Five Investments India is Making to Become China's "Plus One" in Manufacturing

Apple is in the news today for announcing that they will create manufacturing capacity in India to produce 25% of the world’s iPhones from there.  Apple is acting on a trend with other multinationals to reduce reliance on China as their primary manufacturing source.  The COVID-19 pandemic and geopolitical events such as the Russia-Ukraine war have vividly illustrated the fragility of the world’s supply chain.

India is one country that’s been working hard to become China’s Plus One and improve its attractiveness as a manufacturing hub.  Currently, manufacturing contributes 17% of the GDP.  The government’s goal is to expand manufacturing to 25% of GDP by 2025.  Below are five investments India is making to attract foreign investment and build domestic manufacturing capacity.

Investment #1: Production Linked Incentives (PLI)

The PLI schemes provide economic incentives to foreign companies, like Apple, to set up manufacturing facilities in India.  It also provides incentives to domestic Indian companies to set up or expand manufacturing capacity to increase employment and reduce reliance on imports to meet domestic demand.  These schemes are targeted at 14 key sectors including electronics, pharmaceutical drugs, and medical devices.  In exchange for investing in plants, machinery, and R&D, the government is providing various incentives for up to five years.

Investment #2: Special Economic Zones

India has approximately 270 Special Economic Zones (SEZ) to attract Foreign Direct Investment (FDI).  These SEZs give favorable tax treatment to companies setting up manufacturing sites.  Often, these zones are targeted at specific industries to develop manufacturing clusters.  As an example, Pune attracts about 20% of India’s FDI with a concentration in automobiles and durable goods.  Pune also serves as an engineering R&D hub for companies such as Tata Motors, Volkswagen, and Visteon.

Investment #3:  Road Infrastructure

India is focused on improving road infrastructure with agencies such as the Ministry of Road Transport and Highways (MoRTH) and the National Highways Authority of India (NHAI).  India’s roads support over 60% of freight transportation in the country.  In FY22, India completed over 6,200 miles (10,000 kilometers) of roads, up significantly from previous years.  Much of that has been built under the Toll-Operate-Transfer model where India builds the highways and then monetizes them by selling the right to operate the roads and collect tolls.  Companies like Canada’s Brookfield Asset Management are providing the capital for this monetization process.  The Indian government has even gone digital with the deployment of a Project Management and Data Lake cloud-based software used to manage the bid and execution process of all contracts.

Investment #4: Shipping Port Infrastructure

The Indian maritime sector accounts for 95% of export-import trade by volume.  Like roads, India has been actively working to build port capacity through the use of Foreign Direct Investment.  The Maritime Vision 2030 initiatives seeks to attract foreign investment to build and operate ports under long-term contracts.  A central component of the Maritime Vision 2030 is the creation of four mega-port clusters.  These will come in the states of Gujarat, Maharashtra, Tamil Nadu, and West Bengal-Odisha.  Key features will include port automation, seamless movement of cargo, and paperless transactions to create standard processes and provide access to real-time information for port management.

Investment #5: Human Capital Development

According to a 2020 World Bank study, India’s Human Capital Index places it 116th out of 174 countries.  The index measures a variety of factors including projected life expectancy and quality of education.  India’s population skews younger, with 65% of the population under 35.  As part of the challenge to develop skills to compete, India has a partnership with the World Bank to improve education quality.  Additionally, private companies run programs to further improve skills after completion of education at the university level.

Conclusion

India is not alone in its desire to take manufacturing from China.  Other Asian countries like Vietnam, Thailand, and Malaysia are also ramping up to compete.  However, India is making serious commitments to increase its global competitiveness and become a central part of the world’s manufacturing sector.

The Impact of Rising Trade Restrictions

Rising trade restrictions between countries can have significant economic and geopolitical implications, leading to a range of key issues that affect various stakeholders. The International Monetary Fund (IMF) has an interesting article out this month in Foreign Affairs in which they argue that the world is moving in the wrong direction by increasing the number of trade barriers.

According to the latest International Monetary Fund projections, annual global GDP growth in 2028 will be only three percent—the IMF’s lowest five-year-ahead forecast in the past three decades, which spells trouble for poverty reduction and for creating jobs among burgeoning populations of young people in developing countries. - International Monetary Fund

Since the Global Financial Crisis in 2008, growth in world trade has more or less leveled out, what some have described as “slobalization”. While the growth in trade has been slowing, the nature of trade is also morphing. In light of the Covid pandemic and the Russia-Ukraine war, countries are reevaluating which trading partners can be counted on in difficult times. This “friendshoring” movement will reduce supply chain risks, but also impact the cost of goods and services, with developing countries much more likely to feel the brunt of reduced trade and global growth.

Countries perceive trade restrictions as working in their best interests, but this is a short-term view. I’ve written elsewhere that India would do well to rethink its trade restrictions, including taxes on imported sub-components for the assembly of mobile phones. This is just one example where lessening trade restrictions would eventually lead to longer-term economic growth, with millions of Indians benefiting from a broad and efficient manufacturing economy.

Countries should be thinking about the following issues before they erect even more trade barriers:

• Economic Impact: Trade restrictions, such as tariffs, quotas, and import/export bans, can hinder the flow of goods and services across borders. This can lead to reduced economic growth and lower consumer welfare. Industries that rely heavily on international trade might face challenges in accessing foreign markets or sourcing necessary inputs, which can disrupt supply chains and lead to higher production costs.

• Price Increases: Tariffs and other trade barriers often result in higher prices for imported goods, as the cost of complying with these barriers is passed onto consumers. This can lead to inflationary pressures, particularly if the affected goods are essential or inputs for other industries. For Western countries, moving supply chains to “friendly” countries will almost surely have the impact of rising prices from both labor and materials.

• Reduced Competition: Trade restrictions can limit the level of competition in domestic markets, as they protect domestic industries from foreign competitors. While this might offer short-term advantages to domestic producers, it can lead to complacency, decreased innovation, and reduced efficiency in the long run.

• Global Value Chains Disruption: Modern production processes often involve components and materials sourced from different countries. Trade restrictions can disrupt global value chains, causing delays in production and increased costs as companies search for alternative suppliers. In an example like rare earth metals, there are relatively few countries that have these materials. Countries, and companies that need these materials for production will have to find a way to deal with these countries, even if they are deemed “unfriendly”.

• Retaliation and Trade Wars: When one country imposes trade restrictions, its trading partners might retaliate with their own restrictions. This tit-for-tat escalation can result in a trade war, where both sides suffer economic losses, reduced trade volumes, and increased uncertainty.

• Impact on Developing Countries: Developing countries often rely heavily on exports to drive economic growth. Trade restrictions can limit their access to global markets, reducing their ability to generate income, create jobs, and improve living standards.

• Global Economic Uncertainty: Rising trade tensions and protectionist policies can create uncertainty in global markets. Businesses might delay investment decisions due to the unpredictability of trade relations, leading to reduced economic activity. Already, many companies including Apple are looking at a China Plus One manufacturing strategy, given the geopolitical risks of dealing with China.

• Inefficiency and Resource Misallocation: Trade restrictions can lead to inefficient resource allocation as countries are forced to produce goods domestically that could be produced more efficiently elsewhere. This can result in a waste of resources and reduced overall economic output. It may also result in the misallocation of human resources, where domestic resources could be involved in higher-value activities if low value activities where outsourced to other nations.

• Neglect of Multilateral Agreements: Increasing trade restrictions can undermine multilateral agreements like the World Trade Organization (WTO), which aim to promote global trade cooperation, reduce barriers, and resolve trade disputes. A disregard for these agreements can weaken the international trade framework.

• Geopolitical Tensions: Trade restrictions can exacerbate geopolitical tensions between countries. Economic conflicts can spill over into political and security issues, making it more challenging to resolve international disputes.

According to the IMF, over the long term, trade fragmentation—that is, increasing restrictions on the trade in goods and services across countries—could reduce global GDP by up to seven percent, or $7.4 trillion in today’s dollars, the equivalent of the combined GDPs of France and Germany and more than three times the size of the entire sub-Saharan African economy.

Rising trade restrictions for goods and services between countries can create a range of negative consequences, affecting economic growth, consumer welfare, global cooperation, and geopolitical stability. It's important for countries to carefully consider the potential drawbacks of protectionist policies and to seek avenues for constructive dialogue and negotiation to address trade-related issues.

Questions:

• What do you see as the primary negative consequences of increasing trade restrictions?

• Do you think there are positive benefits that outweigh the negative consequences outlined above?

• How do you think companies should balance Foreign Direct Investment (FDI) against national interests?

Let us know your thoughts in the comment section.

India Leads the World in Wage Hikes

An article from Industry Week discusses the double-digit wage hikes employers can expect to hand out.  According to the article, wages are set to rise almost 13%.

An excerpt:

At the fastest pace in the world, Indian corporate salaries are set to grow by 12.9% this year and will keep rising at this level for up to five years, a consultancy forecast on March 8.

Indian wage growth slipped to an average 6.6% in 2009, the survey said, but quickly moved up the following year to 11.7% as India shed the effects of the global economic downturn.

"We expect Indian salaries to grow by 12% to 15% over the next four to five years for sure," Sethi said.

Continue reading India Sets World Record for Double-digit Wage Hikes.

Indian commerce group pushes back on the implementation of IFRS

The Federation of Indian Chambers of Commerce and Industry (FICCI) is pushing back against the Indian Ministry of Corporate Affairs (MCA) on the adoption of IFRS.  As of now, the MCA wants Indian businesses with a net worth of Rs 1,000 crore to convert to IFRS by April 2011.

As FICCI notes, the standards are still being developed and it doesn't necessarily make sense to implement the standards when they are still undergoing revision.  While they're at it, they're also pushing back on the possible requirement that companies will need to produces parallel statements according to both Indian GAAP and IFRS.

You can read the full article at: Ficci demands delay in implementation of IFRS

Genpact plans to double US headcount in 2-3 years

A number of India-based companies have made no secret of their desire to break the mold of an "Indian only" company.  Many have established country presences in the U.S., the U.K. and elsewhere.  In a recent news article, The Hindu Business Line reported that Genpact plans to substantially add to their headcount in the U.S.  

An excerpt from the article:

Offshore BPO major Genpact is planning a major ramp-up of its ‘onsite' presence by doubling the US workforce to 2,000 professionals in the next 2-3 years. It currently has about 1,000 professionals in the US, across functions such as revenue cycle management, mortgage processing and loan modification.

“This whole area of business process management and driving improvement in business processes will demand more onsite presence, more domain-specific capabilities and very high-skilled re-engineering capabilities. I think we need to be closer to our customers when we do this kind of work. So we are very comfortable from a business model and demand perspective, with regard to our hiring plans in the US,” the Genpact President and CEO, Mr Pramod Bhasin, told Business Line.

You can read the full article here: Genpact plans to double US headcount in 2-3 years

Extreme Offshoring: IT Edition

India's Business Standard is reporting that Infosys is looking at moving IT work from outsourced contracts from the U.S. to India in response to rising Visa costs.  Per the article, Infosys has the ability to offshore 95% of its work.

An excerpt from the article:

Against the backdrop of a clampdown on visas by the US and growing antagonism towards foreign workers and immigrants in that country, Infosys Technologies, India's second-largest IT services firm, is mulling an ‘extreme offshoring’ model to help reduce its dependence on H1 and L1 visas.

“There is a cost element (due to the visa fee hike) to what is happening now and there is a philosophical or directional element. The cost is no doubt increasing, but it is manageable. But it is more about what it indicates. If there a build-up of negativity in sentiment, we have to prepare ourselves (for extreme offshoring) if need be. However, as long as unemployment remains high, the negative sentiment will continue, unfortunately,” Kris Gopalakrishnan, CEO and MD, Infosys Technologies, told Business Standard.

You can read the full article here: Infosys plans 'extreme offshore' model to tide over visa crisis

India and ASEAN seek to liberalize trade

The Hindu is reporting on an upcoming economic summit between India and ASEAN (Association of Southeastern Nations).  At the top of the agenda for is a liberalized trade agreement that will create greater access to ASEAN member nations for Indian professionals.  However, no all member nations are on-board as they are concerned about dominating their markets.

An excerpt from the article:

After signing a free trade pact in goods last August, India and ASEAN are engaged in talks to widen the agreement to include services and investments at the earliest. Indian officials had earlier indicated that the negotiations would be wrapped up by end of this month.

The official, however, admitted the pace of talks is slow as there are some differences.

“ASEAN members are not ready to liberalise services where India has interest,” he said, adding that some of them are apprehensive that India, which is the world’s second fastest growing economy, would end up dominating their markets.

During the meeting, Commerce and Industry Minister Anand Sharma is likely to press for more access for Indian professionals in the ASEAN market.

India, which has expertise in areas like finance, IT and education is eager to enter the vast services market of the south-east Asia. Similarly, the ASEAN members are eyeing India’s growing contract services area and tourism.

ASEAN consists of of Malaysia, Singapore, Vietnam, Myanmar, Thailand, Bruni, Cambodia, Indonesia, Laos and Philippines.

Here the link to the full article: India, ASEAN trade ministers to meet in Vietnam on Aug 26

Would you like research with that?

I've previously written about the desire of Indian companies to move up the value chain from a back-office transaction processor to a value-added business partner.  An article about the pharmaceutical giant AstraZeneca illustrates the point.  They recently signed a contract with Cognizant Technology Solutions to provide electronic support for AstraZeneca's research efforts.  This includes the hiring and training of clinical investigators.

The article puts it this way:

Pharmaceutical giant AstraZeneca has signed a $95m (£47m) deal with Indian outsourcing firm Cognizant to provide electronic support to its research and development (R&D) operations.

The five-year contract will require Cognizant to provide a range of services, data management planning, medical coding, and the training of clinical investigators.

The agreement is part of AstraZeneca's wider plans to improve the effectiveness of its R&D projects, according to Anders Ekblom, vice president of clinical development.

“Delivering efficiencies through reshaping our business is one of our key strategic priorities,” said Ekblom.

The article notes that the two companies had an existing relationship as Cognizant has been supporting AstraZeneca globally.  Companies will continue to look to outsourcers like Cognizant to help "deliver efficiencies through reshaping our business".  Companies like AstraZeneca understand that the use of selective outsourcing can greatly facilitate that goal.

Here the link.

India's Newest Challenges

Quick.  Who is India's largest tech services provider?  Wipro? Infosys? Tata?  Turns out it's "none of the above".  The largest provider of tech services in India is....IBM.  Business Week has an interesting article on the challenge of India's largest tech companies to transform themselves from purveyors of relatively inexpensive back-office processes to truly global companies.  While companies such as Wipro, Infosys, Tata, Cognizant and others have focused on every major country except India, companies like IBM and Accenture have been actively building their services to Indian companies. 

The Business Week article puts it this way:

The writing is on the wall: India's vaunted technology companies must upgrade their business model or face dwindling profits and market share. At the annual conference of Nasscom, the powerful Indian software association, currently under way in Mumbai, the buzz has centered on one topic: When will Indian tech companies grow discontented with being no more than happy back-office campers and start behaving more like their global counterparts IBM (IBM) and Accenture (ACN)?

Given India's determination and talent, I'm pretty confident that the country's top companies can move to the next level.  It will be intersting to see how this transformation takes place and over what time frame.

You can read the full article here.

India Outsources Outsourcing

Here's an article that made me laugh.  The International Herald Tribune has a story about a new outsourcing trend.  Some of the largest outsourers in India, such as Infosys and Tata Consultancy Services, have begun setting up operations around the world to outsource some of their outsourcing work.  Part of it is cost.  Salaries in India have been rising rapidly due to the great demand.  But part of it is about finding the right language and technical skills wherever they might exist.  An excerpt from the article:

One of the constants of the global economy has been companies moving tasks - and jobs - to India, where they could be done at lower cost. But rising wages for programmers here, a strengthening currency and companies' need for workers in their clients' time zones or for workers who speak languages other than English are challenging that model.

At the same time, India is facing increased competition from countries seeking to emulate its success as a back office for wealthier neighbors: China for Japan, Morocco for France and Mexico for the United States, for instance.

Looking to beat back these new rivals, leading Indian companies are opening back offices in those countries, outsourcing work to them before their current clients do.

In an era of globalization, work will continue to be outsourced to the locations that offer the right skills at the right price.  Who knows, maybe even the US will pick up a few jobs.

You can read the full story here.

Will India Dominate Knowledge Processing?

I suppose it was inevitable.  With large numbers of educated, English-speaking professionals, India has already made huge inroads into the Business Process Outsourcing (BPO) market.  Now comes a story from The Times of India about the growing Knowledge Process Outsourcing (KPO).  According to the article, the KPO market will grow just under 40% a year through 2011.   Of the $16.7 billion (US) market by 2001, India would account for $11.2 billion.

You can read the full article here:

http://timesofindia.indiatimes.com/India_to_dominate_global_KPO_market/articleshow/2227383.cms

Strong Rupee Impacts Indian IT Salaries

An article in The Times of India discusses the impact of a strengthening Rupee on the Indian IT industry.  After years of strong salary increases, Indian IT and BPO companies are moving to slow the growth of salaries.   The story puts it this way:

Salary cost is by far the biggest component of cost, accounting for 45% of IT companies' costs and 40% of BPO costs. With many mid-size and small IT/BPO firms seeing a fall in profits in the Q1 of this fiscal, and most larger ones witnessing a sharp slowdown, varied options are being considered to keep the salary component under check or to get more work out of each employee.

After years of unprecedented growth, Indian companies are finally having to look at how they deploy resources.  It is no longer sufficient to hire large numbers of employees.  Wage increases are causing companies to rethink their personnel strategy and compensation programs:

Says Gangapriya Chakraverti of Mercer India, "Variable pay will come up in a big way. Compensation related to productivity and contribution will take over. Companies will have to be careful about headcount. They will no longer have the luxury of maintaining a large talent pool that's sitting idle." Such pools are maintained to provide for attrition or to use in the event of the firm suddenly bagging a big project.

Rupee's rise is expected to hit BPO employees harder than IT. Unlike infotech, where 30% to 50% of employees work on-site and paid in dollars, in BPOs, 90% of the work is done in India and employees are paid in rupees. "Mid and senior level executives in BPOs have been getting increments of 14-20%. I think that will come down to 8-15%. Overall weighted average of increments used to be 7-8%. That may be down to 4-5%," Vashistha says.

Does India Have A Talent Shortage?

Conventional wisdom dictates that the United States and the European Union face an onslaught of highly talented and low cost IT resources from India.  Indeed, many Western companies have moved their operations offshore or outsourced their operations completely. 

According to an article in the Los Angeles Times titled India’s Looming Talent Shortage (registration required), not everyone in India is that optimistic.  The article quotes Lakshmi Narayanan, President and CEO of Cognizant Technology Solutions.

[A] shortage of talent is looming that could put a dent in India’s reputation as the world’s information-technology outsourcing champion. Three or four years from now, Narayanan and others forecast, qualified engineers in India are going to be at a premium as companies like his vie for their services to sustain the industry’s remarkable growth.  “Clearly there’s going to be a challenge,” said Narayanan, the president and chief executive of Cognizant Technology Solutions Corp., which produces business system software for such clients as Wells Fargo & Co., Aetna Inc. and ACNielsen.

The article goes on to point out that while India does indeed graduate a large number of IT students, only between 10 and 25% of these students are qualified to work for a multi-national, primarly because of insufficient English language and other soft skills.

It remains to be seen if these will be a serious impediment to continued development of the Indian IT sector, but for now Western companies continue to source their IT requirements from low-cost countries like India.  This is a development worth watching.

From Customer Service to R&D

The Times of India has an interesting article on how layoffs from several global companies is likely to benefit India as these companies look to fulfill the work with lower cost resources. Embedded in the article is an interesting point about the nature of jobs being shifted to India. It is fairly well known that relatively low-skilled jobs (from a Western point of view) such as Call Centers have been moving to India. What may be less well known, but that has been documented by author Thomas Friedman, among others, is that countries like India are not racing us for the bottom jobs, but for the top jobs.

Here is an excerpt from the article:

Intel India has an employee strength of close to 3,000 with nearly 90% in R&D and related activity, while the rest are associated with sales and marketing. An internal mail sent out to employees on Wednesday said the restructuring plan may not affect India as compared to its other global sites. Intel may become a smaller company globally, but Indian operations will be pursued.

Intel India president Franklin Jones, in a communication to all employees, said: “India is a key market for us as it is considered a growing economy. When all IT companies are positioning their strategy with India in focus, we cannot look the other way.”

The interesting part is that 90% of all Intel jobs in India are in Research & Development - hardly a low-skill job. The fact is India has many talented people with advanced degrees, at a fraction of the cost of Western resources.  This is also true in the Finance arena. Companies began by moving transactional business, such as accounts payable and general accounting, to low wage countries.  As they gain more comfort with the off-shoring model, they are looking to move high-skill functions, such as business analysis, to India.  Companies like Agilent have already proven the concept.  Other companies are in hot pursuit to secure these resources.

India to grow at 8%

An interesting article in the Shanghai Daily notes that India is projected to grow 8% over the next year.  The article notes that despite the projected growth rate, Indian unemployment is still a concern.

What I thought was interesting is that the economic report suggests that India needs to adopt more flexible laws, like they have in China.  I think the irony is that communist China has more flexible labor laws than does democratic India.  Of course, India is still in the process of throwing off the old vestiges of socialism, but I can tell you first hand that China has indeed moved quickly to adopt Western business practices. 

It will be interesting to see if India does implement more flexible labor laws, in additon to improving it's basic infrastructure.  India needs to do so, because in the race to the top, China is well on its way.