Innovation only mantra for manufacturing

Date:   Wednesday , August 06, 2014

Hindustan Motors Ltd. (BSE: 500500) (NSE: HINDMOTORS) is an automotive manufacturer based in Kolkata, West Bengal. The company currently has a market cap of Rs.148.74 crore.

Which is the right path to becoming a developed nation: manufacturing or services? This has been an ever raging debate which has failed to produce a universally acceptable conclusion.

I have never been comfortable with this line of discourse. Why should we talk in terms of manufacturing OR services? I find the either/OR mode of thinking rather dangerous. OR divides. It excludes. Therefore, why not manufacturing AND services? AND offers the possibility of diverse systems, methodologies, domains, thoughts and more collaborating. It is inclusive. It unites. It diminishes the probability of X growing at the expense of Y. It thus serves to dispel both inequity and inequality – the lethal bane of Indian socio-economic scenario. India needs its manufacturing and services sectors to grow in tandem.

However, the emphasis on either of the two keeps on changing with shifts in the growth cycle. The last one decade witnessed services driving growth and expansion. Now, the responsibility is gradually gravitating towards manufacturing in India. Being a manufacturing professional for close to three decades, I got the opportunity to lead major manufacturing companies and conglomerates in India, West Asia and UK. Hence, my focus here is on making the most of manufacturing.

Historically, the manufacturing sector has always played an important role in the economic development of most countries. Asian economies including China, which began their economic development at the same time as that of India, are way ahead primarily due to the difference in the growth strategies adopted by them. China\'s emphasis has always been on a robust manufacturing policy, while India concentrated on developing its services sector.

A recently released CRISIL report highlights the symbiotic relationship between India\'s manufacturing and services sectors. To produce one unit of manufacturing output required 0.34 units of services in FY 2008 versus 0.25 units in 1998-99. What more proof of the inter-linkage do we need?

The manufacturing sector has led to the economic resurgence of almost all Asian countries. Moreover, growth in these countries has covered larger disadvantaged sections of the society. Looking at tremendous growth of the manufacturing industry in China and other Asian countries, with an average contribution of around 35 per cent to the country\'s GDP, the Indian manufacturing industry with its present contribution of around 16 per cent to its GDP has a long way to go in order to realize its full economic growth potential.

Manufacturing can accommodate even minimal-skilled raw hands in greater proportion in comparison to the service sector which expects advanced technological knowhow and expertise. In order to achieve uniform and sustainable growth, a country should provide equal opportunities for all segments. Economic growth solely dependent on the services sector has its limitations. The labour intensive manufacturing sector alone has the capability to generate employment on a large scale, boost income levels and make a dent in poverty level.

But Willy C Shih, professor of management at Harvard Business School, pertinently points out, \"Historically, manufacturing has provided jobs to those who did not have the benefit of more advanced education, and in emerging economies, this is still true. As more advance economies have outsourced or off-shored assembly types of manufacturing, the skill levels needed in manufacturing have risen as well…But your country (India) is held back by infrastructure. If India wants to be an attractive place for global supply chains, it will have to recognize the importance of efficient and low cost logistics and transportation.\"

No doubt, our manufacturing calls for changes.

The National Manufacturing Policy\'s (NMP) objective is to boost manufacturing output so that it is 25 per cent of our GDP by 2022, and create 100 million additional jobs in the next 10 years. But at the same time, we see that increasing productivity, new production techniques and greater automation are all contributing to a reduction in the labour-intensity of manufacturing. Competitiveness of India\'s low-value-mass-manufacturing is based mainly on wage arbitrage and companies and industries tend to continuously migrate to ever-lower wage locations, as their suitability improves.

Indian IT industry\'s ardent advocate, Mr. Kiran Karnik, strongly feels that Indian manufacturing needs to focus on strategic sectors like aerospace, nuclear technology, defence, IT, communications and electronics and areas of comparative advantage, like pharmaceuticals and automobiles. \"Ultimately, India needs a large, vibrant, value-creating manufacturing sector that is knowledge-based rather than wage-arbitrage driven,\" Mr. Karnik states.

In this context, the recent successful launch of Mars orbit mission or Mangalyaan has proved to be a major technical milestone. According to reports, the entire Mars mission cost the Indian Space Research Organization (ISRO) just Rs. 450 crore and took around 15 months to be put together. In comparison, NASA\'s similar MAVEN Mars project cost 10 times more and took triple the time. ISRO\'s accomplishment is an object lesson in frugal engineering in a highly strategic segment. It has enabled the \'Made in India\' brand to carve for itself the pride of place in the manufacturing world. India\'s machine tool sector has truly matured in terms of technology and automation offerings.

But one cannot gloss over the reality that over 70 per cent of our engineering and management graduates are unemployable. Their syllabus and their faculty fail to equip them with the needs of the manufacturing sector which is also to blame, to some extent, for the prevailing talent crunch. Unlike the IT sector, which constitutes a major segment of services, manufacturers and the academia could never be on the same page. Thankfully, remedial action has begun from both the sides.

However, a McKinsey analysis finds that rising demand in India, together with the multinationals\' desire to diversify their production to include low-cost plants in countries other than China could together help India\'s manufacturing sector to grow six fold by 2025, to $1 trillion, while creating up to 90 million domestic jobs.

Capturing this opportunity will require India\'s manufacturers to improve their productivity dramatically—in some cases, by up to five times of current levels. The country\'s central and state governments can help by dismantling barriers in markets for land, labour, infrastructure, and some products. But the real spadework will have to be done by India\'s manufacturers themselves.

But what malady plagues India\'s manufacturing?

McKinsey points out that India\'s manufacturers have long performed below their potential even though the country\'s manufacturing had make a mark particularly in skill-intensive sectors such as auto components, engineered goods, generic pharmaceuticals, and small cars, till the current slowdown put a halt to this march.

According to McKinsey\'s analysis, a majority of India\'s largest manufacturers do not return their cost of capital, a factor that dampens investment in the sector and makes it less attractive than its counterparts in competing economies, such as China and Thailand. China\'s manufacturers captured nearly 45 per cent of the global growth in manufacturing exports from low-cost countries between 2001 and 2010, whereas India accounted for a paltry 5 per cent. Economists have blamed the Reserve Bank of India\'s tight monetary policies for raising borrowing costs. This has hit the medium and small enterprises most grievously.

India has a massive workforce, but labour productivity remains a challenge. Workers in India\'s manufacturing sector are almost four and five times less productive, on average, than their counterparts in Thailand and China, respectively. Otherwise with its emerging supply base, and access to natural resources needed in production, notably, iron ore and aluminium for engineered goods, cotton for textiles, and coal for power generation, India can become a viable manufacturing alternative to China in industries ranging from apparel to auto components and might even dominate some skill-intensive manufacturing sectors.

However, all is not lost. India has the potential of transforming into the factory of the world. The mantra to success is innovation in manufacturing.

According to a KPMG white paper released recently, research has shown that India can continue to consolidate its competitive advantage over China as its manufacturing sector has attracted high value-added manufacturing vis-à-vis China\'s focus on high volume and low technology production. Also, India\'s underdeveloped domestic consumer market offers alluring potential to its manufacturing sector. But the demand can be created only through innovation, development and then commercialisation of new products.

How should one go about the innovation exercise?

(1) Start with sourcing: New components, new suppliers and improved deals with existing suppliers can improve both products and profits. Several manufacturers have co-opted suppliers into the manufacturing processes. This helps online visibility of inventory as well as quality control. E-auctions and reverse auctions are also emerging as effective means to manage material cost and boost efficiency in procurement.

(2) Process innovation: By making changes in product development and production, either within the company or the supply chain, the manufacturer can gain competitive advantage through improved quality, reduced costs or reduced time-to-market. A very basic example could be the introduction of assembly line model by automobile pioneer Henry Ford. Though it did not entail any change in the product, it permanently changed the process of manufacturing and delivering the product. Today, several companies collaborate to shorten their new product development cycles. Often, Tier I suppliers are also involved in the exercise.

(3) Changes in management principles: These can make a long lasting impact on the organization? Toyota\'s renowned lean manufacturing model transcended the definition of process innovation and propelled a tectonic shift in management philosophy. Thanks to this model, the manufacturing industry underwent a transformation globally. The company\'s synergy in its policies in human resources management and supply chain networks played a big role in Toyota\'s success. It may sound surprising to us in India but the fact is that in Toyota, on an average, there were over 10 improvement suggestions per employee per year and over 99 per cent of suggestions were implemented.

(4) Technology\'s upward spiral: New generation technology has often led to major breakthroughs in recent times. It has proven to be the change agent in the business process itself. Growing concern about the environment has led to emergence of greener technologies and manufacturing practices. Electric and hybrid vehicles form a good example. But manufacturers need to realise that commercially viable acceptance of such products can be time consuming.

(5) Support from diverse quarters imperative: For innovation to strike roots and to become a hygiene factor rather than a compulsion one needs support not just from the manufacturing sector but also from external stakeholders and the government. As for the organization, it needs to develop and promote strategies that foster innovation. Business should adopt a three-pronged strategy for innovation: (a) initiatives that could impact the organisation in the long term, (b) quick wins and (c) continuous incremental improvements for existing products. It would be fool hardy to allocate too many resources to one initiative. The government has a vital role to play to promote innovation. Fiscal measures like tax deductions to companies and incentives to venture capitalists can ensure that small and medium companies are not dissuaded from innovating. Fear of long gestation for payback is a big apprehension. The government should also ensure protection of intellectual property rights of innovating manufacturers. Also, the companies should have easy recourse to speedy and time-bound legal settlement of IPR disputes.

(6) Nitty-gritty: To ensure that innovation endeavours work smoothly, flexible innovative groups should be created in a collaborative environment. Specialist innovation teams should have active communication with the mainstream business to enable free flow of ideas into the main stream. It is rightly said that what cannot be documented and measured has not happened. However, performance measurement metrics of innovation efforts should be kept scrupulously separate from those for the regular business activities.

(7) A word of caution: Manufacturers should realise that innovation is not a one-time activity. Consistent innovation is called for to remain ahead of competition. The manufacturing organisation should honestly evaluate its grit and gumption to take risk and introduce changes accordingly.

But let\'s not forget that shying away from innovation can be only riskier. The choice is yours.