Manufacturing in India – Insights from Ground Zero

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Manufacturing in India is driven by India’s changing demographics and consumer story. A large portion of the population is poised to move to the middle income segment thereby opening new markets that weren’t there before. On the other side, changing lifestyles and necessities are key enablers of growth in existing markets.

India’s opportunities and challenges in manufacturing have been long debated for now. But insights on how things are being done at the grassroots are often buried in these discussions. This is serious matter for new companies – in the Tier 2 and 3 segments – looking at India as their investment destination.

This article attempts to cite some of our experiences in helping manufacturing companies – mostly French – on their India Entry.

People and Culture

Getting the right set of people to work in India is a key challenge. Relationship and trust building can take more time or may be even hard to come by. This is reflected right across vendors to customers, partners to consultants, and employees to government officials. Some of these challenges can be mitigated to a certain extent by minimizing exposure during initial courses. In core sectors like manufacturing, some institutional relationships needs to be nurtured for reasons that protect the larger interest of the Company. For eg: Labour unions can ring fence the risk of attrition during the critical setting up stage.

Conflicting Interests

Short term objectives overarch the general Indian mindset. Indian businesses look for quick money out of investors from outside. On the contrary, our clients are desirous of building long term business networks. Getting these interests aligned can get serious than what it may look on paper.

Ethics and Work Culture

In general, Indian employees are adaptive and agile. But there are significant differences in the way people see work and life. Values and priorities are often different. Manufacturing companies continue to follow a hierarchical management style; giving less room for collaborative work or team play. A majority of India’s employable work force in manufacturing lack long term career objectives. Personal interests pulldown Companies’ interests in most cases. Executives and other senior management personnel, on the contrary, are ambitious and ethically sound. They are key to business sustenance and growth. Hiring and retaining key people is thus a mission critical task.

Labour – Cost, Skill and Potential

Cost of labour is a yardstick to manage efficient manufacturing costs. Labour cost is location specific. Finding skilled labour is an unfound blessing. It would be extremely dangerous to overshoot the market by paying more. This often happens when one ends up comparing what’s being paid to a technician to a five-star dinner with family! Labour unions need to be comforted, managed and pampered as and when required. There is immense potential for skill development and building R&D teams here by taking advantage of cost arbitrage.

Corporate Structuring & Moving Capital

Like any other country, India has its own capital regulations. Investing and repatriating money requires making appropriate disclosures to Reserve Bank of India (RBI) and other authorities. Thus, it is always important to understand on structuring finance to Indian subsidiaries. There are a number of alternatives to securing finance other than by equity. Project funding can be also infused by way of External Commercial Borrowing (ECB) or local borrowings. Repatriation of profits and equity capital has certain restrictions under Indian Foreign Direct Investment (FDI) regulations and Company Law, and is coupled with attendant tax leakages. Given this, there are some viable debt alternatives which foreign entities can explore to finance their Indian affiliates, earn some interest and receive back the money in due course.

Regulatory Framework

India has always been a land of mystery in many ways and the legal and administrative system is no different. Understanding the Indian system is one of the keys to establishing a successful business in India. There are numerous rules and regulations such as Exchange Control Laws, Corporate Laws and Sector Specific Laws that need to be complied with. Even as these regulations exist in one form or the other outside, some requirements here may lead to unwanted scepticism. Submitting ID proofs, for instance, may sound like an invasion to one’s privacy but that’s called for under various regulatory protocols.

Challenges are Multifold; Ways Out are Manifold

Dealing with Government Authorities & Agencies

The discourse on bureaucracy and red tapism affects a lot of decisions, right from filling out forms to applying for various licenses/approvals thereby greasing a lot of palms even for simple nod-offs. State governments are now competing to draw an end to these deep rooted practises. One such initiative is the single window system. However, transitions have been cumbersome. The are numerous approvals required for setting up a manufacturing base in India. Most of these approvals are for limited periods and need be renewed. Unless meticulous counsel is being offered, availing the approvals under this initiative is tedious.

IP Protection

Intellectual Property Rights continues to be a grey area with many ifs and buts. This is mainly in the context of any dispute that may arise in case of infringement. Manufacturing companies need to develop processes and systems that reduce such exposure of IP or other critical aspects of competitive advantage.

Dealing with Vendors

Cultivating a win-win relationship with vendors is an indispensable essential. In the past, vendor management was simply the department that bought goods and services. But now, it is of key strategic importance. To effectively reduce supplier risks, whether in terms of operations, unforeseen cost implications, or regulatory compliance, increased visibility is a prerequisite. Supplier information, track record, qualifications and even the vendor’s financials need to be investigated to assess various risks. Loyalty and trust building is earned and not granted. There are cheaper and better avenues for sourcing in India than from the home country.

Possibilities are Endless

Core Teams

Most manufacturing companies – in Tier 2 and 3 segments – often move in with their global customers and restrict doing business only with them. They are less inclined to build business development teams here. This outlook needs to be changed by drawing examples from larger companies who’ve managed to grow their domestic accounts by building core teams here.

Taking Advantage

Technology will have a significant role to play in transforming India’s manufacturing canvas. Some of these companies – in the segments that we’ve highlighted – have superior technical advantage over their Indian counterparts. Players in niche sectors need to leverage on their IPs to address a rapidly evolving market regardless of their scale of operations in India.  

Growth by Investments

Use of surplus

Some of our earlier clients are seeing improved margins and shorter runways to breakeven. Over the years, we foresee accumulated profits to pile up in their balance sheets. Taking money out of India can be the least tax-efficient way to realize value to shareholders. Thus, it becomes equally important to put these funds to use. Opportunities to make acquisitions in India are abound. For clients, it is a way of consolidating businesses in certain markets. On the other side, it helps unlock value that’s been accumulated inside these opportunities resulting in a win-win for all.

Following Precedence

Companies that’ve grown rapidly are now actively looking at acquisitions as part of their larger growth strategy for India. In fact, some companies have moved up the ladder to even make bets on path-breaking startups by making high risk growth investments.

New Initiatives

Goods and Services Tax

The rollout of GST is a boon to manufacturing. Even as transitions proved costly during the initial few months, long term benefits are bound to accrue. There is considerable reduction in friction inside the system. Already manufacturing units – even in unorganized segments – are seeing a reduction in logistics time by about 30% to 35%. This saving will translate to more supply of trucks thereby reducing transportation costs. As payments and settlements get streamlined, manufacturing units may realize better cash flow positions.  

Other Development Oriented Transitions

The Government is ambitious and positive about curbing corruption at various levels. There are many initiatives – the single window system for time bound approvals, digital filing, et al. – set in this direction to establish processes that make regulatory matters more transparent. The new face of Indian bureaucrats is also a welcome gesture. Governments – both at the Centre and State – are appointing merit based young and dynamic cadre for leading organizations of critical of economic and business policy matters.

The Road Ahead

India is an attractive hub for investing in the manufacturing sector. With impetus on developing industrial corridors, the government strives to inculcate holistic development by chalking out a road map which will further assist, integrate and develop a conducive environment for manufacturing. In the long run, these initiatives coupled are bound to deliver significant value for foreign companies and their shareholders.

 

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