COVID-19 taught global manufacturing companies the dangers of depending on any single country for their operations. Multinationals are reviewing their global footprints and diversifying away from China. Is India the first step?
Indian Prime Minister Narendra Modi has recognized that India has many of the attributes that made China successful, such as low-cost and abundant labor, technical and engineering excellence and growing domestic consumption led by an emerging middle class. The factor that has been missing has been investor- and business-friendly policies, but Modi is aggressively addressing this shortcoming, and is in hot pursuit of global manufacturing FDI. He has been aggressively pitching India as the next manufacturing hub. India is positioning itself for restructuring of global supply and value chains in the post-COVID-19 world.
It’s beginning to work. The large and growing domestic market, increasingly transparent policies and improving tax regime, labor supply and cost competitiveness and infrastructure improvements have put India on manufacturing investors’ radar screens. India can no longer be ignored.
Following Services’ Footsteps
Just 25 years ago, India was seen as an underdeveloped country with limited economic potential. When outsourcing opportunities first emerged in 1998, corporations in North America moved some jobs to India to test the waters. Now, two decades later, India is a premier destination for outsourcing software services and back-office support work. Having secured its dominance in the service sector, India continues its march toward becoming a global manufacturing hub.
“Up until just the past few years India was bypassed early on in the site selection process as a possible manufacturing investment destination. It was considered too difficult and not investor-friendly,” says John Evans, managing director, Tractus Asia Ltd. “Those days are changing rapidly, and many Tractus site selection clients now are re-evaluating India under a new, more powerful lens to determine if India is the ‘Next China’ and its unique set of factors will meet their global growth goals.”
Since Modi took the helm in 2014, India has been steadily ascending the World Bank’s Ease of Doing Business rankings, moving from a horrible 163 in 2014 to a respectable 63 in 2019. The Modi administration enacted a nationwide Goods and Services Tax (GST), streamlined the nation’s bankruptcy laws and pushed through many labor reforms. The biggest change has been amendments to the incredibly complex tax system, starting with lowering the effective corporate tax rates from 35% to a simpler and more transparent 25.17% for established companies, and a very competitive 17% for new manufacturing investments.
These tax rate reductions, coupled with the large number of policy reforms in business operating conditions, have demonstrated Modi’s intent to have India emerge not only as a possible manufacturing investment destination but as a globally competitive manufacturing destination to serve both export and domestic demand.
Domestic Consumption Fueled Growth
Surpassing France in 2019, India is now the fifth largest global economy with a forecast GDP of US$2.9 trillion in 2020. India's rise has been even more eye-popping over the past 20 years, with GDP jumping by over 500% since 2000. As recently as 2010, India was in ninth place behind countries such as Brazil, Italy and the United Kingdom. Perhaps unknown to many, in 2018 India surpassed China, becoming the world fastest-growing economy among large economies.
Two primary catalysts driving India’s economic growth are manufacturing investment and domestic consumer spending. Nearly 60% of India’s GDP is anchored in domestic private consumption. India’s consumer base is led by its 61 million upper-to middle-income and 97 million lower-middle-income households, who are expected to account for 78% of overall consumption by 2030. A recent report published by the World Economic Forum and Bain & Company forecasts India will be the third largest consumer market behind the U.S. and China by 2030.
India offers manufacturing investors a favorable demographic dividend. With many of the world’s large global economies rapidly aging, India is expected to maintain a young population with a median age of 31 until 2030. To meet the needs and demands of its rising young population, India's government is laser focused on growing its manufacturing sector. The goal is to propel manufacturing’s current contribution to GDP from 16-18% to an ambitious 25% by 2025, and in so doing create 100 million jobs.
According to the most recent data from the World Bank, India has a 5.4% unemployment rate across a labor force of nearly 501 million. The abundance and availability of both low-skilled labor and a large base of more than 35 million post-high school graduates — many in engineering and other technical fields — creates a significant labor arbitrage opportunity compared to many competing countries.
Make in India and Skill India were ambitious plans launched during Modi’s first term. Their objective was to improve India as a global manufacturing hub and create employment opportunities by training its labor force in relevant market skills and thus enhancing their employability. While well intentioned and with some level of achievement, these programs have not yet had the success they hoped to create as the government has not had the resources to effectively implement them. The lack of long established, world-class manufacturing clusters in India means that additional training is required. This will be the responsibility of the investors. But the more than 1.5 million engineering students graduating every year possess the technical acumen to be quickly trained to global best manufacturing practices and increase competitiveness.
Infrastructure Is the Key
During the Modi tenure foreign direct investment (FDI) into India has slowly and steadily grown: India in 2019 experienced the highest absolute growth in FDI among emerging economies, reaching $74 billion. This increase was due to the attractive FDI environment created by the government’s continuing policy liberalization and its investment in infrastructure. The healthy growth in FDI is proof that enthusiasm about India as a manufacturing destination is gaining traction.
In order to continue this transition into a globally competitive manufacturing hub, India will need to continue to invest in its hard infrastructure. The Indian government has already pledged to invest over $1.5 trillion in infrastructure development projects across highways, railways, ports, airports, and industrial corridors by 2023. The flagship of this ambitious development is the Bharatmala project, which includes construction of 65,000 km. (40,400 miles) of national highways with an investment of $100 billion. The government has budgeted $750 billion to improve India’s railway system by 2030 and $7 billion to improve regional air connectivity by 2022.
A recent example of successful investment in logistics infrastructure is the streamlining of the delivery of products from Bengaluru to Delhi. The transit time to move goods has decreased dramatically from a one-week train trip to a one-day truck trip. If India continues to invest in and achieve these ambitious development plans, it will create a logistics infrastructure and network that will drive investment into the country and improve the cost-effectiveness of the manufacturing investors.
Wired and Wireless
Like China in the early days of its manufacturing expansion, India is accepting investment from almost all industrial sectors. In addition, it is liberalizing some if its protected sectors — minerals, aerospace and defense, airports and MROs, electrical power distribution, and atomic energy. Two of the sectors that have shown rapid recent investment include electronics and automotive.
Due to growing global security concerns, electronics hardware manufacturing was a shortlisted priority sector by the government in 2015. The government established financial incentives to promote electronics hardware manufacturing, as well as created a national policy on electronics aimed at positioning India as a global hub for Electronics Systems Design and Manufacturing (ESDM). These efforts paid off as India’s electronics production increased from $27 billion in 2014 to an estimated $78 billion by 2019, growing at a CAGR of about 24%. Initiatives such as Digital India and Smart City projects, and global and domestic technology transitions such as the rollout of 5G networks and Internet of Things (IoT), accelerated adoption of electronics products and increased export orders.
The growth in the electronics sector has fueled growth in mobile phone production. The value of mobile handsets increased from $3 billion in 2014 to $30 billion by 2019. The majority of the domestic demand was met through domestic production, and the country has emerged as the second largest manufacturer of mobile phones in the world, exporting $3 billion worth of mobile phones in 2019. Most major brands have either already set up their own manufacturing facilities or have sub-contracted manufacturing to Electronics Manufacturing Services (EMS) companies operating in India. According to the India Cellular and Electronics Association (ICEA), there are over 260 companies manufacturing cellular mobile phones, including sub-assemblies of parts and components, in India, up from just two units in 2014.
Fewer than seven global companies account for 80% of the world’s mobile phone market share. These companies are in need of large economies of scale to compete in global markets, and the Indian government is wooing them by offering up to $7 billion in Production-Linked Incentives (PLI). Apple, Samsung and Pegatron were among 22 companies that committed to investments worth $1.5 billion in India; they backed the government’s PLI scheme seeking to establish India as a smartphone export hub rivaling northeast Asia’s electronics powerhouses. Apple’s two global contract manufacturers Foxconn and Wistron have also applied for the scheme, which demonstrates Apple’s intent to shift production away from China amid Sino-U.S. geopolitical tensions.
Automobile Manufacturing Zooming Along
From fewer than 1 million units produced in the 1990s, India’s automobile sector has grown tremendously since. India is now the fourth largest automotive market in the world, with an annual production capacity of 31 million across all types of vehicles. The contribution to GDP from this sector is 7.5%, with 37 million people employed.
Despite an over-capacity correction in 2019 and slowdown in 2020 due to COVID-19, the future is bright for automotive sector growth. With a growing young population, roughly 108 million households could enter the consuming class (defined as households with incomes greater than $8,500 per year) by 2030, and many from this demographic could leap straight into buying automobiles as others graduate from motorbikes to owning cars. Currently, the two-wheeler market is the largest segment, with approximately 80% market share. The four-wheeler market accounts for about 15% of India’s automobile industry.
Exports over the last two decades have been growing at a CAGR of 20%. The U.S. imported vehicles valued at $268 million in 2018 and became the third largest export destination for Indian cars in 2019. Other export destinations of Indian-made cars included Mexico, Bangladesh, Sri Lanka and South Africa.
Almost all of the major automotive OEM assemblers have a presence in India, as do the majority of Tier 1 suppliers and Tier 2 and Tier 3 parts and components suppliers. Recent investors include downstream automotive technology and service providers, many of whom are helping the manufacturers leap-frog technology and invest in state-of-the-art equipment and facilities.
A robust R&D infrastructure, stable domestic supply of steel and a strong engineering and skilled labor force are favorable factors for the automotive sector. Global and domestic auto companies are building up their investments to cater to the growing domestic demand and leverage India’s competitive advantage to set up export-oriented production hubs. Almost all of India’s domestic companies are working on disruptive mobility solutions in electric and self-driving cars by having in-house experts and forging partnerships with foreign companies.
Finish Your Homework
Don’t overlook India. Government-led deregulation, infrastructure investment and investment incentives, coupled with an abundant and cost-effective technical labor force and rising domestic consumption, are attracting record investment into manufacturing.
But despite all of the government initiatives and innate positives that are making India increasingly attractive as a manufacturing destination, it still has many obstacles to overcome. Developing a world class infrastructure takes time, and the process will surely cause logistics issues and bottlenecks. In a country where wages are so low, a culture of corruption is still a major issue. Government red tape, while greatly reduced during Modi’s tenure, still has few rivals when it comes to bureaucracy and regulatory administrative requirements.
The attractive and ambitious labor force also are members of the world’s largest democracy, where everyone has the right to oppose investment projects. This happens routinely. Foreign investors need to make sure they do their homework and have local partners and/or advisors to help them navigate the complexities of investing in and doing business in India.
The country is emerging as a viable manufacturing destination for multinational companies that are reevaluating their global supply chains in the wake of COVID-19. Whether it is the strength of the growing domestic market alone or a balanced domestic sales and export strategy, India is a rising world factory that should not be missed.
Sreehari Marar (right) is a senior consultant and Apoorva Handigol (left) is a research analyst at Tractus Asia Ltd., a management consulting company focused on helping foreign investors achieve success in Asia. For more information, visit tractus-asia.com.