Only Quality And Tech Can Help MSMEs Win

Top CEOs at the Outlook Business Smart Enterprise event debate whether Make In India is a threat or opportunity for MSMEs 

Published 8 years ago on Jun 15, 2016 15 minutes Read

N MAHALAKSHMI: I am sure you have heard this story. Two people are sent to a village to find out if there is a market for shoes. One comes back and says nobody wears shoes so there is no market. The other comes back and says nobody wears shoes so there is huge potential and we should go and capture the market. India’s story is somewhat similar. A couple of years ago, people would say China was way ahead in manufacturing and India had missed the bus. But ever since Prime Minister Narendra Modi initiated the high-decibel ‘Make in India’ pitch, talks are now centered on how to crack manufacturing. Companies are talking about making it their central agenda. But the fact is that things are never as good as they are made out to be nor as bad as they seem. India has huge local market potential, but when large companies come, their suppliers and feeder industries follow. More so in today’s environment when growth is tapering in other parts of the world, foreign suppliers are looking to come and set up in emerging markets such as India. Is ‘Make in India’ then an opportunity or a threat for Indian companies? 

JANMEJAYA SINHA: There will be competition wherever you go in the world. But competition only strengthens existing players. I see ‘Make in India’ as a huge opportunity. Not just because of the initiative, but because of the state of the global economy and China in particular. India is already some spaces above China in terms of high quality manufacturing. We have a fair amount of skill and are good with manufacturing small lots but mass scale manufacturing is modest here. There is a need to expand at all levels. And the time is just right with older manufactures moving up the value chain, leaving gaps for SMEs and MSMEs to fill.

PAWAN GOENKA: ‘Make in India’ increases the size of the pie and that’s an opportunity. But it also makes it a little bit harder to occupy a position in that pie. For MSMEs, it means they have to compete with the best when it comes to quality, technology etc. If you go back a generation, contracts came through relatives and friends. But that doesn’t happen anymore. Today, they have to earn their business, which is why the above two factors are important. My customer is not going to forgive me just because I sourced from an Indian MSME. On the other hand, if MSMEs can prevail on the quality and technology front, they can win big not just in India but also tap exports. 

SANJEEV SHARMA: When it comes to the contribution of MSMEs to the economy, we still have a long way to go. For example, in Germany, SMEs contribute 52% to the economy. In India, it’s only 38%. Germany has 4 million enterprises that export goods worth $250 billion. We have 48 million, who export goods around $120 billion. So looking at it from the consumption angle and mere potential, the opportunity is huge. 

At ABB, we have a SME participation rate of about 35%. From our point of view, as we push for more localisation and indigenisation, there are opportunities to be captured by the SME sector. The only thing is they should also be able to innovate. And to sustain, MSMEs must engage in skilling by running internship programs. 

N MAHALAKSHMI: At best it is an opportunity. Worst case, even if it is a threat, it could be turned into an opportunity. But what is the way forward? There are always questions when it comes to cost and quality. Mr Uppal?

RAVI UPPAL: There was a time when India’s economy was growing at a modest pace. For manufactured goods, the demand was very low. But now the economy has started to grow, especially the demand for industrial goods. This should help local producers. We have the competence, the knowledge and the raw materials, most of the things needed to become a competitive manufacturer. We just need some government support. The Modi government has started to enable local companies manufacture goods, which should help our image. 

Germany and China are called manufacturing locations whereas we are known as the knowledge capital or software capital. Nobody acknowledges us as a production player. That’s the kind of image we must shed. Indians are very competitive by nature and that can translate to manufacturing too. We just need to be a more innovative, adhere to global standards and optimise the value chain. The automotive sector has done that exceedingly well. We need to replicate that in case of other industries too. There’s also a need to differentiate between engineered goods and commodities. Commodities need the right kind of support during the formative years. We have to ensure that a repeat of the steel crisis doesn’t occur. We saw how some countries engaged in practices that literally forced the closure of the Indian steel industry. That’s the kind of thing we need to watch out against. 

Then, take the power generation industry. Between 2009 and 2014, 80% of the power generation sets came from outside India. We can talk about becoming competitive but you also have to enable the industry. China does it. America does it. They always do what is good for them and their local players. We have to take a leaf out of their book in this context. 

SRINIVASAN DWARAKANATH: I am emphatic that it is an opportunity. If you look at the aerospace industry, there are no OEMs making aircraft in the country. Yes, it’s a slightly different ball game compared to let’s say the automotive industry. Today, at Airbus we have say 6,800 aircraft to deliver, that’s approximately 10 years of backlog. But we are looking at expanding our supply chain. For the last 10 years we have been developing suppliers, with 40-45 of them being in India. We selected them not because of some offset obligation but looking at South East Asia, North East Asian countries as well as the Indian market. Out of the 45 suppliers we chose, about 80% of them are SMEs and MSMEs. So these companies can compete globally.

What we are looking for in these partnerships is quality and cost, more so quality as some aircraft accidents can happen because of something as small as a fastener. So quality is non-negotiable but we are also asking them to look at innovation. We want them to come back with innovative methods and see what they can bring to the table. Overall, there is lot of scope for SMEs in the aerospace segment. 

N MAHALAKSHMI: Mr Agarwal, Micromax has grown in a very short span. You started off with a low priced proposition and slowly graduated in terms of quality. How hard was the transition?

RAJESH AGARWAL: Our story, the kind of devices we produce and how they are consumed in India is why I say that ‘Make in India’ is a great opportunity. Mobile phones are a $20-billion industry and India has a population of 1.2 billion people. This alone demonstrates the potential. Which is why the electronics industry, especially mobile manufacturers, are upbeat about the initiative. 

Coming to Micromax, we started as a small organisation back in 2008. The business model then was based on imports. But over the last couple of years, we are looking to produce out of India. The ecosystem is still not fully developed. But even the automotive sector took 10 years to reach that stage. We should reach there in the next three to four years. I always say that when it comes to crude and commodity imports, we don’t have a choice. But electronics is the third biggest forex consumer. In this case, we definitely have a choice and ‘Make in India’ in electronics is a great opportunity. 

N MAHALAKSHMI: But all the three factors — land, labour and capital — are expensive in India. With these macro conditions, how do you succeed? At the company level, there are many things you can do. But when you look at the overall economy...

JANMEJAYA SINHA: First, I don’t think that labour is expensive. And land is not really that much of a cost in manufacturing. What is really expensive right now is capital. We are the only country in the world that has real interest rates. Everyone is borrowing money abroad and investing it in India. If you look at it, last year, $51 billon of FDI came in. Globally, India is one of the few places that is drawing interest. Our economy has quintupled in the last 15 years, and spending is only going to grow. Moreover, companies such as Mahindra are coming out with products built for the Indian market.  

N MAHALAKSHMI: But labour costs are clearly not as competitive as China. In the case of textiles, you have Bangladesh, Philippines and other markets…

JANMEJAYA SINHA: In textiles, we have messed up our trade agreements. So we need to take our factory to Vietnam or to Ethiopia to export. That’s a problem and a policy failure. Earlier, the ease of doing business was a problem, but that’s getting better. Yes, getting land clearances are an issue and something we need to look at, but companies need to operate in different environments to sustain. China is also a difficult market in some ways. For instance, we talk a lot about the corruption in India but there is a lot of corruption in China too. There are constraints everywhere in the world. India is no exception. Right now, the cost of capital is unnaturally high and a huge headache.

N MAHALAKSHMI: Mr Goenka, you are considering setting up a manufacturing base in China for SsangYong Motor to cater to the local market there. You have seen Korean manufacturing and Indian manufacturing. How do the three countries compare in terms of costs and capabilities? Where does India stand?

PAWAN GOENKA: We talk a lot about ease of doing business but that’s what I call hygiene and doesn’t automatically translate into ‘Make in India’. Among other things, we also need to focus on the cost of doing business in India. We talked about labour, land and capital. I agree that capital is a problem but land and labour can’t be ignored either. The labour costs in India are growing very rapidly compared to other countries. But in spite of that, the overall labour cost still forms a very small part of the overall product cost, especially in case of capital intensive industries such as automobiles. So, for us, labour is not the immediate worry. But if we are not careful, it could become a problem in the future.

Continuing the same point, consider Korea. It has amongst the highest labour costs in the world, even higher than most European countries, certainly higher than the US. Yet Korea exports more than half of their automotive output to the world. Why? It’s because of the technology they have developed over the years, the efficiency they have built into their plants. Nothing ever fails. In five years of working with SsangYong, there was not a single day where the output was one vehicle less than what was planned. That’s the strength and that’s how the cost of doing business is much lower even though the labour cost is much higher. 

In the case of China, when the manufacturing infrastructure was set up, it was done with state support. Therefore, individual companies didn’t have to worry about ROI. Moreover, there is no Wall Street or stock exchanges to worry about . So, they are able to set up infrastructure way ahead of demand. And the cost of capital is almost half that of India. If you combine these factors, the cost of doing business is much lower. The taxation is lower. So, China’s pricing power is much better than India’s when it comes to exports. 

The three countries that we are comparing have different strengths. We cannot copy a China or Korea or Germany. We have to create our own model. In my view, our strength lies in our frugality. Frugality not just in terms of what we can do on the plant floor, but what we can do with engineering. How we can bring frugal innovation into manufacturing to produce goods that are competitive than Korean or Chinese products. Finally, it is not any rhetoric that is going to make ‘Make in India’ work. It is what I am able to produce at what cost. And if you can’t do that at a competitive cost, ‘Make in India’ won’t happen.  

N MAHALAKSHMI: Mr Agarwal, you have set an audacious goal of developing 100% ‘Make in India’ phones by 2017. The ecosystem in China is already set. They have got the mobile phone prices to as low as they can get. To replicate the whole thing in India seems like a tall order. What is the incentive for you to do this?

RAJESH AGARWAL: The size of the Indian market is the biggest incentive. Whenever we have looked at other countries, we have realised that the potential is huge in India compared to any other country. Second, electronics manufacturing (mobiles) has just started in India. It is not just a great opportunity for industries but also for boosting employment in the country. We want to manufacture all products we want to sell in India by 2017. The biggest roadblock for this is that we need to develop design capabilities. If we can reach the stage where China and Korea is in this aspect, we won’t be second to anybody. So, we are investing in design capabilities and manufacturing bases across the country. Over the next two years, most electronics, at least mobiles, will have a local production base. 

N MAHALAKSHMI: Mr. Dwarakanath, you have also set yourself a fairly ambitious goal of increasing outsourcing from $400 million to about $2 billion over the next 4-5 years. How are you going about it? How big a challenge is it considering we don’t have the requisite competencies in India yet?

SRINIVASAN DWARAKANATH: You are right about that. When it comes to the aerospace industry, if you go back 10-12 years, we had public sector units such as HAL and other research establishments working on that. But they hardly developed the supply chain. About 10 years ago, we started working with HAL. We also talked to a lot of private players. Some of them thought it was a good idea to be in the aerospace industry because of the good margins involved. Companies such as Dynamatic and Quest wanted to enter the segment, saying that labour is cheap and they already have a presence in the automotive segment. But that’s not enough. What’s important is the total cost of running a business. In this segment, cost is just one equation. Quality and consistency in terms of delivery are more important. 

Over the last 10 years, people have looked at the low hanging fruit — built to print. Companies from the automotive space want returns in 3-5 years but that’s not possible in this industry. Not surprisingly then, they too started with build to print. But the real value will only come when we design and build. It’s only then that you can innovate and value-add. Then, cost becomes a secondary issue. That’s why we are looking at developing suppliers across the product life cycle. In India, it’s still a very nascent industry. It took 25-30 years for western countries to develop the entire aerospace ecosystem.

We are also looking at vertical integration. Right from making assemblies to detailed parts to materials, and not just for India. Over the next 4-5 years, we should have a reasonable supply chain to do this. But I don’t think we can really develop the complete ecosystem in the time span. We are still about 10-15 years behind for that. But we are on the right path and ‘the government’s Make in India’ push should help plug gaps quicker.  

N MAHALAKSHMI: As far as the capital goods industry goes, where are we on the localisation curve? When you look at the cost capability matrix, you said in power generation, 80% of the equipment came from outside India. Over the next 5-10 years if we have to build infrastructure, and I am sure lot of equipment would be needed, there will be a lot of demand for capital goods. So how much runway do we have?  

RAVI UPPAL: The manufacturing sector in India can be described as a sunrise industry. Our share has been so miniscule that we can really grow. But when we talk about manufacturing in India, it shouldn’t be restricted to local companies. We should also invite multinationals to set up a base here. Local entrepreneurs are of course most welcome to set up their own capability and manufacturing. It should essentially be a free ground for everyone. However, multinationals should not be allowed to indulge in unethical practices such as dumping or predatory pricing. In the power space, 50-60% of the total energy equipment produced in India is by multinational companies. 

We have made a good beginning in some sectors. The automobile sector has shown that the right policy framework can help a sector. The same thing is true of industrial commodities. Seven of the top 20 steel making units worldwide are Indian. What helped us here was that since we started late, we adopted best-in-class technologies. Besides, the private sector focused on value engineering and producing commodities at the lowest cost. 

As far as the capital goods sector is concerned, I think India has made steady progress. I see a great future as the volumes of the goods and services produced by the capital goods sector starts to rise. 

N MAHALAKSHMI: What is the one message that you want to give to small entrepreneurs? The one thing they should focus on to become successful?

SANJEEV SHARMA: I would say they need to have a lot of self-confidence. I think that’s the starting point. Over the last two or three decades, we have create companies that are respected globally. India has also done well on the services side. 

The global economy runs on cycles. You had space for the UK, then Europe and the US. They were followed by Japan, Korea, China. I believe the macroeconomics are stacking in favor of India now. So it’s up to us what we make of it. 

JANMEJAYA SINHA: In short, SMEs and MSMEs need to increase productivity and impart skills besides working on quality and consistency.

PAWAN GOENKA: I would say that cost can’t be a sustainable distinguishing factor. To really compete and grow, one has to move up the quality and technology ladder. Without that there is no future. 

RAVI UPPAL: The government has started to focus on the ease of doing business. That will reduce the cost of capital, which I think is a big deterrent for many private players. But more support from the government is needed. Startups must be encouraged not only in the IT space but also in the conventional space. A bunch of young graduates can setup an IT enterprise. But how many of them can setup a cement plant or a power plant? We need to think of creative ways to draw young talent into the conventional industry and drive innovations.

SANJEEV SHARMA: I too think there should be innovation alongside ‘Make in India’. Because without innovation the government’s initiative is not sustainable. Another thing is that pricing can’t be the only unique selling point of the business. It can be the icing on the cake, not the distinguishing factor. Most people try going that route and find out that they were wrong.  

SRINIVASAN DWARAKANATH: For the aerospace industry, 80% of the supply chain involves MSMEs and SMEs so there is massive opportunity. But the message to these companies is that you are not too small to innovate.