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A manufacturing renaissance: Can China-plus-one deliver for India?

Apple Inc’s plans to manufacture iPhone 14 in India set the ball rolling for the country to promote itself as an attractive manufacturing hub. The move by the American tech company, which was reported by Bloomberg News, reflects an effort to de-risk the production and supply chain for products that have a high level of dependence on China.

In the wake of increasing US-China tensions, serial lockdowns and supply chain upheavals, many companies across the world have been rethinking their business models that were so far dependent on China. The China Plus One strategy — in which companies look to diversify their manufacturing bases and supply chains outside of China — started gaining ground in 2018 and sped up with the virus outbreak. Countries such as India, Vietnam, Thailand and Malaysia are seen as the alternative destinations.

When global companies set up bases here, industry stakeholders say, it will bolster the manufacturing capabilities of the smaller operators. There is no doubt that skills and knowledge will trickle down. But is that enough to give the millions of SMEs and the ancillary industries in the country a leg up in the manufacturing space?

Arun Maira, a former member of the erstwhile Planning Commission and the former India chairman of Boston Consulting Group (BCG), says SMEs will not gain just because some MNCs shift to the country. He uses the example of Apple, which started assembly operations in India in 2021. “Where are the parts that add value coming from? Not from India. The chips are not produced in India but in Taiwan. That is where the tech and value lie. In my view, this is a shallow development that will not provide the deep roots needed to build industry. Unless the foreign manufacturers want to buy from the local industry, how will SMEs benefit?” he says.

Only 5-6% of the value of an Apple phone is produced in China, Maira says. “There are so many parts in an Apple phone. What they will put up in India is the bottom part of the value-adding operations. High-value ones are more like tech, research and development. So, should we welcome Apple? Yes, we should, but let us not get carried away that India will achieve its policy objectives via such a move,” says the former chief of BCG.

What India needs

Maira’s views stem from the fact that India's greatest need currently is to increase employment and income. He lists ownership of the means of production and technologies as must-haves to meet these goals. “Ownership of tech is important. The plant may belong to someone, but if the tech that we are using for production is held by someone else, then we would face challenges of being unable to change the technology whenever the product is upgraded. National security also becomes a problem. If foreign players control all the tech and maximise global value, 10 years from now, we will find that our plants are no longer competitive because we did not develop our own capabilities in the domain,” he says.

Ensuring that we build our own skill sets and invest in R&D, design and development will be key in building a more competitive manufacturing space for India.

Midhula Devabhaktuni, Co-founder of homegrown electronics brand Mivi, points out a model followed by foreign tech companies that have set up manufacturing bases in India. “They still retain the knowledge with them and just pass on the ground-level jobs to Indians.” Even in the case of iPhone 14 manufacturing, the ground-level assembling staff may not learn the technical know-how. “The engineer that is driving the line, the plant engineer — these people should also be Indians.” And they should get to pick up the technical knowledge so that Indians learn those skills, she adds.

Indian companies should also carefully look at the legal documents that spell out the details of a joint venture or such an arrangement. It is important to remember that protection of tech and skill sets is critical, says Rajeev Singh, Partner and Automotive Sector Leader, Deloitte India. “You don’t want it to be misused in any way. One must also look at why they want a particular JV partner, what is the role that the two partners will play, the investment and what each of them is bringing to the table,” he says.

If Apple sets up a plant here, it will have a ripple effect on multiple industries and pave the way for the creation of an entire ecosystem, says Singh. Drawing a parallel with German automotive manufacturers in India, he highlights how that led to a multiplier effect. “It not only led to employment generation but also lifted the capabilities in the ecosystem. That capability was used by industries beyond auto as well. Hence, we should not just look at this from the lens of employment, but also how capabilities can be built and leveraged in other industries as well,” he adds.

Sectoral pull

Some sectors have already shown their potential of being able to make India a lucrative manufacturing hub. Automobiles, textiles, electronics, consumer durables and pharmaceuticals, among others, have a clear competitive advantage if they have a base in the country because of large domestic consumption potential. “We will continue to attract players in these sectors,” adds Deloitte’s Singh.

Giving the example of the auto sector, he says that certain aspects can be emulated by others. For example, when a passenger vehicle company sets up a facility, it will bring in a lot of standard quality control and management processes. “That definitely ups the capability of the vendor ecosystem. All tier-II and -III manufacturing companies in India, which are local players getting into the manufacturing of auto components, have learnt a lot because of such processes. So whenever a large multinational player wants to set up a facility in India, it should try to build an entire ecosystem that focuses on building capability and skills at tier-II and -III levels as well,” he adds.

As a sector that contributes approximately 7.5% to India’s GDP and 49% of the manufacturing GDP, the automobile segment has played a crucial role in India’s growth and continues to do so in its aspiration to become a $5-trillion economy.

Read More at https://economictimes.indiatimes.com/small-biz/sme-sector/a-manufacturing-renaissance-can-china-plus-one-deliver-for-india/articleshow/94190270.cms

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