domestic firms, the government has not been ignoring foreign
companies. Consequently, the government issued the new ‘Consolidated Foreign
Direct Investment Policy’, which came into effect from April 1, 2010. Further, in
FY11, the government eased norms for investments by foreign companies that are
present in India through a joint venture (JV) or a technical collaboration.
Accordingly, the foreign company will not have to seek a ‘no-objection certificate’
from the Indian partner for investing in the sector where the JV operates.

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According to PricewaterhouseCoopers, eased norms would augment the

confidence of investors who will no longer require their Indian partners’ approval.
Consequently, investors sitting on the sidelines are expected to move in, thereby
increasing FDI inflows into the country.

4. OPPORTUNITIES IN GLOBALISING: BRIEF INSIGHTS

4.1 Pharmaceuticals: Moving on to high-end drugs and clinical trials

The key players in the sector are Cipla, GSK, Ranbaxy, Sun, Zydus Cadilla, Alkem
and Lupin.

Strengths and notable trends

 Annual turnover of USD21.73 billion in FY10; ranks 3rd globally in terms of

volume and has a 10 per cent share (in terms of volume) of the global
market
 Enjoys comparative advantage in costs and has strong R&D credentials
 Produces about 60,000 generic brands across 60 therapeutic categories
and manufactures more than 500 Active Pharmaceutical Ingredients
(APIs)
 Has the highest number of US FDA approved manufacturing facilities
outside the US; Indian firms also lead in the filing of drug master files
(DMF) with the US FDA

Opportunities in key areas

Indian firms are currently focussing on the global generic and API business, R&D
activities, and contract research and manufacturing alliances. Other notable
opportunities in the sector both in India and abroad are:

 High-end drugs: Indian firms can building on successes in generic drugs

and API
 Clinical trials: Large and genetically diverse population in the country will
aid the sector; Indian firms then have the option to replicate successes in
the field and also in rural market penetration in other developing
economies

4.2 Engineering goods: Building on existing strengths to go global

Key players in the segment include BHEL, L&T, ABB, Siemens India, Cummins
India, Engineers India, Thermax, Kirloskar, Crompton greaves, and Bharat Forge.

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Strengths and notable trends

 The engineering goods sector accounts for 3 per cent of GDP with a 30.5
per cent weight in IIP
 Cost advantage due to economies of scale and low input costs
 Availability of skilled labour is enabling firms to move up the value chain;
India produces 0.4 million engineers every year

Opportunities in key areas

India’s engineering firms are thriving on strong economic growth and the
government’s growing emphasis on infrastructure. Opportunities for key
industries include:

 Electrical machinery: Increase in power generation will drive demand for

generation, transmission and distribution machinery. Opportunities will
also emerge in renewable energy and nuclear power in India and abroad
 Engineering process outsourcing hub: India enjoys a strong position in
automotive and high-tech telecom engineering services. With its talent
pool and existing expertise, opportunities could emerge in areas such as
aerospace

4.3 Automobiles: Global hub for auto majors; new markets through innovations

The key players in the sector are Maruti Suzuki, Tata Motors, Mahindra &
Mahindra, and Ashok Leyland.

Strengths and notable trends

 Annual turnover of USD73 billion in FY11 (22 per cent share in

manufacturing GDP)
 Enjoys comparative advantage in costs and has strong R&D credentials;
innovations include the world’s cheapest car – the Tata Nano
 India is the one of the world’s top three passenger car markets in terms
of growth
 Cumulative FDI inflows over Apr 2000 – Feb 2012 stood at USD6.6 billion
(4.1 per cent of total FDI)

Opportunities in key areas

India is all set to become a global manufacturing hub for automobile companies,
especially for small cars. Car majors like General Motors, Toyota, and Nissan
have already announced their plans to do so. At the same time, OEMs have
already lined up plans to make India a component sourcing hub for their global
operations. Other opportunities like in –

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 Global R&D hub: Both the government and the private sector (Hyundai,
Suzuki and General Motors) have been investing in developing R&D in the
sector
 Creating sizable market segments through innovations: Launch of the
Tata Nano has directed attention to the low-income market. At the same
time, other potential markets are emerging. These include gas-driven two
wheelers and electric cars

5. CONCLUSION

India started off as a predominantly agrarian economy. However, the share of

agriculture has since declined to give way to the services sector, which
contributes the most to the GDP currently. In contrast, the manufacturing
sector’s contribution to the GDP has remained range-bound for quite some time.
Considering the government’s efforts, the Indian manufacturing sector is
expected to substantially increase its contribution to the GDP in the next decade.
For this, Indian manufacturing would have to undertake globalisation on a
grander scale.

A higher share in global manufacturing compared to a decade ago signifies that

Indian manufacturing is moving in the right direction. Growth in the sector has
been strong, outpacing overall GDP growth over the past few years. With regard
to exports, the country has made its presence felt in key industries such as
engineering goods and chemicals. The experience of globally successful
companies underscores the fact that success depends on consistent innovation.
Considering that India has a marked competitive advantage in innovation with
costs about one-third of that in developed markets and amongst the lowest in the
world, it should build up on this advantage. This would help in moving towards the
manufacturing of high value goods.

India is well aware of the importance of increased trans-nationalisation of

manufacturing in economic development and job creation. In line with this, the
country has been setting up SEZs and encouraging foreign collaborations with the
aim of technology transfer. Today, India is among the world’s 10 largest
manufacturers and the country’s manufacturing prowess is set to grow even
further given its ranking as the second-most competitive country in the world.

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DISCLAIMER

India Brand Equity Foundation (IBEF) engaged Aranca to prepare this report and
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