A4 Report Template - CII

PrefaceIndian manufacturing industry is at an importantjuncture today. The last ten years have seen animpressive annual growth rate of 6.8% marking aphase of strong performance. This compares favourablywith growth rates in many other rapidlydeveloping economies. This same period saw the Indianeconomy grow at around 7%. There is widespread consensuswithin the Indian political leadership that for Indiato improve its per capita income and reduce thelevel of poverty, Indian economy should continue togrow at a high single digit rate if not low double digit.With a strong growth rate, the manufacturing industryhas been a significant contributor to GDP growth. However,unlike many other developing nations the overallcontribution to GDP is only 15%, which is the lowestamong the major RDEs. It is in this context that somepertinent questions need to be answered. What shouldbe the growth aspirations of the manufacturing sector inthe country? How can India enhance competitiveness ofits manufacturing sector? What are the impediments toachieving this aspiration?This report examine these questions in the context ofthe major forces that are shaping global and Indianmanufacturing industries. The report sets out an aspirationfor the Indian manufacturing industry for 2025, astretch but achievable target. It then examines the variousconstraints which could potentially hold back theIndian manufacturing sector and also the different leverswhich are critical to achieve the aspirational growthfor the sector.While the intent of the report is Not to develop detailedpolicy recommendations to be presented to thegovernment, we do identify and contextualise four keypolicy themes which we believe are critical in meetingthe aspirations set forth in the report.This report’s articulation of the aspirations, potentialroadblocks, opportunities and imperatives for India’smanufacturing sector should provide the context toguide future discussions among all stakeholders to maximizethe potential of this sector.4 The Boston Consulting Group • Confederation of Indian Industry

IntroductionIndian manufacturing has grown at a robust rateover the past 10 years and with the exception ofChina, India has been one of the best performingmanufacturing economies—growing at 6.8% perannum. Yet, critics will point to the fact that thecontribution of the manufacturing sector to GDP is substantiallylower in India compared to other rapidly developingeconomies (or RDEs, a term which will be usedto describe these large and fast growing developingcountries throughout this report), and thus leaving muchroom for significantly higher growth rates as India industrialisesrapidly over the next few decades (as shownin Exhibit 1a).Evolution of Indian ManufacturingTo set the context for this report it is useful to recap thehistory of this sector. Since Independence in 1947, theIndian manufacturing sector has traveled from the initialphase of building the industrial foundation in the 1950sand early 1960s, to the license–permit raj in the period1965–1980, to the phase of liberalisation in the 1990’s,Exhibit 1a. While Indian manufacturing industry has shown robust growth, the share ofGDP is lower that of other RDEsManufacturing GDP growth for comparabledeveloping countries (FY 1999–2009)Manufacturing GDP(as %oftotal GDP for FY2009)ChinaBrazilRussiaIndiaTurkeyPolandThailandMalaysiaArgentinaHungaryEgypt010.3%2.7%6.6%6.8%3.9%6.7%6.6%6.7%2.2%5.0%5.4%100 400 1,100 1,200Manufacturing GDP (in 2005 US$ Bn)ThailandChinaPolandMalaysiaTurkeyHungaryArgentinaBrazilEgyptRussiaIndia18%16%16%16%15%28%26%26%30%34%40%0 10 20 30 40 50%FY1999FY2009CAGR (1999–2009)Sources: Economic Intelligence Unit; Data Monitor; BCG analysis.Note: GDP data for FY1999–2009 refers to India’s GDP from 1998–99 to 2008–09, but for some countries such as China, Brazil and Russia, it refers tocalendar year 1998–2008.Indian Manufacturing: The Next Growth Orbit 5

Exhibit 1b. Indian manufacturing sector has grown steadily in the past1950–1965Industrial foundationGovernment investmentscontributed 53% of totalGross Capital Formationand 92% of all investmentsin greenfield projectsGrowth led bymanufacturing andinfrastructure sectors;electricity and water grew at11.2%1965–1980Import substitution Oil shock (1970s) and devaluationof rupee Licensing restrictions andcontinued public sectorinvestments Import substitution policy1980–1990De–licensingDe-licensing insome keysectors; allowedgrowth ofprivatecompaniesOpening ofcapital goodsimports1990–2000LiberalisationBroad reforms,reduced licensingMore competition,technology access,imported inputsHigher share ofprivate sector infixed investmentIncreased threatfrom Chinareduction oflicensing2000 onwardsGlobal competitionRemoval of mostimport controlsResurgence of keyindustriesIndian identity forIndian companies(acquiring cos.abroad)Creation of design,development skillsOutsourcing boomHighlights Government monopolisesinfrastructure Rise of iron &steel andtextiles Nationalisation ofindustries Coke, IBM, etc. exit India Maruti startsoperations Coke &Pepsienter Rise of auto &pharma cos. M&M, BharatForge, TATAacquires foreigncos.Mfg. GDP 1Rs '000 Cr500CAGR = 6.2%CAGR =4.0%CAGR =5.7%CAGR =5.5%CAGR =7.3%25001950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005Source: BCG–CII–DIPP Report; CSO; MOSPI; BCG analysis.Note: Manufacturing GDP at constant (1999–2000) prices.1GDP for 1998–2008.2008emerging into the current phase of global competitivenessas explained in Exhibit 1b.With growing capability, Indian manufacturing companiesare now making a bold move to globalise their operations.The Boston Consulting Group (BCG) has beenstudying this phenomenon among RDE companies formany years and publishes a report on “BCG New GlobalChallengers” which identifies and tracks the success oftop 100 global challengers from the RDEs. In the last versionof this report released in 2009 1 , 20 of the 100 challengerswere from India signaling the growing success ofIndian firms on this front.Starting Position of the Manufacturing SectorThe importance of manufacturing for the Indian economycannot be over–emphasised. It contributes about15% of India’s GDP, with estimated revenue of Rs 30 lakhcrore 2 in 2007–08. More importantly, the sector contributesa disproportionately large share of nearly 50% tothe exports from the country. Besides, around 12% of theworkforce today finds employment in this sector (asshown in Exhibit 1c).It is also critical to understand the different sub–sectorswithin the manufacturing sector. As shown in Exhibit 1d,food processing (including beverages and tobacco),metals and electrical machinery are the largest threesegments, contributing 42% of the total output generatedby the manufacturing sector, primarily through thedomestic market. The next group of industries includeschemicals, petroleum, transport equipment and textileswhich account for a further 40% of sector revenue. Also,these four industries rely heavily on exports, whichaccounts for nearly one–third of their revenue. In termsof relative growth, electric machinery and metals havebeen the fastest growing industries over the last 5 yearswith their revenues growing at 17% and 13% per annum,respectively, while food processing, textiles, rubber,petroleum and non–metallic products have grown at lessthan the overall industry rate. While this report does notdelve into details of individual sub–sectors, understandingthis baseline will be important to disaggregate andcascade targets for individual sub–sectors.1. The 2009 BCG 100 New Global Challengers.2. Central Statistical Organization (CSO) and Annual Survey of Industries(ASI) estimates.6 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 1c. Manufacturing sector is important for the Indian economy1Contributes ~15% to India’s GDP ...2...~50% to the total exports ......and ~12% share of workforce%10057%100%%% Split10037% 100%10017%8060402017%15%11%806040200 0 0AgriculturfacturingIndustryculture facturingManu-Other Services TotalAgri-Manu-Other Services TotalIndustry10%50%3%8060402015%11%57%GDP 3 56%12%8%24%Workforce 4 AgricultureManufacturingOther IndustryServicesSources: NSSO data; MOSPI; RBI; Institute of Applied Manpower Research; NSSO surveys; International Trade Statistics (WTO); CMIE; BCG estimates.Note: Workforce defined as people working in the age group of 15 years and above; Other industries include mining and quarrying, construction and utilities.12008–09.22006–07.32008–09 GDP numbers.42008 employment workforce numbers.Exhibit 1d. Manufacturing sector dominated by a few key sectors todayRevenue generated by manufacturing sub–segments through exports and domestic market (2007–2008)ExportsTotal revenue generated by manufacturing sector ~Rs. 30 lakh crore% share of revenueDomestic10013610 1226803629371productsMetals Machinery 13%Petroleum 8% products 3 Equip. 4Metallic 7%58604099979490746471638820042FoodBasicElectrical Chemical Rubber & Textile5Metal Transport Non-Others216%14%12%14%7% 6% Products3%6% 13% 17% 10% 7% 7% 9% 10% 7% 9%Rev.as%oftotal mfg. rev.5–yrear real growthrate (FY 2003–08)Source: Central Statistical Organization; Annual Survey of Industries; D.G.C.I.&S; BCG analysis.1Includes tobacco products.2Includes apparel.3Includes machinery.4Includes auto.5Includes paper and wood products.Indian Manufacturing: The Next Growth Orbit 7

We should also understand the starting context of thetwo key factors—capital and labour. The average capitalefficiency (revenues/invested capital) in the manufacturingsector is nearly 2.4 (based on an analysis of registeredsector data) but it varies across the sub–sectorsfrom 1.4 for non–metallic products to 3.5 for food products.The average labour efficiency (revenues in croreper 1,000 workers as reported by the Annual Survey ofIndustries) is nearly Rs 48 cr/1,000 workers. However,there is wide variation across different industries withwood and paper generating only Rs 7 cr/1,000 workers,whereas basic metals revenues are ~Rs 340 cr/1,000workers (as shown in Exhibit 1e).The manufacturing sector employed 58 million 3 people(about 12% of the workforce) in 2008. By 2012, it is estimated,based on current economic projections, that thissector will employ a further 12–13 million out of nearly89 million additional people who will enter the workforce.It is well known that manufacturing provides atransition to large numbers of agricultural labour movingfrom low skilled to more value added jobs. Studies haveestimated that every job created in manufacturing has amultiplier effect, creating 2–3 jobs in the services sector.In a country like India, where employment generation isone of the key policy issues, this is a critical factor to consideras we develop the aspirations for this sector.Structure of the ReportIndian manufacturing has performed strongly over thelast decade. However, if India is to achieve its stated goalson GDP growth and more importantly, to generate higherlevels of employment for the growing young population,India’s manufacturing sector has to enter into a new orbitof even higher growth. In chapter 2 we set an aspirationfor Indian manufacturing—‘What should be the targetrate of growth of this sector until 2025?’ We look at someglobal benchmarks and set our aspirations high, but notunachievable and draw out key implications in terms ofcapital, labour and export requirements to support thisstretch target.Setting aspiration for the sector is the easy part. What arethe levers to achieve this aspiration? Much has been writtenin several reports and talked about in different forums3. CSO data.Exhibit 1e. Capital and labour efficiency varies across sub–segmentFood products 1Electrical machineryTransport equipment 2Rubber &PetroleumOthers 3Metal products 4ChemicalsBasic metalsTextile 5Non-metallic productsCapital efficiency by segment (2008)Average 2.41.42.11.92.32.32.32.92.93.53.50 1 2 3 4Capital efficiency(Revenue/Capital invested)Share ofinvestedcapital11%4%6%14%6%7%17%18%10%6%Share oftotal mfg.revenue16%12%6%14%7%7%13%14%8%3%Labour efficiency by segment (2008)Average 48Basic metalsRubber &petroleumElectrical machineryTransport equipmentChemicalsMetal products 45Food products 39Others 23Non-metallic products 19Textile 16Paper &wood products 6 73412582581921890 100 200 300 400Labour efficiency(Revenue in Rs Cr per 1000 workers)Share oflabouremployedSources: Annual Survey of Industries 2005–06; Central Statistical Organization.Note: Capital efficiency analysis based on only registered manufacturing sector data, All figures are rounded–off for ease of representation.1Includes tobacco products.2Includes auto.3Includes paper and wood products.4Includes machinery.5Includes apparel.6Includes furniture and wood products, paper and printing.2%3%2%1%3%8%20%10%10%24%17%Share oftotal mfg.revenue14%14%12%6%13%7%16%5%3%8%2%8 The Boston Consulting Group • Confederation of Indian Industry

on driving higher growth on the manufacturing sector. Wehave taken a holistic view and propose a ‘House of Manufacturing’(as shown in Exhibit 1f) which provides an integratedframework for the government and industry todevelop its long term strategy for the manufacturing sector.The ‘house’ on the foundation of four key governmentpolicy areas which have been identified, consists of threecore pillars of:1. Enabling infrastructure.2. Avenues for growth.3. Driving competitiveness.The critical challenges faced by the manufacturing sectordue to gaps in infrastructure are well known. Most of thesolutions are also known and have been discussed in differentreports. It is not the intention of this report to proposeunique solutions for improving the enabling infrastructure.However, no report on manufacturing wouldbe complete without setting this context in place. InChapter 3 we describe the first pillar on developing strongenabling infrastructure in three core areas:1. Creating world class physical infrastructure.2. Building stronger human capital.3. Simplifying government procedures and policies andreducing the transaction costs of doing business inIndia.Indian manufacturing sector has been driven mainly bythe growth of the Indian economy and its rub–off impacton consumption in the domestic market. However, someof the fast growing trends in the global and domestic marketsprovide new large growth opportunities. In Chapter4, we cover the second pillar which identifies three ‘new’growth avenues for the manufacturing sector from:1. Rapid globalisation of supply chains and migration ofindustrial capacities to RDEs.2. Emergence of the ‘‘Next Billion’’ customersegment.3. Threat and opportunities of the green movement andpotential to build leadership in green technologies.Exhibit 1f. Globally competitive ‘House of Manufacturing’Aspiration and Visionary LeadershipEnabling InfrastructureNew Avenues for GrowthDriving Competitiveness1World class physicalinfrastructure4Globalisation andexport–led opportunities7Development of industrialclusters2Stronger human capital5Sustainable developmentand green technologies8Leadership in innovation &new technologies3Simplified governmentprocedures and policies6Targeting the Next Billioncustomers9Lean 2.0 and improvingplant productivity• Focus on export-led growth• Balancing scale and depth across industries• Labour policy for manufacturing industry• Driving the right ‘industrial structure’ for IndiaPolicy PrioritiesIndian Manufacturing: The Next Growth Orbit 9

These three growth opportunities together have the potentialto re–define the sector and fuel its next wave ofgrowth and position India for global leadership.In Chapter 5, we discuss the third pillar for driving higherproductivity and greater competitiveness where weidentify three important levers:1. Developing industrial clusters.2. Building leadership in innovation and in new andemerging technologies.3. Lean 2.0 manufacturing practices and improving plantproductivity.In Chapter 6, we identify four themes where the governmentpolicy intervention will be critical for meeting theaspirations of the Indian manufacturing sector—focuson export led–growth, balancing scale and depth acrossindustries, developing a comprehensive labour policyfor manufacturing and creating the right industrialstructure for India. We draw on global benchmarks, suggestsome of the policy imperatives for the governmentand lay out a framework that can be used to define acomprehensive policy agenda in these four areas.At the outset, we would like to remind the readers thatthis report is not about short term issues and solutionsor making policy recommendations to the government.It takes a long term view of the manufacturing sector,presents a perspective on challenges and opportunitiesand makes a case for action for both government andindustry on the different fronts.10 The Boston Consulting Group • Confederation of Indian Industry

Setting an Aspiration forIndian ManufacturingThe Indian manufacturing sector has beenone of the major growth engines for the Indianeconomy with an average growth rateof 6.8% between FY 1998 and 2008. This positionsIndia as the 2 nd fastest growing manufacturingsector among the major RDEs, with only Chinahaving a higher growth rate (10.3%) 1 .As India pushes for higher GDP growth, what should bethe growth rate for the manufacturing sector, and howcan this sector unleash its full potential?Setting AspirationsThe manufacturing sector has a critical role to play indriving economic growth in the country. Subsumedwithin this overall role for the sector is its crucial contributionto generating employment in the country. Giventhis dual importance, no one will question that the aspirationshould be to achieve the highest possible growthrate for the sector. What should be this target over thenext 15 years—which is aspirational, but not impossibleto achieve? We have approached this question from twodifferent directions. To answer this question, we first dida peer study to understand how other large RDEs haveperformed in terms of manufacturing growth rates (asshown in Exhibit 2a), and examined the drivers behindthis growth. We then looked at the relationship betweenthe overall GDP growth of an economy and growth inthe manufacturing sector. We then understood the relativeimportance of domestic consumption versus exportsled growth. We also analysed the two potential constraintsto the growth in terms of factor availability—primarily capital and trained labour—and developedimplications for both, if India is to achieve its aspirationaltarget.Indian manufacturing has been the second fastest growingmanufacturing economy after China among the majorRDEs as shown in Exhibit 2a China’s manufacturing sectorhas registered a growth rate of over 10% over the past 10years. The year–on–year growth rate has been even higherthan 11% in several years during this period. Setting thisas a benchmark for India could be a good starting point.However, before we set this growth target, it is importantto understand the implications of setting this highaspiration.Unlike several other RDEs, India’s manufacturing growthhas been largely fuelled by domestic consumption. India’smanufacturing GDP grew by 6.8% in the past 10years while its exports grew at around 11%. In comparison,while China’s manufacturing sector grew at 10.3% inthis period, its exports grew at 21% 2 .Cross country analysis (as shown in Exhibit 2b) showsthat, in general, manufacturing growth closely co–relatesto overall GDP growth within 0%–2% points. The exceptionsare countries which have a significant manufacturingexport component like China, which has a highergrowth rate of 2%–3% than GDP growth. It follows that ifIndia has to target a high growth of 11% for its manufacturingsector over next 15 years, it needs to necessarilyfocus on growing its exports much faster.Thus, if the Indian economy can grow at 8%–10% perannum, to reach a manufacturing growth target of 11%,the exports growth has to accelerate to 15%–20% 2 (in realterms) and get a greater share of the globalising manu-1. EIU data; BCG analysis.2. EIU; Datamonitor estimates; BCG analysis.Indian Manufacturing: The Next Growth Orbit 11

Exhibit 2a. Comparison of RDEs on manufacturing GDP and exports growthManufacturing GDP growth (FY 1999–2009) Manufacturing exports growth (1998–2008)China10.3%(%)25%IndiaPolandMalaysiaRussiaThailandEgyptHungaryTurkeyBrazilArgentina6.8%6.7%6.7%6.6%6.6%5.4%5.0%3.9%2.7%2.2%0% 3% 6% 9% 12%(%)20%15%10%5%0%11%India21%ChinaSources: 2009 Euromonitor International; BCG analysis.Exhibit 2b. Historical analysis: Correlation between Manufacturing GDP and Overall GDPIndia 1996–2008 China 1996–20085–year moving average (%)2015CAGR1990–20085–year moving average (%)2015CAGR1990–200813%106.4%1010.3%56.3%5096 97 98 99 00 01 02 03 04 05 06 07 08096 97 98 99 00 01 02 03 04 05 06 07 08Manufacturing GDP (Real)Overall GDP (Real)Source: EIU; BCG analysis.12 The Boston Consulting Group • Confederation of Indian Industry

facturing value chains (discussed in detail later). Anylower GDP growth would mean that exports have togrow even faster to achieve the target of 11% growth ofthe manufacturing sector. Achieving this aspirationalgrowth would make India not only the fastest, but alsocatapult it to become the 4 th largest manufacturing economyby 2025 compared to its 13 th position today (asshown in Exhibit 2c).It is important to recognise that this aspiration sets astretch target for the sector. To achieve this means notjust matching but surpassing China’s performance overthe last several years in a global trading environmentthat is still recovering from an economic crisis. This alsohas three major implications:1. Indian manufacturing industry will need to transitionfrom a factor cost driven advantage to a more sustainableinvestment and innovation driven model, withsignificant implications on factor requirements, coststructures and productivity levels.2. A concerted policy agenda will be required to catalyseand support this growth which not only provides a facilitativeenvironment to exploit global opportunitiesbut also addresses the specific challenges of India’smanufacturing sector.3. India will have to produce many more ‘world beaters’from the manufacturing sector. Currently there arenearly 25 Indian manufacturing companies with annualrevenue in excess of US$1 bn. Achieving ourgrowth aspirations for 2025 will need this number togrow nearly 3–4 times, with 70–80 manufacturingcompanies having annual revenue in excess of US$ 1bn, and 4–5 firms with annual revenue in excess ofUS$ 100 bn (assuming company growth rate at parwith overall manufacturing growth rate). This calls forvisionary leadership and management talent of a differentorder.Investment, Human Capital and Productivityfor Meeting AspirationsIn a developing country like India, one of the key questionsis the level of investments required to achieve thisaspiration. Our estimates suggest that four to five timesthe level of incremental investment will be requiredExhibit 2c. Aspirational growth will make India the 4 th largest manufacturingeconomy in the worldCountryUnited StatesChinaJapanGermanyItalyUnited KingdomFranceSouth KoreaSpainMexicoCanadaBrazilRussiaIndiaTurkey1 2Comparison of manufacturing GDP (2009–2025E)2009 2025EUS$ Bn1,6521,0911,042608307283234230181173173165152152143~11%CountryChinaUnited StatesJapanIndiaGermanyItalyUnited KingdomSouth KoreaFranceBrazilCanadaMexicoSpainRussiaTurkeyUS$ Bn2,9502,3601,110810720430350330300260250250240210210Aspirational CAGR for Indian manufacturingSource: EIU; Data Monitor; BCG analysis.Note: GDP data for FY2009 refers to India’s GDP for 2008–09, but for some countries such as China, Brazil, Russia and US, it refers to calendar year 2008;Manufacturing GDP calculated based on Real GDP (based on expenditure) data from EIU and applying ‘manufacturing % (of GDP)’ from EIU and Data Monitor.1GDP at constant prices (in 2005 US$ bn).22025 estimates based on EIU projections for all countries (except India).Indian Manufacturing: The Next Growth Orbit 13

over the next five years. In 2007–08, Indian manufacturingcompanies had nearly Rs 13 lakh crore of gross fixedassets 3 . The average growth in asset productivity (revenues/grossfixed assets) for manufacturing companiesduring 2004–08 has been around 7%, with the rate dippingto as low as 3% in 2006 and 2008. A conservativeestimate of 3%–5% improvement in asset productivityimprovement would mean that gross fixed assets needto increase by Rs 55–80 lakh crore by 2025 to meet the11% growth target (as shown in Exhibit 2d). Of this, theinvestment required for 2009–2015 would be ~Rs 12–15lakh crore, which is a very substantial increase comparedto the addition of Rs 3.2 lakh crore to the industry’sgross fixed assets over the previous five years(2004–2008).Appropriate policy measures will be required to ensurethat such a massive funding requirement is met througha combination of public expenditure, and private andforeign investments. Specific efforts will need to be madeto attract higher FDI into the manufacturing sector. Byway of comparison, the total FDI into India, across allsectors including services and infrastructure, between2004 and 2008 was ~US$ 100 bn or ~Rs 5 lakh crore.The topic of trained human capital required to meet thisaspiration is equally challenging. In 2008, the manufacturingsector was is estimated to employ about 58 millionpeople or 12% of total workforce 4 . In the period between1995 and 2005, manufacturing labour productivity wasestimated to have grown by about 4.4% (in real terms) 5 .We expect that the Indian manufacturing sector will embracea higher level of automation and other technologiesand combined with improved operational processeswill grow its productivity faster. Even if we assume that inthe period between 2009 and 2025, the manufacturinglabour productivity will grow faster at 5%–7% per year,the manufacturing workforce would need an additional50–90 million trained people by 2025. This number wouldincrease to over 140 million if the productivity improvementis lower at 3% (as shown in Exhibit 2e). This representsa substantial growth from the current levels andrepresents a much higher share of the total employmentin India. Given the state of the skill training infrastructure3. Capitaline; BCG estimates.4. Central statistics organization; India’s Demographic Dilemma“Talent Challenges for the Services Sector” CII & BCG report.5. EIU country data; BCG analysis.Exhibit 2d. Large investments required to achieve aspirationsTotal additional of Rs. 55–80 lakh crore in manufacturing gross fixed assets by 2025 1Additions in gross fixedassets (Rs lakh cr)80~Rs55–80 lakh crore from 2009–2025604020040.924.726.115.612.417.53.22004–08 2009–15 2015–20 2020–25Actual addition in 2004–08Projected addition @3% asset productivity gainProjected addition @5% asset productivity gainSource: CSO; ASI, Capitaline; EIU; BCG analysis.Note: At 1999–2000 constant prices, FY 2008 base of gross fixed assets is nearly Rs 13 lakh crores, and additions required will be Rs 6–10 lakh crores. Assetproductivity is defined as revenues generated per gross fixed asset.1At current market prices; Nominal value projections.14 The Boston Consulting Group • Confederation of Indian Industry

this represents a significant challenge, which we will discussin some detail in the next chapter.The overall growth possible in manufacturing employmenttells only half the story. The labour intensity varieswidely across different manufacturing industries. For example,the labour intensive sectors like paper and woodproducts, textiles and food processing contribute lessthan 30% to the manufacturing output but over 60% ofthe employment. Special focus on these labour intensivesectors can generate additional employment of 15–20million 6 for every additional percentage point of growth.Hence, to operationalise this aspiration, it is important tode–average the 11% growth target to individual industrieswith the objective to meet the twin objectives of growthin output and growth in employment.One final point on labour: a substantial part of the incrementalworkforce would come from the migration fromrural–agriculture to urban–manufacturing. Hence, it becomesimperative that the appropriate polices are adoptedto make this workforce employable with the rightset of skills and qualifications. Significant efforts wouldalso be needed to increase the labour productivity to ensurethe higher competitiveness of Indian industry. Also,rapid development of urban infrastructure would becomean imperative to support this migration from ruralto urban areas.Exports will Need to Play an ImportantRole in Bridging the GapIt is important to recognize that an 11% manufacturinggrowth rate cannot be achieved without rapid growth inexports. As was mentioned earlier, if the domestic manufacturingsector can grow at 8% to 10% in line with orslightly higher than the overall GDP growth rate over theperiod of 2010–2025, exports will need to grow at 15% to20% annually.This target is not impossible. The last two decades haveseen large scale migration of industrial capacity from thedeveloped countries to RDEs, which have grown their industrialproduction at ~16% per annum compared to ~4% perannum for the developed countries in the last 5 years 7 .6. CSO & ASI; BCG analysis.7. EIU data.Exhibit 2e. Significant workforce requirements to achieve aspirationsAdditional people required inmanufacturing workforce (2009–2020)Workforce requirement based on labourintensity of industry (2009–2020)@7% labourproductivitygrowth715~481518Projected additions (2020–25)Projected additions (2015–20)Projected additions (2009–15)Actual additions (2004–09)Mn people120100100–110Low labour intensive industriesMedium labour intensive industriesHigh labour intensive industries@5% labourproductivitygrowth72327~8636806060–70@3% labourproductivitygrowth7Actual additions(2004–09)3342~1370 50 100 150Projected Additions to manufacturingadditionsworkforce (Mn)62(2009–20)Source: CSO; Institute of Applied Manpower Research; NSSO surveys; BCG analysis.Note: High labour intensive: paper, food, textiles, non–metallic products and others; Medium labour intensive: metal products and electrical equipment;Low labour intensive: basic metals, transport, chemicals and rubber; Labour productivity is defined as real manufacturing GDP/worker employed inmanufacturing sector.4020010–1510–15@3% labourproductivitygrowth5–10 5–10 35–40@5% labourproductivitygrowth4–6 5–7@7% labourproductivitygrowthIndian Manufacturing: The Next Growth Orbit 15

This trend is expected to continue—we estimate that by2025, RDE production will account for over 55% of the globalindustrial production compared to 36% today 8 . Hence,over the next 15 years there will be a massive shift of manufacturingcapacity from the developed to the developingcountries. India has to exploit the opportunity to capture adisproportionate share of this shift thereby accelerating itsexports growth rate. At the same time, India’s traditionalmanufactured goods exports like textiles, rubber, petroleumand metal products will need to fire on all cylinders.Key Levers for Indian Manufacturing toAchieve this AspirationAchieving this aspiration will not be easy. As mentionedearlier, we propose a ‘House of Manufacturing’ based onthree pillars (as shown in Exhibit 1f) that will allow Indianmanufacturing to enter the next orbit of growth. Inthe following chapters we describe each of these levers indetail, identifying specific opportunities and challengesfor Indian manufacturing.8. BCG analysis.16 The Boston Consulting Group • Confederation of Indian Industry

Developing Strong EnablingInfrastructureWorld class enabling infrastructure iscritical for the growth of India’s manufacturingsector. There are threecritical components of this enablinginfrastructure:◊ World class physical infrastructure that drives higherefficiency levels, in terms of both lower cost and fasterspeed to market.◊ Strong human capital to ensure that the manufacturingcompanies have access to the requisite good qualitytalent.◊ Simplified government procedures and policies, andreduction of transaction costs that improve the ‘easeof doing business’ and make it more competitive.No one doubts or questions the need for world classenabling infrastructure. Several reports by differentstakeholders have all pointed this out and have suggestedmany policy initiatives for implementation. Since areport on aspirations for the manufacturing chapterwould not be rooted in reality without a spirited discussionon the biggest bottlenecks to meeting the aspirations,in this chapter we bring together the different issues,along with global benchmarks and some of thepolicy measures required.Creating World Class Physical InfrastructurePhysical Infrastructure Quality is an ImportantDriver of CompetitivenessThe quality of infrastructure of a country has a directbearing on several key elements of competitiveness ofthe manufacturing sector. Energy and logistics cost aretwo of the important costs which are directly impacted bythe quality of infrastructure. Depending on the specificindustry, they can constitute a significant percentage ofthe overall cost. For example, Exhibit 3a shows that for acement manufacturer in India, power and freight costsform nearly 50% of the total production cost (exclusive oftaxes, corporate overheads and inbound logistics costs).Though the cost of power in India is almost comparableto that of China, erratic and unreliable power supply toindustries lead to use of higher cost power through generators.Poor roads increase freight costs from long turnaroundtimes and also leads to higher breakdowns oftrucks, further increasing logistics costs. In many instances,transportation time between the production site andthe market is an important criterion for companies inchoosing the manufacturing location and scale of operationsand thus has a direct bearing on competitiveness,which goes beyond simple cost of production.India’s Infrastructure ChallengeSeveral studies like the IMD world competitiveness surveyhave ranked India a lowly 54 th among 57 countries oninfrastructure facilities. The survey places India muchlower than other developing economies like Thailand(ranked 20 th ), Brazil (ranked 32 nd ) and China (ranked 37 th ).An assessment of the various components of infrastructurereveals consistent gaps across all areas.In the power sector in India, current demand supply gapis around 60 billion kWh and growing which is not expectedto be bridged even by 2020 1 . India’s per capitaelectricity consumption of 0.5 MWh/capita is nearly one–fourth that of China and less than 5% that of USA.1. IEA statistics; BCG analysis.Indian Manufacturing: The Next Growth Orbit 17

Exhibit 3a. Power and freight cost account for high proportion of product costBreakdown ofproduct cost for acement manufacturer in India1%oftotal production cost /ton of cement100145331100.0801760234034200Outboundfreight 2FuelsRawmaterial 3PowerMaterial(wear parts,distribution material,consumables)Source: Company annual report; BCG analysis and interviews.Note: Cost are for Jan – Dec 2008, except Freight cost which is for Sept 07 – Aug 08.1Excluding provisions and depreciations and amortization cost.2Weighted average of rail and road transport costs adjusted for distance from plant.3Inclusive of Mining royalties and taxes.4Includes administrative workforce.LabourownLaboursubcontractedOthers 4TotalThe good news is that the average cost of industrial powerin India is nearly 9 cents per kWh, which is comparableto that in other developing countries. For instance, theaverage cost of industrial power in China is nearly 8 centsper kWh 2 . However, inconsistent and insufficient supplyforces companies to rely on alternative sources of backuppower like generators which are much more expensive.A similar story exists with respect to ports infrastructure.Overall port capacity is constrained with most majorports running at close to full capacity utilisation. Averageturnaround time in India is 3.5 days as against 10 hoursin Hong Kong and 16.5 hours in Colombo (as shown inExhibit 3b). Port connectivity to hinterland is often poor.Given that most of our trade is routed through sea ports,their poor efficiency has a direct impact on the competitivenessof Indian exports.India’s road infrastructure also needs substantial improvement.A significant part of the country’s roads areunpaved. National Highways which account for 2% ofroad length but carry 40% of the traffic are under tremendouspressure. The speed of an average truck onIndian roads is about 40 kmph compared to 60 kmph inChina and nearly 100 kmph in USA and Europe, leadingto significant increase in turnaround time and transportationcosts 3 . Recent policy initiatives in this regardshould go a long way in improving the road infrastructurein India.Huge Investments Planned for InfrastructureDevelopmentGovernment of India has recognised the need for massiveinvestments in physical infrastructure and planned forthe same in the 11 th and 12 th Five Year Plans. Exhibit 3cshows that the government has planned an investmentof Rs 750 thousand crore in the 11 th plan (2007–12) acrosspower, ports and roads, more than doubling the actualexpenditure in the 10 th plan (2002–07).A substantial part of this investment is expected to bemade by the private sector. Exhibit 3d shows that as perthe government’s plans, the private sector will contributealmost 33% of all spend on roads, power and ports developmentprojects.2. JETRO report May 2009.3. NHAI statistics.18 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 3b. India faces significant disadvantages due to inadequate infrastructurePer capita electricitythconsumption 1/4that of ChinaMWh/capita15105013.5USA8.2Japan6.96.22.12.12.0Denmark Thailand China0.5UK Brazil IndiaPort turnaround timenearly 5times thatin Sri LankaTurn around time (hrs)10080604020084India17Sri Lanka10ThailandAverage truck speed inUSA nearly twice thatin IndiaAverage speed (km/hr)10080604020055India65China100USASources: IEA Statistics 2008, IBP Statistical Tables–2009, Office of Freight Management & Operations, Performance Measurement Programs 2008 andFederal Highway Admn, NHAIExhibit 3c. Large increases planned in infrastructure spendInfrastructure spend (‘000 Rs Cr)1,000800256%710th10 plan actualsth11 plan expert estimatesth12 plan expert estimatesTotal investment(‘000 Rs Cr)~800~1600~27006004002000125%20045061%150175%240400133%125272%30046571%120277%21046040%102%16011523090%216%12570Power Roads Telecom Railways Irrigation Watersupply/sanitation2101900%1300%85604606%312%30507248%335%35 4010Ports Airports Othersth th% increase from 10 to 11 planth th% increase from 10 to 12 planSources: Planning comission; Analyst reports; Expert interviews; BCG analysis.Note: 10 th plan 2002–07; 11 th plan 2007–12; 12 th plan 2012–17; Conversion rate: 1 US$ = Rs 45; All figures rounded–off for ease of representation.Indian Manufacturing: The Next Growth Orbit 19

Exhibit 3d. Private sector needs to play a significant role in Indianinfrastructure developmentPower Ports RoadsInvestments (Rs ‘000 Cr)800600Private sectorinvestment to double710Investments (Rs ‘000 Cr)100~60% invested inmajor ports8085Investments (Rs ‘000 Cr)400Private sectorinvestment toincrease fromRs ~7,000 to300 ~90,000 Cr~4004002000200140(70%)actualsth10 plan60(30%)450330(73%)120(27%)500(70%)210(30%)thth11 plan 12 planexpert expertestimates estimates60402002(50%)42(50%)actualsth10 plan6015(25%)45(75%)th11 planexpertestimates85(100%)th12 planexpertestimates2001000150140(93%)actualsth10 plan2(7%)~240~150(63%)~90(38%)th11 planexpertestimates400(100%)th12 planexpertestimatesSources: Planning Commission; Ministry of Power; Analyst reports (CLSA 08, Crisil 08, DB 08, Motilal Oswal 09);Planning Commission; Analyst reports (CLSA 08, Enam 08; Macquarie 09),Port Authority of India, Expert interviews; BCG analysis.Note: All figures rounded–off for ease of representation.PublicPrivateSplit n/aImproving Execution of InfrastructureProjectsThe challenge facing India’s infrastructure is not lack ofintent or plans, but failure of execution. As an exampleof power infrastructure (as shown in Exhibit 3e), the actualaugmentation in the generating capacity has consistentlyfallen short of plan.This is true for most infrastructure improvement plans.Most projects run significantly behind schedule—delayscaused both in the initial planning as well as in the executionof the project. Government’s own estimates indicatethat over 50% of projects in India are runningbehind schedule and 400 big infrastructure projects aredelayed between 6 months to 2 years, and costing thegovernment an additional Rs 45,000 cr or 17% of theplanned project costs 4 . For example, the Bandra–Worlisea link was awarded in 2000 and slated for completionin 2003. However, High Court clearances were obtainedonly by 2005. Lack of funds and design changes led todelays of another 4 years and the project was finallythrown open to public (partially) in 2009—a 6 year delayfrom the planned date of completion, leading to asubstantial increase in total cost.Four reasons contribute to these delays—poor planning,long lead times in land acquisitions, delays in gettingenvironmental clearances and poor performance management.Projects are often delayed during the tenderingstage itself due to unplanned and outdated cost estimatesand engineering designs. Acquiring land is anextremely tedious and time consuming process due tothe many government clearances, and at times rehabilitationissues of the displaced villagers. Many projectscannot start due to outstanding public litigations on rehabilitationin a court. Presently, it takes 1 to 3 years toget an environmental clearance from the Ministry of Environmentand Forests and 60% of power projects and40% of road development projects are delayed on thisaccount alone 4 . Once the project is underway, ineffectivedispute resolution and poor performance managementfurther add to the delays. Addressing these issues will becritical if we are to achieve our stated plans.Agenda for ActionIt is not the purpose of this report to make detailed recommendationson infrastructure. As we have said, the4. Government of India estimates.20 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 3e. India has a poor track record on the achievement of infrastructuredevelopment plansExample: Power capacity added vs. plannedMW50,00040,000-48%-53% -49%TargetAchievement30,00020,00010,000-45%-76%0VIII Plan(1992–1997)IX Plan(1997–2002)XPlan(2002–2007)FY08 Apr–Nov 08Historically, the power sector has realised onlyaround half of the planned expansionSources: Planning Commission; Ministry of Power; Analyst reports (CLSA 08, Crisil 08, DB 08, Motilal Oswal 09); Expert interviews; BCG analysis.challenges are well known and so are most of the solutionsin terms of:◊ Better planning and coordination across different governmentinstitutions: Responsibility of infrastructure creationis currently fragmented across multiple governmentministries, departments and bodies in terms ofboth types of infrastructure (e.g. roads versus power)and different permissions required (e.g. land acquisitionand rehabilitation versus environmental clearances).Often these agencies have different prioritiesand agendas. Better planning and coordination andacross these different entities is essential for an integratedinfrastructure development effort and speedyimplementation.◊ Better project execution and monitoring: The largestproportion of infrastructure spending will still bemade by the government and its agencies will be responsiblefor the execution of many of the projects.These agencies need to enhance their capabilitiesand systems to drive better execution and monitoringof the projects, ensuring adherence to quality andtimelines.◊ Ease private participation in infrastructure: The centraland state governments need to ensure a stable andeconomically attractive environment for private playersto participate in this space. Some of the elementsthat would contribute to this include economically viableconcessionary agreements, transparent rules foraward of contracts, clearly laid out environmentalclearance mechanisms and setting up robust regulatorymechanisms for the different sectors.One idea which the government may want to consider inits agenda for infrastructure is whether a ‘boosterdose’—a major increase in investment in infrastructureusing some of its foreign currency reserves should beconsidered despite potential increase in budget deficit.There are many instances in recent history where governmentsin several countries have done this, and theeconomic growth that was generated was well worth therisk of potential inflation from increased deficits.Building Stronger Human CapitalHuman capital is the second big challenge facing themanufacturing sector in meeting its aspirations. The soIndian Manufacturing: The Next Growth Orbit 21

–called “demographic dividend” will see a disproportionateincrease in the working population in India inthe coming decade. To ensure that this working populationprovides the requisite ‘employable’ resources forIndian manufacturing and does not become a liability,India needs to massively gear up its education and skilldevelopment infrastructure.India’s ‘Demographic Dividend’A study done by The Boston Consulting Group, highlightsthat by 2020 India would have about 45% of itspopulation in the age group of 20–50. As a comparison,the figure is 42% for China and 36% for France 5 (asshown in Exhibit 3f).These favourable demographics mean that by 2020, Indiawould be one of the few countries which to haveexperienced a disproportionate expansion in their workingage populations (as shown in Exhibit 3f). In 2007,India had nearly 60% of its population within the workingage group (20 to 50 years). By 2020, the figure willreach approximately 63%. This additional 3% will translateinto a nearly 47 million addition to the workingpopulation 6 .The ‘Demographic Dilemma’India’s ‘demographic dividend’ should, in theory, translateinto an abundant supply of working age people tofuel the drive for manufacturing growth. Unfortunately,a de–averaged picture of the demand–supply of skilledpeople indicates a major mismatch. In a study in 2008along with CII, The Boston Consulting Group analysedthis demographic dilemma of India and found that asthe demand mix for people shifts more and more towardsgraduates and trained people, an availability issuestarts arising. At an overall economy level, 23% of theincremental demand is expected to be for graduates andvocationally trained personnel as compared to about10% today, leading to a shortfall of qualified talent. Ourestimates suggest a shortfall of about 2 lakh engineers, 4lakh non–engineering graduates/post–graduates, and 1.5lakh vocationally trained personnel over a 5 year period(as shown in Exhibit 3g).The shortfall in qualified workforce gets further exacerbatedwhen the “employability” lens gets applied, which5. US census bureau; BCG analysis.6. US census bureau; BCG analysis.Exhibit 3f. India will have a disproportionate surplus in working age population by 2020Potential surplus population in working age group (2020)US -17Mn5MnMexico3MnBrazilGermany -3MnUK -2MnCzech Republic Russia0Mn -1Mn-6MnIrelandTurkeyIraq 2MnFrance -3MnChina2Mn Israel-10Mn-9Mn JapanIran PakistanSpain -3Mn -2Mn0Mn5Mn3Mn 19Mn7Mn 7PhilippinesItalyBangladesh4Mn47MnEgypt4MnIndiaVietnam1MnMalaysia5MnIndonesia-0.5MnAustraliaSources: U.S. Census Bureau; BCG analysis.Note: Potential workforce surplus is calculated keeping the ratio of working population (age group 15–59) to total population constant and under theassumption that this ratio needs to be broadly constant to support economic growth. Therefore, India will have 47 million more people in the working agegroup/total population by 2020 compared to today, while France will have a deficit of 3 million people in the working age group compared to today.22 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 3g. India will face shortfall in availability of qualified and ‘employable’ labourShortfall in qualified personnel estimated for 5year period 2007–12 (in lakhs)# Lakhs4039.0Shortfall based on qualificationShortfall based on ‘employablity’3020104.02.06.01.57.50Graduates/Post graduatesEngineersVocationallytrainedSource: CII–BCG Report “India’s Demographic Dilemma”, 2008.measures whether these educated personnel would havethe right skills to get employed. Given the wide disparitiesin quality of education across different institutes inIndia driven by variations in infrastructure, facilities andcapabilities, not all qualified graduates/engineers are directlyemployable. Several institutes in India, while providingformal degrees/diplomas do not adequately developbasic skills like verbal ability, comprehension anddata analysis to meet the threshold of employability.Studies indicate that the employability of graduatesranges from 9% to 60% across sectors with manufacturinghaving an employability of 40–45% 7 .Building in the impact of ‘employability’ on the overalldemand–supply situation indicates that India could facea huge issue with a shortage of skilled people in terms ofengineers (~6 lakh), graduates (~39 lakh) and vocationallytrained personnel graduates (~7 lakh) for the nextfive years (as shown in Exhibit 3g).It is important to emphasise the need to de–average theproblem and develop initiatives specific to industry orgeography as manufacturing industries have a wide variationin terms of the volume and skill level of labourrequired. This is illustrated in Exhibit 3h which showswide variation in labour intensity between industrieslike wood and paper which are much more labour intensivecompared to sectors such as electrical machineryand basic metals.Industries like transport equipment, electrical machineryand petroleum require workforce with specialisedskills and qualifications such as understanding of mechanicalprocesses, levers and engines; also heat treatmentof steels and knowledge of physical properties ofmetals. These will likely see a significant shortage asthese sectors continue to grow, and though the numberof pass–outs from ITIs and other vocational colleges increase,‘employability’ remains a concern.Industries such as wood, paper products and textiles onthe other hand require large workforce—mostly unskilledwith no special qualifications. Greater focus onthe growth of these industries will offer opportunities toabsorb the growing surplus of unskilled workforce in the7. India’s Demographic Dilemma “Talent Challenges for the ServicesSector” BCG–CII report.Indian Manufacturing: The Next Growth Orbit 23

Exhibit 3h. Wide variation in labour intensityLabour intensity across sectors in manufacturing industry in India#of worker/Rs lakh revenue generated1.5 1.391.00.50.620.530.440.260.220.0Paper &wood1productsTextile 2NonmetallicproductsOthersFoodproducts 3Metalproducts &machinery0.05Chemical0.05Transportequipment 40.04Electricalmachinery0.04Rubber &petroleum0.03BasicmetalsSource: Annual Survey of Industries 2005–06, Central Statistical Organization, India stat online database 2008.1Includes furniture and wood products, paper and printing.2Includes apparel.3Includes tobacco products.4Includes auto.country, particularly in states such as Uttar Pradesh, Bihar,Jharkhand where the population is expected to increaseby 8–11% by 2015 8 .Agenda for ActionSimilar to the infrastructure challenge, the governmentis quite aware of the human capital challenge and hastaken several major initiatives on this front ranging fromsetting up a National Skills Development Council to encouragingprivate participation/management of ITIs. TheCII–BCG report released in 2008 had highlighted severalareas for government policy intervention with an equallycritical focus on enhancing ‘employability’ rather thanjust increasing the number of qualified personnelthrough the upgradation of existing schools, sector–specificskill development and creation of vocational trainingplatforms. Some of the key agenda areas include:◊ Improving quality of teaching imparted in schools andcolleges: Three key levers were identified. First, thespending on public education will need to be enhanced.India spends ~US$ 300 per pupil compared toan average of US$ 1,600 for the other BRIC countries.Secondly, accountability in the public school systemhas to be enhanced. Currently, ~25% of the teachers inprimary schools are absent on any particular day, andthere is no system of performance tracking 9 . Andthirdly, private participation in the education sectorwill need to be encouraged.◊ Enhance provision of sector specific skills to qualified personnel:Vocational/industry–specific training postgraduation is a critical element enabling the graduatesto become productive quickly and calls for qualityassurance and curriculum development to ensurerelevance.◊ Improve attractiveness, availability and feasibility of vocationaleducation for school drop–outs: The currentvocational education infrastructure comprising government–runITIs, privately–run industrial trainingcentres and private vocational institutes have manydrawbacks. They suffer from poor quality of education,crumbling infrastructure and poor alignment toneeds of the job market. The government has recogn-8. Central statistics organizations projections.9. BCG analysis.24 The Boston Consulting Group • Confederation of Indian Industry

ised these issues and is putting in place plans to addressthem.While the scope of this report does not allow going intodetails of each of these recommendations, it is imperativefor all stakeholders to align on the objectives, plansand need for speedy action to ensure that Indian manufacturingdoes not face constrains in the form of humancapital to its future growth.Simplified Government Procedures andPoliciesGovernment procedures and policies play an importantrole in defining the attractiveness of a country as a manufacturingdestination. These include:◊Ease of starting or setting up a new business.◊ Ease of accessing and controlling the key factors ofproduction like capital and labour.◊ Impact of taxation structures and government procedureson cost competitiveness and transaction costs.India Rated ‘Poor’ on Ease of Doing BusinessA Forbes study of “Best Countries for Business” in 2008ranked India at a lowly 120 th out of 127 economies studied,falling 11 places from last year’s position. Eventhough significant progress has been made through delicensingand easing of norms, there is clearly some way togo. India is still rated a difficult place to set up a newbusiness—in terms of number of procedures and clearancerequired, the time taken to make things happen andthe resultant cost of doing so.This makes India an expensive destination to start businessas computed by World Bank in its project ‘DoingBusiness’ of the World Bank group which computes a‘cost of doing business’ score as an indicator of the cost ofstarting a business as a percentage of GNI per capita. Thiscost is driven by procedures and legalities to be completed,and the various fees paid to the government andother agencies (as shown in Exhibit 3i). There are otherareas where India lags its peers. For example, enforcingcontracts in India takes twice the time it takes in OECDcountries and costs almost 40% of the contract value.Closing down or exiting a business is also seen as a veryExhibit 3i. India lags on ease of starting a new businessNo. of procedures151310586#ofdays taken to start abusiness5041403030201710Cost (% of GNI per capita)80706040312090IndiaSouth EastAsiaOECD0IndiaSouth EastAsiaOECD0IndiaSouth EastAsiaOECDSource: ‘Doing Business’ database–2009: www.doingbusiness.org, a World Bank Group database.Note: Cost of starting a business, is the incremental costs incurred in starting business like fees paid for legalities and procedures.Indian Manufacturing: The Next Growth Orbit 25

lengthy and cumbersome process and the recovery rateof closing the business is estimated at less than 10% ofthe value outstanding 10 .Higher Transaction Costs Faced by theManufacturing SectorPoor ‘ease of doing business’ translates to higher transactioncosts for Indian businesses, which is of particularconcern for export competitiveness. For example, CIIstudies indicate that about 31 documents in a total of 87copies are required to ship goods from India. Many ofthese are certifications from various agencies and aredone in manual form. Another example is the extent ofdocumentation required for clearance of import/exportshipments in an SEZ, which include: five physical copiesof the Bills of Entry required for clearing a single importshipment, 28 rubber stamp impressions and 32 signatureson the Bill of Entry for clearing a single import shipment;eight rubber stamp impressions and 15 signatures for anexport shipment.Similar to the examples above on documentation fortrade transactions, substantial paperwork and bureaucracyis involved in different processes at other touchpointslike indirect taxation, inter–state border checkpointsfor transportation of goods, etc.These procedures and paperwork need to be eliminated,streamlined or simplified to improve cost and time effectivenessof Indian companies. Industry and governmentshould work together to identify specific and detailed improvementsthat can be implemented across various processesto bring down transaction costs in India.Cascading Taxation StructureDespite ongoing tax reforms, the Indian indirect tax systemcontinues to be complex and inefficient for the manufactureras the cascading impact of various taxes likeexcise, state and central sales tax, and octroi and entrytax can be as high as 25–30% of the retail price in India.Exhibit 3j shows this cascading affect of multiple taxes ona consumer good like refrigerator where the overall taxincidence is as high as 27% of the sales price.In comparison, many countries like China impose asingle nationwide value added tax (VAT), at a level of10. World bank ‘Doing business’ database.Exhibit 3j. Total indirect tax incidence in India is between 25% to 30% of sale priceExample: Tax incidence on price of refrigeratorPercent of sale price30252014.126.615107.41.21.8500.9CSTon rawmaterial0.6Octroion rawmaterial0.6Customsduty on rawmaterial importExcise dutyon productCST onproductOctroi onproductVAT onproductTotal taxincidence onrefrigeratorpriceTaxes on raw materialsTaxes on manufactured productSource: BCG analysis and company report.Note: CST refers to Central Sales Tax unless otherwise mentioned.26 The Boston Consulting Group • Confederation of Indian Industry

17% of the retail price. CII studies indicate that exportsfrom most countries are exempted from taxation. In Indiatoo this is the general policy but given that there isno re–imbursement on certain categories of taxes suchas octroi and central sales tax, Indian exporters end uppaying 4%–6% of cost of goods as tax on their exportsthereby reducing cost competitiveness 11 .Besides the cash outgo, the multitude of taxes and exemptionscreates inefficiencies and delays in the system.Indian manufacturing firms have higher logistics and inventorycosts as thousands of trucks wait on state bordersto pay taxes. According to a World Bank study conductedin 2005, 15%–25% of transportation time is lost due todelays at inter–state checkpoints 12 . Manufacturing companiesset up warehouses in multiple locations, whichfurther increase logistics cost, to optimise tax outgo. Finally,decisions around choice of manufacturing locationsand scale of plants are distorted by tax considerationsrather than economies of scale or proximity to markets/raw materials.A simplified, transparent, unified and better administeredtax structure across the country (proposed to beimplemented via the Goods and Service Tax (GST))would go a long way in helping to drive greater efficienciesfor the Indian manufacturing sector.Labour Laws in IndiaSeveral detailed reports already exist on this sensitivetopic. We have therefore refrained from getting into detailsin this section. Instead we would like to emphasizea few key points.India needs to protect worker rights, which becomeseven more important given that there is no social security.However, this does not mean that India should notput in place a flexible, efficient labour market to optimiseoperations and improve efficiency. This becomesmore critical as given the increased volatility in the externalenvironment, rigidities in the labour market implylower flexibility in operations and invariably highercosts.At present, there is a multitude of labour laws in thecountry. There are 45 Central Acts and 16 associatedrules that directly deal with labour. In addition, thereare other acts that deal indirectly with labour. There isa need to harmonise rules across all these acts.The key policy agenda for the government is how tosimplify and refine the labour laws keeping in mindthis need for flexibility and efficiency of the manufacturingsector, while at the same time protecting andmanaging the interests of the labour. We will discussthis in more detail in Chapter 6 on the policy agendafor the government.Attracting Greater FDI into Indian ManufacturingSectorAs discussed earlier, India will have to get a much higherlevel of investments into its manufacturing sector toachieve the desired aspiration. Gross fixed assets of themanufacturing sector will need to increase by Rs 55–80lakh crore between now and 2025, on a base of Rs 13 lakhcrore of gross fixed assets today. Just to compare, the increasein gross fixed assets over 2004–2008 was Rs 32 lakhcrore 13 .To make this happen India has to start attracting higheramounts of FDI. While the FDI flow into India has improvedrapidly over last few years, it still lags its peers(as shown in Exhibit 3k). Within this overall FDI flow,most of the manufacturing FDI has gone into Chinawhich has received over US$ 40 bn into this sector 14 .Higher FDI into the manufacturing sector will also be acritical contributor in helping India achieve higher exportgrowth of 18%–20%.An interesting model that India could look at is “CzechInvest”,set up by the Czech government as an independentinvestment and business development agency in 1992.This agency attracts foreign investment and developingdomestic companies through its services and developmentprograms. CzechInvest is exclusively authorised to file applicationsfor investment incentives at the appropriategoverning bodies and prepares draft offers to grant investmentincentives. It actively provides potential investorscurrent data and information on business climate, investmentenvironment and investment opportunities in theCzech Republic. Its services also include handling of investmentincentives, business properties identification,supplier identification, business infrastructure developmentand providing access to structural funds.11. CII estimates; BCG analysis.12. World Bank estimates.13. Refer Exhibit 2d, Chapter 2.14. UNCTAD FDI stats, EIU estimates.Indian Manufacturing: The Next Growth Orbit 27

Exhibit 3k. Overall FDI flows into India lag peer countriesFDI inflow (US$ Bn)1009084806040546172327352357045412008181519 201510136842003 2004 2005 2006 2007232008Russian Federation Brazil China 1 IndiaSource: UNCTAD FDIstats, Economist intelligence unit.Note: FDI amounts in US$ at current prices. China 2008 numbers projected as CAGR of previous 4 years. India 2008 projection from EIU.1China excluding Hong Kong, Macau and Taiwan.Agenda for ActionAs in the case of infrastructure and human capital, theimportance of improving upon the ‘ease of doing business’and its attendant issues are well recognized. As Indianmanufacturing companies compete more and moreon the global stage, all these elements would becomekey to cost competitiveness. Specific policy recommendationshave been proposed in several CII publications already.Without belabouring the issue, and getting intothe details of each of these, we reiterate three broad areasof focus:◊ Simplification of procedures and rules and reduction oftransaction costs: The need to rationalise, harmoniseand simplify procedural requirements at all levels ofbureaucracy—both central and state, is well recognised.The aim should be to come close to establishinga ‘single window clearance’ to the extent possible andreduce the number of touch–points required by businessesand leverage information technology.◊ Rationalisation of indirect tax structure: Rapid implementationof the proposed Goods and Services Tax(GST) regime is the cornerstone of simplifying andminimising the cascading tax burden. Simplifying theadministration and collection of these taxes is equallyimportant.◊ Reform of labour laws: The Second National LabourCommission had developed several specific recommendationsin 2002, on this important topic. Theseneed to be looked at in detail, and implementationaccelerated.◊ Attracting higher FDI into India: The recent initiativelaunched by the commerce ministry of setting up ‘InvestIndia’ to promote foreign investment into Indiain a structured and comprehensive manner is a stepin the right direction. Invest India will provide structuredsupport for foreign investors looking to investin India, facilitate setting up of the business and helpcoordinate with the state governments. It is critical toensure that the intent behind this initiative is realised,and further efforts are made as required to attractgreater FDI.This pillar of developing strong enabling infrastructure isabsolutely critical for achieving the aspirations for the28 The Boston Consulting Group • Confederation of Indian Industry

Indian manufacturing sector. In this chapter we havehighlighted three key areas. In addition, there is a need toimprove the overall regulatory mechanism for industries,enhance the efficiency of the legal and contract enforcementsystem, and boost the efficiency of the capital marketsand intellectual property protection mechanisms.Most of the issues raised here have been on the radarscreen of the government and industry for a while now.Action has been taken and improvements have happenedalong several dimensions. The imperative now is to alignall stakeholders on the need to accelerate the implementationof the extensive action agenda before them.Indian Manufacturing: The Next Growth Orbit 29

Exploring New Avenues ofGrowthThe second pillar that will support India’smanufacturing aspirations is identifying andexploiting new avenues for growth. Achievingthe aspiration for the Indian manufacturingsector has to take into account certainimportant forces that are shaping the Indian and globalmanufacturing landscape. We examine three powerfulforces that can offer significant opportunities for Indianmanufacturing.◊ Globalisation of supply chains—the biggest force thathas transformed the global industrial landscape in recentyears, offering opportunities for export–ledgrowth from India.◊ Sustainable Development and emergence of “GreenTechnologies”—will be one of the strongest forces overthe next two decades, offering both challenges and opportunitiesin green manufacturing and new technologiesfor Indian companies.◊ India’s changing income demographics—will offer opportunitiesamong different segments, especially the“Next Billion” both in India and globally.In this chapter we examine these opportunities, India’scurrent position and competitiveness to tap these anddraw implications for the sector to drive growth in theseareas.Globalisation and Export–Led Opportunitiesfor IndiaGlobalisation has been one of the defining trends of thelast two decades, and the pace of globalisation has beenincreasing rapidly. This is being driven by a unique confluenceof large, low–cost, high–growth markets comingtogether with the rapid opening up of world trade. Overthe last 3 decades, merchandise trade of the US increasedclose to seven fold from ~US$ 480 bn in 1980 to US$ 3.2tn in 2007, growing at about 7% per year. China and Indiahave shown an even sharper growth, with China’strade growing at nearly 16 % per year to reach nearlyUS$ 2.2 tn in 2007, and India’s trade growing at nearly11% per year to reach nearly US$ 360 bn (as shown inExhibit 4a).Industrial Capacity Migrating to the DevelopingCountriesThis rapid globalisation has seen large scale migration ofindustrial capacity to RDEs which have grown their industrialproduction at ~16% per annum compared to ~4%per annum for the developed countries in the last 5 years(as shown in Exhibit 4b). Consequently, the total industrialproduction of these RDEs has grown from less than25% of OECD countries to more than 50% between 1990and 2008. The primary drivers of this migration havebeen rapid growth of these RDE markets and lower labourcosts which have led MNCs to restructure theirglobal supply chains. For example, a leading telecomplayer’s share of capacity in the RDEs increased from~40% to ~70% over a six year period 1 .While China has been the leading beneficiary of this migration,several other countries including India have alsogrown their manufacturing sectors substantially duringthis period. In select categories like consumer electronics,household appliances, textiles and apparel, close to 50%of US domestic consumption is now imported from justAsian countries.1. Market interviews; BCG analysis.30 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 4a. Rapid growth in global tradeMerchandise trade (Exports/Imports) for 1980 – 2007$Bn 4,0003,0002,0001,00004831980+7%2,0419111990 2000US3,183ExportsImports2007$Bn 400$Bn 3,0002,0001,000China3801980India300+11%200+16%4741151990 2000362Exports2,174ExportsImports200710002319804219909420002007ImportsSources: World Bank; WDI.Exhibit 4b. Large migration of capacity from developed to developing countriesMigration of capacityIllustration: RDE based supplychain of global telecom playerAnnual growth of industrial production (‘04–‘08)25Russia Total Industrial GDP =US$ 4.6 Tn (2008)20ChinaIndonesiaBrazil15PolandCzech RepublicThailandMalaysiaIndia105HungaryMexicoSpainUnitedStatesTotal Industrial GDP =US$ 7.9 Tn (2008)CanadaItalyGermanyFranceUnitedJapanKingdom00 10 20 30 40 50Manufacturing labour costs per hour in 2008 (US$)Production capacity (indexed)210Share of RDEincreased from~40% to 70%2000 2002 2004 2006BrazilChinaHungaryIndiaMexicoKoreaSources: EIU; Market interviews; BCG analysis.Note: Gross domestic product (GDP) at current market prices in US$ from industrial production i.e. mining, quarrying, manufacturing, construction andutilities.Indian Manufacturing: The Next Growth Orbit 31

However, it is important to recognise that a large part ofthe shift in production over the last several years hasbeen dominated by lower value added products. As anexample, while many automotive companies are sourcingparts or commodities from countries like China and Mexico,only few are sourcing full modules/systems. MNCsstill struggle to exploit the full potential of manufacturingand sourcing from RDEs due to external challenges likelack of scale of suppliers, high volatility in currency andtransport costs, and higher quality costs and internal challengesaround lack of integration between different functionslike procurement and engineering— procurementwants to source from low cost suppliers while engineeringwants suppliers closer to home.The March of Globalisation Likely to ContinueUnabatedThe recent economic crisis has raised the spectre ofgreater protectionism in major economies in the world.There has also been talk about the eroding competitivenessof RDEs as wage rates increase, transportation costsrise due to higher oil prices, and currency volatility increases.Does this mean that the forces of globalisationare likely to slacken?Let us look at some facts. Our analysis shows that thehuge labour cost differential between the RDEs (~ US$0.3/hour to US$ 9/hour in 2008) and the developed countries(average for G7 countries was ~US$ 29/hour in2008) is very unlikely to narrow in the short or mediumterm. Even with the likely increase in wage rate in RDEsa substantial gap verses developed countries will continueto exist. Transportation costs are unlikely to risesubstantially from current levels as oil price stays in theUS$ 65–100 per barrel range. There is increasing downwardpressure on container freight rates given the demand–supplysituation in the container market. RDE–based production thus continues to be significantlycheaper than the U.S. or Europe—except for productsthat have minimal labour content or are bulky and costlyto ship and has remained so even in times of hightransportation costs and strong RDE currencies. A simpleproduct like a coarse shirt or a precision engineeredproduct like an automotive part is still around 25%–50%cheaper to produce and ship from the RDEs to the westernmarkets 2 .Similarly, while there has been a lot of talk around protectionismin several countries, free trade is expected toprevail in the longer run. Lessons have been learnedfrom previous recessions where raising trade barriers actuallyproved counter–productive. Also, the inter–linkednature of the supply chains today makes it difficult forcountries to raise tariffs without negatively impactingtheir own producers, or inviting retaliatory responsesfrom other countries. Support for free trade remainsstrong with the G20 stance being to “promote globaltrade and investment and reject protectionism to underpinprosperity”.Global Markets Offer SubstantialOpportunities for Indian CompaniesIn the last two decades, total industrial production in theRDEs has grown from ~20% of OECD countries to morethan 35% between 1990 and 2008 on the back of greatercost competitiveness. We estimate that by 2025, theRDEs will overtake the developed markets in industrialproduction 3 . This continuing shift offers substantial opportunitiesfor Indian companies. With a concerted pushIndia could increase its share in global off–shoring effectivelyfilling the gap between growth in domestic consumptionand in its manufacturing aspirations. To dothis, two important considerations emerge—choice oftarget industries and choice of export destinations.Choice of industry will be important. Recent BCGanalysis shows that off–shoring to Asian countries willcontinue to rise. However not all industries will be equalcontributors to this. BCG analysis shows that based onrelative competitiveness of Asia versus other off–shoringlocations, six industries will continue to be the biggestcontributors to the Asian off–shoring story. These are appareland textiles, consumer electronics, furniture andwood products, automobiles, industrial machinery andindustrial chemicals. Some industries where India is alreadyan important exporter will continue to offer strongpotential—specifically chemicals and textiles. Indiacould also make a bigger push into consumer electronics,furniture and industrial machinery. The choice of futurefocus industries will depend on multiple factors–exportpotential from these industries, India’s current relativecompetitive advantage to serve this demand, key exportdestinations and India’s trade relations with them. A focusedand detailed effort is required to identify prioritysectors for India to target breakout growth in exports.2. BCG analysis.3. EIU data; BCG analysis.32 The Boston Consulting Group • Confederation of Indian Industry

Need to understand shifting global trade patterns.Over the last decade, there has been a historic shift intrading patterns with global trade shifting from Europeand the US–based flows to intra–Asia routes 4 . For example,the intra–Asian trade in 1990 which was just 4 millionTEUs had the fastest growth among all key tradingroutes and grew to over 28 million TEUs by 2008 and isexpected to grow to over 80 million TEUs by 2015—byfar the largest trading route in the world. China has accountedfor the lion’s share of this massive shift that hasoccurred. India exports to a good mix trading partnerswith exports to Europe accounting for 25%, USA accountingfor 13% and Asia accounting for 32% of total exports.While India needs to keep USA and Europe in its sights,it needs to rapidly deepen its focus on Asia to take advantageof this massive growth in intra–Asian trade in thenext decade.India’s Competitiveness ChallengeIndia is one of many RDE countries considered by MNCsas they globalise their supply chains. At the same time,many Indian manufacturing companies are globalisingtheir supply chains at a rapid pace through both organicgrowth and acquisitions. A strong and competitive manufacturingbase in their home market will be an importantcompetitive driver for most of these companies.How competitive is India compared to other RDEs? Exhibit4c shown below compares India with other RDEson several factor costs such as land rates, power costs,taxes, prime lending rates and labour costs. At firstglance, India looks competitive versus other RDEs. However,a closer look reveals several issues that reduce thiscompetitiveness. India’s manufacturing labour productivityin 2006 was 30% lower than China’s in nominalterms 5 —adjusted for productivity; this virtually eliminatesIndia’s labour cost advantage over China. On severalfactor costs while reported costs are low, there areseveral hidden costs which render India disadvanta-4. Drewery Shipping consultants; BCG analysis; refer Exhibit 6b.5. EIU country data; BCG analysis.Exhibit 4c. Factor costs comparison across countriesFactor cost headsUnits India China Malaysia Thailand Indonesialabor cost per hour (2008) 81Land costs (industrial)(2009)2Power costs$/sq–mt$/KwH320.09380.40.088.50.06810.07400.04(2008)3VAT rate%12.5 175–20 sales tax 7104(2009)(~25-30)depend-ingon items(National tax)5Prime lending rate(2009)6Manufacturing labour costs(2008)7Manufacturing productivity of labour(2006)%$/hour$/worker120.9920,4765.61.4026,6445.12.4319,5925.81.8013,870NA0.3321,136Productivity adjusted manufacturing %ofUScost 5548264614Note: All factor costs are taken at the current market prices for the years mentioned. Factor costs like land costs, labour costs and power costs vary widelyacross regions within large countries like China, India and Russia.1Data from comparative survey of investment related costs by Japanese External Trade Organization ( JETRO). Rates taken are capital values for land inindustrial zones in and around key cities. For India – New Delhi and Mumbai, China – Beijing, Shanghai and Guangzhou, Singapore, for Malaysia – KualaLumpur, for Thailand – Bangkok, for Indonesia – Djakarta. For Russia data from web research.2Power costs taken from IMD competitiveness online for 2008, for India (2009) average of industrial power costs taken from JETRO report for New Delhiand Mumbai, for China average of industrial power rate (2009) for Beijing, Shanghai and Guangzhou.3Data from JETRO report, VAT rates applicable across the country uniformly. For Russia data for 2006 from EIU market indicators and forecasts; tax ratesmay not be completely comparable across different countries due to differences in tax structure.4Total indirect tax incidence on sales price in India can be as high as 25–30% including entry taxes, cesses etc.5EIU country indicators.6EIU market indicators and forecasts.7EIU market indicators and forecasts, Includes formal sector employment only.8BCG EstimatesIndian Manufacturing: The Next Growth Orbit 33

geous. For example, though power costs are almost comparableto other RDEs unreliability of power supplyforces Indian manufacturers to use more expensivesources of power like generator sets. Similarly, land ratesseem competitive but accounting for delays in land acquisitionsand dispute settlements, effective land acquisitioncosts would become higher. Also, though the reportedVAT on goods is 12.5%, additional entry taxes, cessesand customs duty increases the total indirect tax incidenceon product prices to 25%–30% 6 .Labour productivity in particular is a crucial driver ofcost competitiveness. India’s real manufacturing labourproductivity (value of output per worker) lags China’sboth in absolute terms and in rate of growth. India’s labourproductivity is substantially lower than China’s. Asa result, despite lower wage rates in India, when adjustedfor productivity India’s effective labour costs are actuallyhigher than those of China (as shown in Exhibit 4c). Additionally,China’s real manufacturing labour productivityhas grown at a CAGR of ~12.5% with India managingonly a 7% yoy growth in the same period (1998–06) 7 . Thisdifference is driven by a combination of greater efficiencyand better industry mix in China. Exhibit 4d belowexplains some of the factors that have driven the rapidrise in labour productivity in China. India will need toaggressively close this gap versus China in order to competeeffectively at the global level. Over the same period,China’s manufacturing wage rates have also grown rapidly(~10.4% adjusted for inflation) 7 in sync with themore flexible and skilled workforce that has contributedto this higher productivity. Indian manufacturing on theother hand has sustained extremely low nominal wagerates; in fact on inflation adjusted basis India’s real wagerates have decreased in the same period (on a US$ basis,to facilitate comparison with China). Of course, it is importantto realise that this wage rate is a blended averageacross industries—hence while wage rates mighthave increased in individual industries, the workforcemix could have shifted more towards lower wage rateindustries. Going forward, India will need to drive higherproductivity, recognising the fact that wage costs will alsoneed to grow at a faster pace to attract and retain a moreskilled workforce—further exacerbating the need for anincrease in productivity.6. Refer Exhibit 3j, Chapter 3.7. EIU country data.Exhibit 4d. Key drivers that have propelled China’s rapid labour productivity growthStrong clustering effects• High focus on building clusters andsupplier networks• Collectively Chinese companiesfollow asteep curve to criticalmass—production scale, talentdevelopment etc.Manufacturing labour1productivity growth of~13% (FY 1995–2005)Infrastructure investments• Pace of investment in highways, railand airports is very high• Breaks constraints on manufacturingscale as economic distance totransport goods increasesGovernment inducedconsolidation• Government's stated objective offorcing scale in production andlogistics• Direct bearing on productivity aslarger plants will have scale benefitsSpeed of execution• Easier and faster procedures for newprojects—with local support, aprojectcan be up and running in 6months• Timeline to cash positive is muchshorter in ChinaHigher capital availability• Higher capital availability helpsbusinesses move up the value chain• Labour intensity is reduced, lessermore skilled labour increasesproductivitySource: EIU market indicators and forecasts; Market interviews.1Manufacturing labour productivity defined as value added per worker. Based at 1995 constant market prices.34 The Boston Consulting Group • Confederation of Indian Industry

This productivity challenge will have important implicationson Indian manufacturing’s employment andworkforce requirements. Manufacturing industries willneed to proactively develop, attract and train relevantskilled workers—already an important gap in India’stalent pool today. At the same time, growing productivityto drive competitiveness would mean loweroverall incremental workforce requirements. Manufacturingwould therefore need to grow at an even higherpace in order to generate more employment opportunitiesand address India’s overall employment challenge.There are two other key areas which will contribute toIndia’s competitiveness in global supply chains. First,in terms of factor costs, having a more stable currencyoutlook and improving transportation infrastructuree.g. ports and roads, so that volatility and fluctuationsin transport time could be reduced are critical. Second,as MNCs look to increase the level of value–additionfrom their RDE plants through greater integration betweenmanufacturing and R&D, India should positionitself as the most competitive location with its Englishspeaking strong engineering talent.These elements of competitiveness become even moreimportant as trade barriers come down and India opensitself more and more to imports. With several FTAs alreadysigned, and many more on the table, the mostrecent being the FTA with ASEAN countries, import barrierswill keep declining. Customs duties in India havebeen declining steadily, with the value of import dutiesas a percentage of total imports coming down from~24% in 1999 to ~11% in 2008 8 . Unless India improves itglobal competitiveness rapidly, there remains a dangerthat these FTAs, at least in the short term, could lead toan increase in imports without similar growth in exports.This has been the experience since the FTA wassigned with Thailand a few years ago. Exports to Thailandsince the FTA was signed have roughly doubled invalue while imports have gone up almost four times.This is illustrated in Exhibit 4e below.Agenda for ActionGlobalisation has been the most important force shapingmanufacturing industry globally in the past few decades.It will continue to play a critical role and supply8. RBI handbook of statistics; Ministry of Commerce; BCG analysis.Exhibit 4e. Improving India’s competitiveness will become more important withreducing trade barriersImport duties for India havereduced over the past decadeExample: India now net importer from Thailand,imports increased 4x after FTA (2004)Customs duty as %oftotal imports2523.6 23.2Rs. ‘000 crs10FTA signed9.3201510521.016.915.814.111.710.110.5–54%10.88642Exports to Thailand7.9Imports from Thailand7.36.55.44.83.84.13.93.43.02.82.41.92.01.81.4 1.4 1.51.1099 00 01 02 03 04 05 06 07 08000 01 02 03 04 05 06 07 08 092000–20042004–2009Imports CAGR12.4%38.3%Sources: Indiastat online; RBI handbook of Statistics; Ministry of Commerce.Exports CAGR26.4%16.2%Indian Manufacturing: The Next Growth Orbit 35

chains will become more globally integrated. This phaseof globalisation saw massive migration of industrial capacityfrom high cost developed countries to low costRDEs driven by their low wage rates. The new wave ofglobalisation will move beyond simple labour cost arbitrageinto a more value added role for RDE plants. Indiahas to improve its competitiveness to compete againstother RDEs and capture a greater share in the large opportunitythat this shifting production creates.Indian companies will have to develop focused strategiesto capture a greater share of this opportunity. Theywill need to:◊ Understand the specific needs of global players andidentify industries with off–shoring potential.◊ Develop industry specific approaches to drive a greatershare of off–shoring.◊ Continue investment in upgrading local talent,benchmark against other RDEs in terms of cost competitivenessand implement plans to improve productivity.The government also has a key role to play which wewill discuss in more detail in the last chapter on policyimperatives.Sustainable Development and GreenTechnologiesSustainable Development Now a GlobalAgendaGlobal warming has made sustainable development akey priority for governments and companies. The topic ofsustainability has the potential to change the economicsof manufacturing and will significantly affect the futurecompetitive positions of companies—changing the coststructure of industries and potentially restricting marketaccess. At the same time, several new opportunities willemerge driven by the growing carbon trading market anddemand for “green” products and technologies.India’s Sustainability ChallengeWhile India’s carbon emissions per capita are lower thanother countries, in absolute terms India is one of the largestcarbon emitters in the world (as shown in Exhibit 4f).As Indian economy develops, the absolute carbon emis-Exhibit 4f. India amongst the top carbon emitting nations in the worldIndia has sizable carbon emissions ...... However, per capita emission is lowChina6,018United States19.78United States5,903Canada18.81Russia1,704Russia12.00India1,293South Korea10.53Japan1,247Germany10.40Germany858Japan9.78Canada614United Kingdom9.66United Kingdom586Italy8.05South Korea515France6.60Italy468China4.58Mexico436Mexico4.05FranceBrazil418377BrazilIndia2.011.16Average0 2,000 4,000 6,000 8,000Mn MT CO 20 10 20 30Tons/capitaSources: Energy Information Agency (Department of Energy) 2006; EIU; Data Monitor; BCG analysis.36 The Boston Consulting Group • Confederation of Indian Industry

sion will grow rapidly putting pressure on India to capand/or lower its total emission.The emerging global carbon market and growing demandfor “green” products and technologies will offer significantopportunities for growth in the years to come. Onthe other hand, escalating carbon costs could, over time,have significant implications on future global supplychains and influence market access for Indian companies.Indian manufacturing needs to focus on four areas:setting binding targets for 37 industrialised countries includingthe European Union to reduce greenhouse gasemissions (GHG). The protocol resulted in the creation ofa worldwide market for emission reductions. As Exhibit4g shows, this market is today already worth about US$125 bn and is estimated to grow to over US$ 3.1 tn by2020.Several factors are likely to drive growth in the carbonmarket:◊◊◊Explore opportunities in the rapidly growing carbontrading market.Drive “greening of operations” to reduce their carbonfootprint.Explore opportunities in “greening of products”.◊The European Union Emission Trading Scheme (EU ETS)itself would become more efficient: The first phase oftrading scheme (2005–2007) faced criticism due to excessiveand inappropriate allocation of carbon caps.The third phase (2013–2020) is likely to have harmonisedEU–wide rules which would make the system fairand robust.◊ Explore emerging “green technologies” with opportunitiesto build local and global leadership.Significant Carbon Trading Market EmergingThe Kyoto Protocol was a landmark movement in 1997,◊Scope of EU ETS would be widened: The scope of ETS islikely to be extended to include sectors like aviation,chemicals/petrochemicals and aluminium. The capture,transport and geological storage of all GHG emissionswill also be covered under ETS.Exhibit 4g. Carbon trading markets to continue to grow rapidlyWorld carbon market estimated at nearly $3 trillion by 2020Annual carbon volume (Gt)100+29%642+65% Australiacap–and–tradeschemescheduledUS ETSexpected tobe up andrunningUS ETSto bemore thandoubleEU ETS02005 2006 2007 20082009201020152020$54Bn$125Bn$3.1TnETSOthers (includes CDM and JI)Estimated 1 global marketUS$ value of carbon marketSource: Point Carbon.1$30/tn carbon price assumed in the long term.Indian Manufacturing: The Next Growth Orbit 37

◊ New countries entering the carbon space: Developed nationslike the US and Australia are likely to set up theircarbon trading systems. (In June 2009, US senate passedthe Climate Change Bill, which binds it to reduce carbonemissions by 17% from 2000 levels till 2020 and by83% of 2000 levels by 2050. It also sets a national capand trade system.) The US carbon trading market itselfcould be almost twice the size of EU ETS.India is still to make significant inroads in the carbonmarket. The Kyoto Protocol, under its clean developmentmechanism (CDM), allows companies in developing marketsto set up emission reduction projects to earn certifiedemission reduction (CER) credits, each equivalent to onetonne of CO2. These CERs can then be traded/sold, andused by countries under the Kyoto Protocol to meet emissioncaps. The projects range from reduction of energyconsumption, better waste heat recovery and effluenttreatment systems, to greater usage of renewable energy.China is already at the forefront of this movement withthe largest number of CDM projects. India, however, hasnot been able to fully exploit the CDM opportunity.Though, India ranks second in terms of number of CDMprojects, the CER value per project (as shown in Exhibit4h), is only about one–fourth of China. The Chinese governmenthas put emission reduction on the political agendaand is strongly supporting the CDM market. A nationalCDM fund has been set up to facilitate the CDM marketwith financial incentives and capacity building support forprojects. State–owned companies have also entered themarket with large scale, high CER revenue projects.Indian companies, across sectors, have already startedprojects that employ mechanisms to reduce emissionsand earn CERs. Going forward, India needs to accelerateits progress and implement a similar consolidated andaggressive effort to target carbon credits on a larger scaleand at the national level.The Need for “Greening” of OperationsSustainability linked costs could shape future globalsupply chains. This global ‘green’ movement can posesevere challenges for companies and sectors that have alarge carbon footprint. The cost structure of various carbonemitting industries can change significantly making themless competitive with the inclusion of carbon costs. Exhibit4i shows the potential impact of carbon cost, with increasesbeing as high as ~5%+ in the cost structure for some in-Exhibit 4h. India’s efforts in CDM are currently fragmentedIndia contributes 25% to theCDM projects worldwideIndia’s CERs per project significantlylower than market leader ChinaAverage annual CERs (in ‘ 000)/project# CDM projects registered 1 Republic2,0001,50022%9%3%2%2%2%1,782500400Republic of Korea1,000500035%China25%IndiaOthersBrazilMalaysiaPhilippinesChileof KoreaTotalSource: United Nations Framework Convention on Climate Change.1Projects registered as of 23rd August 2009.300ArgentinaChina200BrazilOthers100 ChileIndiaMexico00 200 400 600 800#of registered CDM projects#of CERs (in ‘000)38 The Boston Consulting Group • Confederation of Indian Industry

dustries. The cost impact could be direct due to emissionsof the company against caps; or indirect due to usage offuel/power with embedded carbon cost.This has had animpact on multiple fronts. There is a much higher focus onbringing down carbon emission levels. More radical aremoves by many companies who are rethinking their manufacturingand supply chain footprint on the basis of totalcosts including the carbon costs. A survey of some of thecarbon intensive industries in the developed economiesgives certain pointers to the future (as shown in Exhibit 4i).Across multiple industries like metal and cement, lime andglass, companies in the EU with carbon caps are rethinkingtheir production as they see the economics of their industrychanging dramatically due to carbon costs.Sustainability issues could also impact market access.There has been increasing protectionist sentiment againstcompanies and countries that do not have emission caps.While these are not likely to stand the test of WTO normsas they stand today it is likely that some sectors couldcome under pressure on two fronts.While countries may not tax or create barriers for companiesor products which are not green they may create incentivesystems for products which are greener–skewingmarket economics. An initiative by the Canadian governmentin 2007 introduced a US$ 1000–2000 consumer incentiveon new cars achieving mileage of 6.5 litres per 100km, or better. Two of Canada’s top–selling cars failed toqualify, and the car manufacturer had to absorb a significantcost as it opted to pay the incentives from its ownpocket. Growth of such initiatives could change the marketlandscape for companies that are not “green” enough.At the same time, increasing consumer preference forgreen products could further exacerbate this. While thejury is still out on whether the consumer is ready to paya premium for a greener product, multiple studies donein the EU and the US suggest that at a similar (or lower)price than existing products, large sections of customerswould prefer greener products. This increasing awarenessis even spreading among Indian consumers, a recent examplebeing the adoption of energy ratings. Adoption ofsuch ratings for consumer durables in India saw revampingof many product development activities by manyfirms to ensure that products are more energy efficient asmany consumers use energy efficiency as an importantcriterion for product purchase.Exhibit 4i. Carbon costs could shape future global supply chainsSeveral industries already movingMetalsCement, limeand glassOtherN=301 (2009)(%)64Carbon emissions trading couldproduction due to carbon costs 1 increase industry costs by up to 5%Potential cost increase due to carbon price 2Highly capitalintensive industriesunlikely to shift innear term€ 20/t CO 2Pulp and paperOil and gas2Public powerand heatNo02040 60Yes, are considering moving production80Yes have planned to move productionCarbon cost relatedYes, have already moved productionto powerIndirect ETS costsSources: Point Carbon; de Bruyn et al, 2008; US House of Representatives; BCG analysis.1Either due to tariffs or developing countries’ own emissions schemes.2Assuming €20/tCO 2carbon price, and €14/MWh electricity price increase, estimated based on publication.3Estimated based on industry carbon emission rates.100Share of respondents (%)0Apparel &textilesWood &furniturePaper Consumerelectronics 3Industrial Automotive 3chemicalsIndustrialmachinery 3Carbon cost relatedto direct emissionDirect ETS costsIndian Manufacturing: The Next Growth Orbit 39

“Green Products” Emerging as an ImportantOpportunityThe focus on sustainability has also meant the emergenceof a growing market for “Green Products”. Globally, thismarket is estimated at ~US $190 bn and expected to growat ~15% year–on–year across segments like alternativeenergy, construction of green buildings and green consumerproducts like organic food and cotton (as shown inExhibit 4j). Large sections of consumers across the developedmarket, and increasingly so in RDEs, are beginningto prefer greener products.Many companies like Walmart, GE, Tesco and Unileverare already taking a lead in addressing the market forgreener products. GE launched its ‘ecomagination’ campaignin 2005 to develop green products which serve customerneeds, offer a superior value proposition or operationalperformance, and impact environmentalperformance. GE also instituted a product review processto quantify the product’s environmental impact. Theproduct claims on environmental benefits were auditedby a third party. Today ‘ecomagination’ spans a largeportfolio with more than 80 products across multiple verticals,ranging from energy products like efficient turbinesand transformers to energy efficient consumer productslike dishwashers and refrigerators. This has generatedrevenues of close to ~US$ 17 bn, with R&D investmentsof ~US$ 1.4 bn 9 .“Green” is clearly moving on from being a mere buzzword to a trend with significant business potential. Companieswill need to take a closer look at their productportfolios and rethink their business models to benefitfrom this. The transformation will not be limited to targetinga newer product sub–segment, but rather will requirere–creating a whole new business model around it.New Green Technologies will Shape FutureMarketsSustainability trends have given rise to new technologiesthat will significantly impact future businesses. Researchin renewable technologies like wind, solar and water isalready yielding environmental and business results. Developmentin other areas like nanotechnology, fuel cellsand wireless communication are likely to create ecosystemsfor sustainable growth (as shown in Exhibit 4k).9. Company releases; new reports.Exhibit 4j. Green markets expected to cross US$ 280 bn by 2011Expected growth for Green markets 2008–2011US$ Bn300+15%280+49Biofuel20019069Wind3551405SolarFuel cellsGreen buildings10030223494777Organic consumerproducts020082011Source: Cleanedge (for Biofuel, wind, solar and fuel cell estimates); Data Monitor and Cotton exchange; BCG analysis.40 The Boston Consulting Group • Confederation of Indian Industry

A Boston Consulting Group study estimates that a quarterof cars sold in 2020 could be electric vehicles. China is strategicallypromoting and investing in the electric car segmentgiven its traditional advantages of being among thelargest electric motor and battery producers across theglobe. The Chinese government having realised this andeager to gain dominant position in this emerging segmenthas given hefty subsidies (upto US$ 8,800) to taxi fleetowners, tax credits to consumers using these cars and investedin filling stations across cities to support usage 10 .India needs to scan the wide range of technologies, identifythose with sustainable business prospects and strategicallyinvest in areas where it can gain competitive advantageover other countries. Solar energy and newdevelopments in nuclear power technologies are two suchpotential areas where India can take a leading position inthe coming years.Solar energy market is expected to grow at almost 9%per annum till 2017 11 . India is already investing in solarresearch and is at par with global players (as shown inExhibit 4l). The high solar irradiance across the country,of the order of ~220 KWh/M 2 as compared to

Exhibit 4l. India already competing neck–to–neck with global players in solar technologyresearchHighest efficiency achieved for various solar PV technologiesHighest efficiency achieved (n)3024.7ndrdThree 2 and 3 generationtechnologies developed in IndiaWorldwideIn India201019.720.316.012.712.013.511.516.510.519.513.016.68.711.15.06.50Si–singlecrystalSi–Multicrystala–Sisinglea–SimultiCdTeCIGSSi FilmsDyesensitized0.0OrganicPolymernd‘2 Gen’rd‘3 Generation Thin film’‘3 rd Gen Nano’Source: Solar India 2007 Conference Presentations.Opportunity for cost-effective local leveltechnology tie-ups for early moversIndian Companies Need to Build their“Green” Report CardThe imperatives for Indian manufacturing companiescan be classified into four key areas:◊ Establish the current “green baseline”: This should includea comprehensive evaluation of current emissionlevels and “greenness” of their operations, greennessof their current products and as well as those used fordevelopment.◊ Identify and assess risks to businesses: Proactively usethe baseline to define risks to current and future businessoperations. This should include the impact oflikely legislations, incentive systems, and consumertrends on relative cost competitiveness and accessacross different markets.◊ Mitigate risks through focused initiatives: If the businessis being impacted directly, companies need to take internalinitiatives to balance green market forces. At thesame time, if the changes impact the ecosystem in general,companies need to look through their businessprocesses and align them towards the new ecosystem.◊ Systematically identify and exploit emerging opportunities:Evaluate the product portfolio and operations,and define opportunities from CDM projects to tapinto the carbon market and development of greenerproducts for domestic and international markets. Companiesembarking upon large manufacturing investmentsshould also evaluate their projects through asustainability lens for future competitiveness inclusiveof carbon costs.Improving Income Demographics andTargeting the ‘Next Billion’ Customersin IndiaA global market of 1.2 billion people spending ~US$ 950bn per annum remains largely excluded from formalmarkets 13 . They are considered impossible and unprofitableto serve with current business models but couldbecome profitable if served with new business models—we call this segment the ‘Next Billion’. This is a growingpopulation, living in expanding economies worldwide.While there are numerous challenges involved in reach-13. BCG analysis.42 The Boston Consulting Group • Confederation of Indian Industry

ing them effectively as consumers or business partners,they can provide significant opportunities for companiesthat find successful approaches.A Key Driver of Consumption Going ForwardIncome demographics in India are changing rapidly.Over the last two decades India’s income pyramidchanged dramatically—with increasing incomes and theemergence of hitherto insignificant segments. One suchsegment is the ‘Next Billion’. Defined as the segmentwith incomes between Rs 90,000 and 2 lakh per annum,it includes nearly 90 million households in India with anexpenditure of over US$ 145 bn (as per 2006 estimates)Growing at nearly 8% per annum, this segment will becomean overall market of nearly US$ 300 bn in Indiaby 2015 (as shown in Exhibit 4m).Even at the global level, this segment is becoming extremelyimportant. A study by The Boston ConsultingGroup, suggests that the total size of this segment wasaround 400 million households, comprising about 1.2billion consumers and a total expenditure close to US$950 bn in 2006 (as shown in Exhibit 4n) and will grow atover 8% per annum over the next 10 years 14 .The impact of this change in income demographics cannotbe over–emphasized. The growing demand from‘Next Billion’ customers will offer unprecedented opportunitiesto companies that are well prepared to servethis market. As per BCG estimates, more than 40% of‘Next Billion’ demand will be served by the manufacturingindustry (especially FMCG, apparel and consumerdurables). Also with increased consumption of services,demand for associated manufacturing products will alsogrow. For example, higher penetration of telecommunicationservices will imply larger consumption of handsetsand telecommunication equipment.Innovative Business Models RequiredAccessing this opportunity is not straight forward. TheNext Billion are unprofitable to serve with existing businessmodels and multi–pronged innovation is required todesign profitable models. As a first step, companies needto carefully understand this segment. The ‘Next Billion’often find themselves having to make difficult compromises:their incomes are limited, yet they desire productsand services that are suited to their needs and growing14. BCG analysis.Exhibit 4m. Increasing income levels in India creating new consuming classesDistribution of households (in ‘000s) by income class: IndiaIndia in 2002 India in 2015Super Rich >1crSheer Rich 50 lakhs –1crClear Rich 20–50 lakhsNear Rich 10–20 lakhsStrivers 5–10 lakhsSeekers 2–5 lakhsAspirers 90,000 –2lakhsDeprived

Exhibit 4n. Globally, Next Billion nearly a trillion dollar opportunityThe Next Billion global opportunityNo. of households – 2006 Total expenditure – 2006CEE5213%CEE20722%Brazil349%Brazil13214%China21455%China45849%India9123%India14615%Total391Total9430 100 200 300 400Households MM1.2 billion consumers;~US$ 950 billion expenditure0 250 500 750 1,000Household expenditure (US$ Bn)Source: NCAER; NSS Household consumption expenditure survey 2003–04; IBGE PNAD 2005; China Statistics Yearbook; ACMR Income Survey; EIU;Quantitative Research; BCG analysis.Note: CEE includes 18 countries—Baltic countries (Latvia, Estonia, Lithuania), Romania, Bulgaria, Russia, Ukraine, Belarus, Moldova, Slovakia, Slovenia,Hungary, Czech Republic, Poland ,Croatia, Bosnia & Herzegovina, Serbia & Montenegro, Macedonia.Exhibit 4o. Business model framework for Next Billion: Design principles for success Price for the budgets ofthe next billionsTailor products to addresslocal constraints andemphasise quality Engage with communitiesto unlock local potential Collaborate withunconventional partnersLife enhancingofferingsCreativecollaborationReconfiguredproduct supply chainsSource from localproducersBroaden reach and savecosts by leveraging localdistribution channelsOvercome infrastructureconstraints throughinnovative solutions Top down commitment Focus and accountability Provide decision rightsand autonomy Establish objectivemetrics Create lean and agilestructuresEducational marketingand communicationUnshackledorganisationEducate about productbenefitsCreate word-of-mouthadvocacyAim for trust and identityin branding44 The Boston Consulting Group • Confederation of Indian Industry

aspirations; they require information, yet they have difficultyaccessing it; they live in scattered towns and ruralvillages, yet they must deliver their wares to distant markets.The next step is to create new business models thatbreak these compromises. Companies need to work onfive key dimensions (as shown in Exhibit 4o):◊ Create life–enhancing offerings: Develop offerings thatimprove the livelihoods of the ‘Next Billion’ by pricingfor their budgets and tailoring products to addresstheir usage constraints. For example, mobile phoneswith single sheet key pad to prevent dust accumulationor a radio with crank mechanism to eliminate theneed for electricity.◊ Reconfigure the product supply chain: Create a cost–efficientdistribution system by sourcing from local producers,leveraging existing local distribution channels,and finding creative ways to overcome infrastructureconstraints through private participation.◊ Educate through marketing communication: Design marketingprograms that contain educational as well aspersuasive messages about product benefits. Leveragetrusted people, institutions and brands to build consumerloyalty.◊ Collaborate in non–traditional partnerships: To lower costsand broaden distribution, partner with local producersand consumers, as well as other companies and even civilsociety organisations. Invest in local talent and createincentives that encourage self–governance.◊ Unshackle the organisation: Design corporate organisationalstructures—including metrics, incentives andaccountability systems—to support, measure and rewardlong–term success in business initiatives targetingthe ‘Next Billion’.There is no silver bullet to succeed in this market. Organisationswill need to be prepared to consider innovationon several fronts. Often there may be a need to redesignbusiness models and build new businessecosystems to successfully tap this opportunity.Several Success Stories Already ExistThere are many examples of Indian companies whichhave proactively targeted this market, be it Tata’s Nanoor Hindustan Unilever’s Shakti. In this report we discusssome examples from other emerging markets,which may be less well known but are equally instructive(as shown in Exhibit 4p).Local success can drive global advantage. Several companies—bothmultinationals such as Unilever, Nokia, LGand Whirlpool, and domestic players such as Galanz andNatura Cosmeticos have invested in designing innovativebusinesses models to target the ‘Next Billion’ segment incountries like India, China and Brazil. They have benefiteddisproportionately not just in these countries, but alsoby taking this expertise to other developing and developedmarkets.A Source of Global Advantage for IndianManufacturingIndian companies have a natural advantage in this space.By investing early in this segment they can garner leadershippositions in this segment–not just in India, butalso globally. Indian companies can:◊ Leverage domestic ‘Next Billion’ market, to buildscale advantage, and fundamentally alter cost structuresto compete globally.◊ Focus on relevant innovations for the segment, and applyacross global markets with needed customisation.◊ Include the Next Billion into product supply chains asproducers or distributors. This will improve economicsfor the company and at the same time strengthendemand by providing additional income opportunitiesto the ‘Next Billion’.Agenda for ActionInnovative approaches can form the foundation of newgrowth opportunities for companies that are boldenough to experiment. The right type of engagementcan bring about a transformation in the lives of the‘Next Billion’ by linking them to formal markets as producers,business partners and consumers. Companiesthat are first to establish sustainable, profitable and scalablebusiness models to include the ‘Next Billion’ willestablish a competitive advantage by securing marketshare and winning the long–term loyalty of consumersand producers.Companies will need to take the lead in designing andexecuting fundamentally new business models – otherIndian Manufacturing: The Next Growth Orbit 45

Exhibit 4p. Several players have successfully captured the Next Billion opportunityCustomer Relevant InnovationA global consumer durable player launched aUS$150 washing machine, targeted at the ‘NextBillion’ segment in Brazil. Independent surveysindicated that automatic washers were thesecond most–coveted item by Brazil’s 30 millionlow–income consumers, after cell phones.To tap this opportunity, the company established anR&D centre to better understand needs of the lowincome segment and developed a new low–cost design,rather than stripping down an existing modelfrom developed market. It developed a single drivemachine, with lower power and small load capacity,which met the consumers’ need for frequent andsmall load laundering. Significant focus was put onensuring high aesthetic appeal, based on consumerinsight that the washing machine was a strong statussymbol. Within two years of its launch, it became thelargest selling low cost washing machine in Brazil.Game Changing DistributionNatura Cosmeticos, a Brazilian cosmetics manufacturersuccessfully penetrated Brazil’s rural marketand achieved market leadership over global majorssuch as Unilever, L’Oreal and Avon. It used a directsales model to reach the rural consumer, living insmall communities throughout Brazil’s vast countryside(Brazil is fifth largest country in the worldby area). Natura’s direct sales force of 600,000 self–employed ‘consultants’ comprises mostly of womenwho work part–time and are paid on a commissionbasis. The rural consumers responded positivelyto these ‘consultants’ because of personal serviceand close interaction, and it also provided a built–in word–of–mouth channel for Natura to extend itsreach. Natura, grew at a breakneck speed, with itsshare in key market segments rising from 12 percentto nearly 23 percent in four years—2002 to2006. In 2006, Natura posted revenues of nearly US$1.8 bn, with total market share of 13 percent, higherthan that of Unilever. After a strong performance inBrazil, Natura expanded in Latin America, and hasrecently entered into France 1 .Leveraging Scale BenefitGalanz, a Chinese microwave manufacturer, exploitedthe ‘Next Billion’ opportunity to increase scale. Inthe first phase, Galanz focused on becoming the contractmanufacturer of choice for foreign OEMs enteringand catering to the Chinese Market. The emphasiswas on developing a low cost microwave, utilizingthe cheap land and labour available in China. By1996, 1 out of every 2 microwaves sold in China,had been manufactured by Galanz. This large scaleproduction, catering to the domestic market, gaveGalanz a significant cost advantage. In the secondphase, the company started leveraging its strengthsand moving towards more global markets like USAand South Korea. Galanz created R&D centres in thetarget country, to ensure requisite customization, butkept the back end manufacturing largely integratedin China, to ensure that it continued to benefit fromscale advantage. By 1998, Galanz had become theworld’s single largest microwave production facility.Today, it has a global market share of nearly 30 percentin microwaves.1Company data; BCG analysis.stakeholders will often need to be an integral part of theprocess. Companies will need to:in capacity building of ‘Next Billion’ suppliers anddistributors.◊Understand the specific needs and constraints of the‘Next Billion’ and invest in R&D and new productdevelopment for the market.◊Partner or collaborate with other companies, governmentsand civil service organizations to align investments,share distribution and improve infrastructure.◊Assess opportunities to integrate the ‘Next Billion’into value chains and reduce overall costs, and invest46 The Boston Consulting Group • Confederation of Indian Industry

Driving Higher Productivityand CompetitivenessProductivity is a key driver of cost competitiveness,and estimates suggest that Indiacurrently lags several other RDEs on bothlabour and asset productivity. Driving acceleratedimprovement on this dimension is goingto be critical as India positions itself as a competitivedestination for global manufacturing.Manufacturing industries have seen several revolutionsover the last few decades. The 1960s and 1970s saw asurge of Japanese manufacturing with focus on ToyotaProduction System (TPS) which was based on waste reductiontechniques such as Kaizen and JIT. The1980s sawMotorola introducing the Six Sigma and redefining thefocus on Total Quality Management (TQM). In the 1990sthe focus shifted to mass customization, flexible automationand strategic manufacturing. Many of these conceptswere clubbed together in the concept of Lean manufacturingthat has driven unprecedented growth in manufacturingproductivity in recent times.Indian companies have also made major strides in implementingthese practices to enhance their productivityand competitiveness. Nevertheless there is substantialdistance to cover. While India’s real manufacturing labourproductivity has increased by ~65% from 1998 to2006, this growth looks small as compared to Chinawhere it has increased by ~180% in the same period 1 .Exhibit 5a shows that India’s real manufacturing labourproductivity lags China both in absolute terms and inrate of growth over the last decade. As a result, whilelabour wage rates in India are significantly lower than inChina, productivity adjusted wage rates equate the twocountries. India needs to make substantial efforts to closethis productivity gap to remain competitive on a globallevel. Principles of productivity improvement will thereforeremain important and Indian industry will need tocontinue to enhance its capability on these dimensions.However, it is also important to recognise that the worldis changing and as a result so are some of the key dimensionsfor competitiveness. Indian industry will need toacknowledge and address these new dimensions or riskbeing left behind.There are three important trends that will shape the futureof competitiveness in the years to come—increasedvolatility in factor costs, shifting demand patterns and amore aware and educated labour force.◊ Increased volatility in factor costs leading to significantsupply side risks. For example the Indian rupee haddropped below Rs 40 to a US dollar in early 2008 andwas expected to drop further, but instead depreciatedto over Rs 50 by November of the same year. Similarly,shipping costs that had risen to very high levels suddenlydropped very sharply in the second half of 2008,on some routes by as much as 70% (Hong Kong–Rotterdamare now rising rapidly once again) 2 .◊ Demand patterns are shifting rapidly. Rapid advancementin technology has resulted in sharp price reductionsand continuous product enhancement. This combinedwith increasing consumer awareness has createdunprecedented fragmentation in consumer needs callingfor greater variety, increased customisation andshorter product life–cycles. Close to 200 models of mobilephones were launched in 2008 alone. Hard diskdrives have seen prices fall from ~US$ 75/GB to a meagerUS$ 0.29/GB within a mere 10–year timeframe.1. EIU country data.2. Oanda Currency Exchange Interbank Rates.Indian Manufacturing: The Next Growth Orbit 47

Exhibit 5a. India lags China in manufacturing labour productivityIndia vs China—trend in manufacturing labour productivity (1995–2008) 1Index 24ChinaIndia32101995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: EIU market indicators and forecasts, BCG analysis.1Manufacturing labour productivity is defined as value added per worker in USD, adjusted for inflation. Estimates only include formal sector employmentfor both countries.2Index is at 1998 values, all figures have been adjusted for inflation at 1990 market prices.◊ Labour forces are becoming more discerning. With risingeducation and awareness levels, individuals are moreconscious of their options, aspirations and rights. Labourunions have become more demanding than everbefore. Workers, driven by an increased awareness oftheir own rights as well as rapidly growing aspirationsfor themselves and their families, are less willing to‘settle’ for management driven decisions.These trends call for a new revolution in productivity enhancement.In this chapter, we identify three critical leversof productivity enhancement that combine the mostpowerful traditional levers with the new need for flexibilityand people engagement:◊◊◊Exploiting the power of clusters.Leadership in innovation and new technologies.Lean 2.0 and improving plant productivity.Development of Industrial ClustersThe importance of clusters in industrial development isa well known phenomenon. Industrial development happensin clusters or ‘ecosystems’ of inter–related companies,suppliers and service providers. These clusters developand grow with a combination of appropriategovernment policy and the concerted efforts of one ormore large companies.Cluster development is already happening at a rapid pacein RDEs. Cities from Chennai to Suzhou are becomingregional industry centres. In the main coastal provincesof China, hundreds of industry ecosystems have beenbuilt in the last decade. Chennai has rapidly emerged asa hub for automobiles with Ford, BMW and Hyundaichoosing to locate their production facilities there. Thailand,on the other hand, has emerged as a major clusterfor hard disk drives production. Several of these RDEclusters are outgrowing similar clusters in developedeconomies and taking away share of manufacturing.Clusters Help Drive Higher CompetitivenessWell developed clusters provide several advantages tocompanies and drive more competitive economics. Companiescan achieve cost and productivity gains in clustersbecause of multiple reasons:48 The Boston Consulting Group • Confederation of Indian Industry

◊ Increased supply chain responsiveness because of manufacturingconsolidation near suppliers: Geographic consolidationof component manufacture and assemblyshortens production cycles, co–location with suppliersfacilitates just–in–time inventory and increasedcompetition between suppliers helps reduce partscosts.◊ Decreased time–to–market: Companies can more effectivelyleverage the capabilities available with vendorsin the cluster.◊ Superior access to talent: Better and more cost effectiveavailability of labour, and also lower talent recruitingefforts.◊ Lower logistics costs: Due to proximity of customersand/or suppliers etc.Exhibit 5b illustrates the value generated by a well developedcluster location versus an isolated assembly plant.Though the extent of each benefit will vary by industryand location, the overall value of placing a unit within amature cluster cannot be disputed.Well Developed Clusters Could AddressIndia’s Productivity ChallengeAs discussed earlier, India faces a crucial productivitychallenge—India’s current productivity trend combinedwith wage increases in the next decade could erode itscompetitiveness when compared with China and otherRDEs. However, the situation could look markedly differentif cluster impact is taken into account. Exhibit 5cbelow illustrates the benefits of placing a manufacturingunit within a cluster for a sample RDE. Over a ten–year period from 2000–2010, wage rates in this RDE roseby 180% while productivity increased by only ~65%. Thisreduced competitiveness (from a labour perspective) by~41%. However, by locating the said manufacturing unitwithin a cluster the increase in productivity outpacedthe wage rate increase resulting in an 18% increase inproductivity.The creation and management of successful clusters willhence be critical to achieving India’s productivity goals. Asof August 2008, there were ~500 notified SEZs in India ofwhich ~40% were manufacturing oriented 3 . While this is a3. Ministry of Commerce and Industry.Exhibit 5b. Clusters enable substantial cost savingsExample of the value of acluster location versus an isolated assembly plantIndexedcost100100.02.02.04.0-13%2.01.22.086.8806040200Initial costswithout clusterScaleLean time &just in timeFreight &foreignexchangeSupplierpricecompetitionrisk mitigationJointexperienceAccessto talentTotal costswith clusterbenefitsSource: BCG analysis.Indian Manufacturing: The Next Growth Orbit 49

Exhibit 5c. Example: Effect of cluster economics on productivity and wage cost in an RDEUS$10,000Over the last 10 years,1productivity increasing+65%Impact of cluster strategy on indexedproductivity/labour costsImpact of labour cost increase mitigatedby cluster advantage5,00004,558 5,7177,5202000 2005 2010Index0.80.660.27+18%0.390.78three times the increase in productivity...but labour wage rate increased at almostUS$2.0+180%0.60.40.21.00.01.400.500.742000 2005 20100.0Indexedproductivity/labour costsin 2000Impact ofincreasinglabour costsImpact ofclustereconomics 2Indexedproductivity/labour costsin 2010Source: BCG analysis.1GDP/Worker.2Cluster advantages due to increased productivity due to scale benefits of networks, reduced logistics costs etc.large number, it is important to recognise that creatingSEZs alone will not allow industries to reap the full benefitsof cluster advantage. The entire ecosystem will needto be developed in order to get the full benefits.Effective Cluster Development RequiresCoordinated EffortsNot every cluster that is set up will achieve sustainablescale. Some will plateau out and others will wither dueto competition. However, the ones that achieve scale arelikely to attract disproportionate new investment intomanufacturing and drive strong growth. Success of a clusteris not mere serendipity. Careful assessment of successfulclusters reveals several factors that come togetherto drive sustainable cluster advantage and determinesuccess.There are several examples of successful clusters acrossRDEs. We examine here the hard disk drive (HDD) industryin Thailand where close co–operation across stakeholdershas led to the development of an integrated HDDcluster spanning the entire value chain (refer Exhibit 6jin Chapter 6). Leading firms came together to form anassociation for driving development of the cluster. Thegovernment made HDD a priority industry and providedincentives and tax exemptions for companies for investingin R&D centres, which further accelerated technologicaladvancements. Universities and companies jointlyinvested in laboratories and R&D centres. Between 2001and 2005, Thai HDD value add rose from 30% to 45%,while the number of Thai HDD supporting industriesgrew by 20%. Thailand’s share of the global production ofhard disk drives increased from 10% to 33% making Thailandthe world’s largest HDD exporter 4 .Creation and development of successful clusters shouldbe the joint responsibility of the government and industry.Public private collaboration across the entire range ofstakeholders—government, companies, suppliers, educationalinstitutes and employees is critical to success. Severalfactors need to come together for the creation anddevelopment of success clusters:◊ Carefully and strategically chosen locations close toexisting supplier and raw material bases and withconvenient outbound logistics.4. IDEMA Thailand.50 The Boston Consulting Group • Confederation of Indian Industry

◊◊◊◊Close public–private collaboration to ensure coverageacross the complete production value chain.Investment in and close collaboration with supportingentities such as universities and research centres.Development of relevant supplier networks.Up–front planning and investment to design and developrelevant infrastructure.able vendor network or concentration of companies,availability of cheap or specialised talent (as required),proximity to and availability of cheap rawmaterial, or proximity to sea ports for exports. Thefocus has to be on selecting industries where the existingassets offer distinct advantages and can bringdown overall cost structures.Some of the specific actions that the government candrive include (we discuss these in greater depth inChapter 6):◊ Planning, resources and incentives to develop andstrengthen local capabilities and talent.Agenda for ActionIt is clear that cluster development needs to be an integralelement of India’s manufacturing strategy. For Indiancompanies to drive higher competitiveness, theywill need to be able to tap into manufacturing networksin industrial clusters. Also, as global companies makedecisions on setting up capacities, they will increasinglywant to locate their plants in successful clusters. Whilelarger companies may choose to seed new clusters,smaller ones will typically gravitate towards existingclusters. All stakeholders will need to work together toplan new clusters as well as strengthen existing clustersacross different industries.◊◊◊◊Work with industry to identify and define target strategicsub–sectors and geographic locations for clusterdevelopment.Provide adequate incentive system through tax breaksor subsidies as required. It is critical that this coverageshould be across the value chain, benefiting theend–industry as well as suppliers.Facilitate easy set up of supporting infrastructure interms of required roads, power availability, ports,etc.Invest in and drive close collaboration with universitiesand research centers to encourage innovationand provide support to small enterprises.The first step will be to identify the specific industriesand the geographic locations to establish and grow clusters.Two key parameters that should drive thesechoices:◊ The objective of the cluster: Stakeholders will need todefine whether the objective of the cluster is to enhancethe total output or exports from the zone orprimarily serve as a means to generate employment.This could to an extent dictate the specific geographiesand choice of industry to promote, be it labour–intensive sectors like textile, food–products etc., orexport–oriented sectors like automotive components.◊ Enhance the speed of setting up and scaling businessby reducing the bureaucratic process overload andadopting single window clearances.Successful development of clusters does not depend ongovernment alone. Industry will need to actively engagewith the government and other stakeholders:◊ Develop sub–sector specific approaches to drive clusterdevelopment.◊ Collaborate to encourage representation across theentire production value chain including focused supplierdevelopment.◊Specific differentiating factors and advantages of an industryas well as location: Perhaps, the most importantpoint is to determine the key differentiating factorthat could make the cluster a success. It could beproximity of domestic consumption centres, an avail-◊◊Participate in and support development of relevantinfrastructure.Invest in and provide resources for development andupgradation of local talent.Indian Manufacturing: The Next Growth Orbit 51

Leadership in Innovation and NewTechnologiesInnovation Crucial to Achieving SustainableAdvantageInnovation is a critical driver that enables manufacturingcompanies to attain greater competitiveness and allowsthem to grow at an accelerated rate. In many competitiveindustries the only sustainable lever of competitive advantageis the ability to learn, change and innovate fasterthan competitors. Over time, other players can copy products,services and processes. What is difficult to replicateis the ability for continuous innovation. Exhibit 5d comparesthe share prices of R&D intensive companies withFTSE 100 and shows that better innovation capabilityconsistently drives higher returns for companies.Innovation Extends Beyond New Product DevelopmentInnovation that brings relevant competitive differentiationcan cover various dimensions.◊◊cess innovation, has helped Toyota become a globalleader in the automotive industry. The core of TPS isbuilt on innovating processes to reduce waste and onachieving a Lean process across the value chain. Toyotaalso emphasises continuous process improvementto maintain its competitive advantage in the industry.Product innovation: Tata’s Nano, is an outstanding exampleof product innovation with many design elementsintroduced into an automobile for the first time.Tata’s Nano has the potential to become a world beaterin its category.Business model innovation: Business model innovation createsdurable returns and advantage and is a way of leapfroggingcompetition in a mature industry. Unlike productand process innovation, it offers a completely new valueproposition with a different operating model. Low costairlines or business process outsourcing, are exampleswhere a completely new business model offers a strongvalue proposition and game–changing economics.◊Process innovation to enhance efficiency: Toyota’s ProductionSystem (TPS), an example of end–to–end pro-◊Innovation using newer technologies: In the past twodecades technology has become a major source ofExhibit 5d. Innovation capability is key to achieving strategic competitive advantageCompanies with high degree of R&D perform significantly betterRelative share price changes for R&D portfolio of FTSE100 1 stocks vs FTSE 100 index (% of 1997 value)250FTSE 100R&D Portfolio2001501005001997 1998 1999 2000 2001 2002 2003 2004 2005Source: 2005 R&D scoreboard published by the Department of Trade & Industry—United Kingdom available athttp://www.innovation.gov.uk/rd_scoreboard/1A portfolio of high R&D intensity FTSE 100 companies (R&D spend greater than 4%).52 The Boston Consulting Group • Confederation of Indian Industry

eakthroughs that can help companies upset incumbentsand quickly grow to dominant positions.Innovations related to newer technologies likegreen energy (wind power and solar power), greenbuildings, nanotechnology, smart material etc. willshape the industrial landscape over the next fewdecades.India’s Innovation ChallengeA 2006 study by the Boston Consulting Group with CIIon manufacturing Innovation covering senior managementexecutives representing all major manufacturingindustries showed that 83% of Indian respondentsconsidered innovation as one of their top 3priorities. This was in contrast with 66% of respondentsin the same survey covering global industryleaders—clearly Indian leaders are placing greater importanceon innovation.That is the good news. The bad news is that India’s R&Dinvestment is only ~0.8% of its GDP, as compared with4.3% for Israel, 2.6% for US and 1.2% for China. India alsohas only a 0.4% share of patents filed worldwide. Whilethese have grown at 22% per year between 2002–05, mostwere filed by foreign companies (as shown inExhibit 5e).Several factors prevent the intended focus on innovationgetting realized. These constraints are well known andcover four issues:1. Low collaboration between research institutes andindustry.2. Inadequate funding of basic research in areas likemanufacturing technologies.3. Evolving IP protection regime.4. Weak government policies to support innovation.India Can Build onto its TraditionalAdvantagesIndia has a unique opportunity to build leadership in innovationin two very specific areas. Unlike other RDEs, Indiahas built a globally competitive industry and a talent pool inthe IT and software space. Embedded software is fast becomingan increasingly important component and an im-Exhibit 5e. India lags in R&D spend and patent applicationsIndia’s R&D spend to GDP1 rdratio only 2/3 of China'sPatent applications growingrapidly, yet contribute

portant source of differentiation in products like automobiles,consumer durables, mobile phones etc. Leadingconsumer electronics players like Nokia and LG have extensivelyused software capabilities in addition to their hardwareexpertise to design and develop new products. TheiPod and iPhone for example have built software and servicefeatures around the touch screen hardware capabilityto offer fundamentally superior user interfaces. India needsto think of ways of leveraging its strengths in the softwarespace, and of driving higher collaboration between the ITand manufacturing industries to foster greater innovation.The other area, which we discussed in the last chapter isdeveloping and manufacturing products for the Next Billioncustomers. These are innovative products like Nanofrom Tata Motors or Chotakool from Godrej Appliances,products that break the compromise between specificationsand price and reach those customers who find thenormal products too expensive to buy. As we mentionedearlier, there is a market close to US$ 1 tn out there forthese Next Billion focused products and services. Indianmanufacturers can design innovative products and/orbusiness models to target these customers and bid forglobal market leadership in this segment.Driving technology development and innovationin machine tool industryStrong capabilities in designing and building machinetools and access to requisite manufacturing technologieswill be critical for India to gain and retain global competitivenessin manufacturing and achieve its manufacturingaspirations. Machine tools provide the principalindustrial equipment base for manufacturing industries.Local capabilities can provide easier and cheaper accessto technology for Indian companies, enhancing competitiveness;at the same time effective investment in machinetools will have a strong multiplier effect on bothindustrial output and employment generation.Currently the Indian machine tools industry significantlylags its RDE counterparts. The rapidly growing domesticdemand (over 50% yoy from 2001–09) has been increasinglyreliant on imports—India is today the 8 th largestconsumer of machine tools across the world, but only 16 thlargest producer. Over 80% of India’s current machinetools requirements were imported in 2009, up from 40%in 2002. At the same time, India’s share of global outputis less than 1%, with Indian manufacturing exporting only~5% of its machine tools output. In comparison, China isthe 3 rd largest producer of machine tools across the globeand the largest consumer–producing over 30 times asmuch as India and consuming 10 times as much.Several issues hinder the growth of India’s machine toolsindustry.◊ Technology gaps: India currently suffers from importanttechnology and process gaps and lack of local capabilitiesin building critical inputs for most modern machinetools such as ball screws and linear guides, CNCsystems and measuring systems etc that are all currentlyimported from markets such as Japan, Germany,Taiwan and Italy.◊ Inadequate R&D resources: Though we have strong designand development capabilities, India lacks requisiteR&D resources with a focus on machine tool technologydevelopment.◊ Insufficient manufacturing capacity: further hindered bythe fact that machine tool investment is currently lessattractive driven by high investment levels and longpay-back periods.◊Lack of qualified and trained manpower.There is clearly tremendous potential for Indian industryto further develop its machine tools capabilities–both toservice domestic and global markets. However, this will requirefocused efforts to strengthen existing units, encourageprivate sector participation, attract investment, build R&Dfacilities and develop manpower. We shall discuss specificpolicy levers that could be used to spur this in greater detailin Chapter 6 on Policy Priorities. (Refer page 71).Agenda for ActionWhile there are many action agenda which are well documentedby different experts, we would like to highlightthree points:◊ There should be a technology agenda for India for atleast the next two decades with clear milestones and aninvestment plan. These are the areas where the two keystakeholders–government and industry–believe that Indiashould and could aspire for being one of the globalleaders. This plan could include a large technology fund,fiscal incentives and preferential access to capital, whichcan be used by industry for acquisition and further de-54 The Boston Consulting Group • Confederation of Indian Industry

velopment of specific technologies that have been identifiedas critical for future success of the industry.◊ There is a need for stronger collaborations betweenuniversities and research institutions and the industry.◊ The Indian manufacturing industry should actively seekleadership position in two areas: designing and buildingof ‘intelligent’ products with a high level of embeddedsoftware role in collaboration with the IT industry, andproducts for the global Next Billion customers.Lean 2.0 and Improving Plant ProductivityAs supply chains continue to globalise, and volatility inthe global environment increases, “Lean” practices todrive down costs, flexible manufacturing systems and improvedplant productivity will become critical drivers ofcompetitiveness for the Indian industry.◊◊◊incremental improvement in cost–reduction or productionquality in specific areas but without a cleardefinition of the overall business objectives.Lack of equal involvement of top management and ‘floor–people’: Often Lean initiatives are either purely top–management driven or perceived as a mere shopfloorinitiative. In both scenarios, the full benefits are notrealised.Broken link between business objectives and operationaltargets: Without a clear linkage from business objectivesto operational objectives to targets for each operationalprocess, Lean initiatives yield only sub–optimalresults.Lack of performance metrics and accountability: Withoutdedicated and qualified resources with clear KPIs andobjectives, the Lean program will suffer from loss ofaccountability and yield poor results.Lean Initiatives in Play but Full Value NotYet RealisedSince its introduction by Toyota in the 1950s, the wellknown TPS has evolved into a more integrated and comprehensivemanufacturing philosophy under the umbrellaof ‘Lean’ manufacturing. Many Indian companieshave adopted the Lean principles in their operationswith varying level of success. There are many who havesignificantly improved their plant performance andclaim that they are among the most productive plantswithin their industry. There are many others who havetasted some success but have not been able to exploitthe full benefits of ‘Lean’ manufacturing. A recent globalsurvey by BCG among manufacturing executives revealedthat over half the respondents felt that ‘Lean’principles are barely understood by line management,and only 25% of the respondents felt that they are wellunderstood. The same study showed that most ‘Lean’efforts have had short–term focus and at best have createdwell functioning plants, but missed on fully integratingthe Lean concepts into the organisation.Why do Lean programs fail to deliver the full benefits?BCG’s experience with clients across different industriesreveals some insights on this:◊ Adopting individual Lean tools, without an overall businessobjective: Many companies look at Lean to provideLean 2.0—A More Comprehensive ApproachLean 2.0 or the new Lean is the answer to today’s increasinglycomplex business environment which warrantsa more comprehensive approach to achieve sustainabletransformation. It needs to focus on developinga shared aspiration and vision of the plant around qualityand cost leadership; build a strong engagement modelwith strong capability building across levels and anunderlying cultural transformation to ensure that Leanbecomes a “way of operation”, rather than a one–off initiative(as shown in Exhibit 5f).1. Establish a clear linkage of business and operatingmetrics: Firms need to drill down the key business parametersas defined in the overall business strategyinto tangible operating metrics, specifically aroundfour dimensions—cost, quality, cycle time, and safety.An integrated Lean program needs to focus on all fourdimensions instead of just short–term cost wins.2. Build strong engagement models: Any Lean programshould ensure collective buy–in and building of capabilities.Firms need to make the Lean programme a partof everyday life through appropriate changes in the organisationalstructure and role definitions. They need tobuild specific capabilities for problem solving and analysisthrough training and coaching, and ensure an increasinglevel of leadership and workforce engagement.Indian Manufacturing: The Next Growth Orbit 55

Exhibit 5f. Lean 2.0: An integrated approach for Lean adoptionSet the right ambition and business objectives What are the business objectives? How do business objectives link to operational processes?Improve operationalprocesses Which operationalprocesses are priorityimprovement levers? Which Lean tools? Which standards/targets?OperationsBusinessrequirementsPeopleengagementPerformancegovernanceSteer Performance What role forfunctional centralteams? Which KPIs? How to calibrateobjectives/incentives?Free up collective intelligence How to foster collaboration in lean teams across organization? How to build the right capabilities? How to increase job satisfaction?3. Apply a structured suite of operational improvementtools: Successful implementation requires a structuredprocess. The diagnostic process should identify key processesfor improvement and prioritise the key improvementlevers. Firms should set standards and targets forthese processes through best practice benchmarking,and use a complete array of tools and principles acrossprocesses to enable process improvement.4. Cultivate and govern performance: Firms need to steerperformance by optimising management structuresand MIS to act as an enabler of performance. Firmsshould align the KPIs of individuals/teams for Leaninitiatives and enhance cross–functional collaborationthrough service level agreements (SLAs) between departments.Exhibit 5g depicts the adoption of this new Lean approachby a cement manufacturer in India. This companyundertook a manufacturing transformation journey withLean as its backbone at one of its largest plants. The fourkey elements of the Lean approach—understanding keybusiness requirement, operations excellence, performancegovernance and people engagement—were systematicallyapplied and executed at this plant. This resultedin not just a 10% reduction in the cost base of theplant which put it among the best performing plants inthe industry and transformed and the engaged workforcewith a strong mindset towards operational excellence andcontinuous improvement.BCG’s experience with clients indicates that a well structuredand focused Lean 2.0 program can help companiesdrive substantial value along multiple dimensions of cost,quality, safety, cycle time as well as workforce engagement,thereby helping improve competitive position. Thetypical impact includes process cycle time reduction of30%–50%, decrease in scrap and rework of 20%–50%, improvementin labour productivity by upto 20%, increasein asset utilisation by 20%–40%, and decrease in inventoryby 10%–20%.Productivity Improvement Through TechnologyUpgradationThough Lean management practices will have an importantrole to play, it is important to recognise that the extentof productivity gains will be constrained by the natureand quality of existing manufacturing facilities.56 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 5g. Lean manufacturing transformation—A BCG case study• First bench mark alloperating parameters andcost heads of the plant.• Link cost heads across keydepartments to theoperating parameters.• Understand key cost driversand laggard areas.Understandingkey businessrequirementsOperationsexcellence• Cost drivers ideated withworkers on shop floor toidentify problem areas.• Lean concepts like Paretoanalysis, SMED, debottlenecking,wastereduction employed tounderstand root causesbehind issues.• Comprehensiveperformance radar alongkey dimensions like ideaimplementation, safety,trainings etc was created.• KPIs were realigned toefforts towards lean.PerformancegovernancePeopleengagement• Comprehensive trainingeffort to imbibe leanprinciples in employees.• High intensity drive to sendout Lean messag—banners,newsletters, general plantmeetings and 'skits' in locallanguages.Lean based approach achieved ~10% cost reduction and tangiblechange in worker attitude towards operational excellenceBrownfield ventures involving technology upgradationof existing plants will therefore become a crucial leverfor Indian companies to achieve the next wave of productivitygrowth. This will be required for them to competeeffectively with some of the other RDEs whereproductivity is growing rapidly.One of India’s strengths in the manufacturing sector hasbeen its large and diversified industrial base with plantsof different hues and technology levels. Many of theseplants which were set up when the industrialisationtook off in the 1950s and 1960s today are riddled withoutmoded equipment and large labour force. To matchthe global standards of productivity which is beingachieved by many of the newer plants, the older facilitiesrequire fundamental restructuring through investmentin new production facilities, technology improvementand workforce upgradation. However, comparedto new investments, brownfield plants face twin hurdlesin carrying out this upgradation. Firstly, unlike new investments,they do not qualify for any government incentiveslike tax holidays and capital subsidies to helpease their financial burden of investment in new equipmentor technologies. Secondly, they have to usuallydeal with managing excess labour created in this process,which has a significant cost implication and is alsoa time–consuming process. In a sense they feel penalisedfor aspiring to reach global productivity standardsand as a result, many companies hesitate in initiating alarge technology upgradation program. Of course, thereare many examples where Indian companies have doneso quite successfully but very clearly if Indian manufacturinghas to win the battle of productivity with theother RDEs, it has to create a wave rather than a fewselect individual successes.All stakeholders (government, industry and labour) willneed come together to find ways to create a level playingfield between brownfield and greenfield investments andto ensure that the former do not feel penalised, if notincentivised, for productivity improvement through technologyupgradation.Growing Importance of Flexible ProductionSystemsIn a world with growing volatility in costs coupled withrapidly changing demand patterns from an increasinglydiscerning and fragmented customer, flexibility is becom-Indian Manufacturing: The Next Growth Orbit 57

ing a critical lever for manufacturing performance. Flexiblemanufacturing systems offer the dual advantages ofenhancing speed to market to deal with growing consumerfragmentation and rapidly shifting needs, and atthe same time mitigating the investment and businessrisks faced by a firm in these volatile times.Flexibility in manufacturing systems can be introducedin all aspects of the production process–product flexibilitythat allows rapid change and upgradation inmodels and simultaneous production of a broader variety,volume flexibility, lead time flexibility, processflexibility as well as financial flexibility in the investmentstrategy.Several human and machine levers can be used to increaseflexibility. Some of the models that manufacturingcompanies typically utilise to enhance flexibility oftheir manufacturing networks include:◊ Flexible Automation: Large factories use advanced robotictools to produce several different models on thesame assembly line. This allows a company to respondquickly to changing demand patterns. However, the◊◊cost of developing these lines is significant but thebenefits are enormous. Exhibit 5h shows how a globalOEM has used plant flexibility driven by automationto ensure higher utilisation in one of its large USplants to produce different models of cars based onthe shifting demand pattern.Modular systems with a broad network of suppliers: Companiesoften create highly modular products that canbe quickly customised or tweaked to create alternativemodels by changing a few parts or modules. Thismodularity can be product–based and can be extendedto the supplier network. A large global consumerdurables manufacturer, for example, uses highly modulardesigns in its entire range allowing it to flexiblyupdate and test several new models every year atminimal incremental costs.Multi–location production: Allows companies to addressvolatility in freight and factor costs as well asrespond efficiently to changing demand across markets.A global automotive OEM leverages ‘networkscale’ with 11 plants manufacturing similar models ofutility vehicles across Asian, South American and Eu-Exhibit 5h. Global OEM uses plant flexibility to maintain high utilisationModel Btransitions toanother plant, current plantto clear capacity for Model CModel Ctransitions toanother plant, current plantto clear capacity for Model DFlat Model Dsalescompensated byextra Model A3Plant production (upa)400,000Flat total plantproduction300,000200,000Model BModel E1Model CModel DModel E2Model A3added; nowrunning downsame line asModel D&EModel A3100,000Model A1Model A201996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008OEM sistermodels indifferentplants withinregionSource: Market interviews; BCG analysis.58 The Boston Consulting Group • Confederation of Indian Industry

◊◊ropean RDEs which serve as backup for other plantsand also cater to the regional markets. To maintainthe right balance of local sourcing and global scale, ithas dedicated centres of excellence (CoEs) to the ensurequality for critical components.Deferred customisation: It is often hard to predict theexact specifications that your end–user will demand.Carrying unwanted inventories can become extremelycostly while waiting to produce on–demand willmake you unresponsive. Deferred customisation modelsallow companies to break this compromise. A globalpower equipment company uses this extensively totheir advantage. Almost 85% of their global productionoriginates from 3 low cost large–scale plants inRDEs which manufacture ready–to–configure kits forhigh end products. The final configuration is performedat high–cost plants that are close to their customersoffering quick response times, and targetedoffers designed to suit their unique requirements.Disposable factories: These plants are the opposite tolarge–scale plants with expensive flexible automation.They use radically reengineered product processes tobe as simple and low cost as possible. They use simple,inexpensive single product assembly lines thatcan be setup and dismantled at very low costs. Thisdramatically reduces the cost of entry and productionto move in and out of changing markets at very lowrisk. For instance, a major specialty chemical producerexpanding in Asia had traditionally relied on few massivemultipurpose plants catering to the entire regionleading to high investment in storage facilities, EHSprotections and transport infrastructure. For its newexpansion, it shifted its strategy to build many smallclose–to–customer plants for the emerging demand.This led to dramatic reductions on environmental impactand investment costs.Each of these models will offer a different trade–off betweenrisk management and speed to market. There isno one right answer. Players will need to make choicesbased on their own starting positions in terms of financialpriorities and engineering capabilities as well as theextent of volatility in their product markets.Agenda for ActionThe final piece of the puzzle for manufacturing sector inIndia is to embark on the next wave of productivity andquality improvement. Many of the issues, challenges andalso solutions discussed in this chapter have been coveredin many other forums. However, a report on the Indianmanufacturing sector would have been incompletewithout covering them here as well. From this discussion,we would like to highlight several action agenda:◊ While Indian industry has tasted success with theimplementation of different performance improvementprograms like TPS, TQM, TQC and other approaches,they need to move to the next wave of productivityimprovements with a holistic and people–centric ‘Lean’ or Lean 2.0 programme.◊ If India’s older plants do not upgrade themselves andsignificantly improve productivity, we will lose theglobal battle for manufacturing leadership to competitorsfrom other RDEs. All stakeholders from governmentand industry have to come together to develop aprogram that incentivises brownfield sites to upgradetheir technology rather than penalising them in relativeterms compared to new investments.◊ Other than productivity, the final frontier for today’splants is flexibility. Indian companies have tocarefully think through their agenda on this frontand select and implement the right solution fortheir business.Indian Manufacturing: The Next Growth Orbit 59

Policy Priorities for IndianManufacturingIf India is to change the trajectory of growth of itsmanufacturing sector and achieve its aspirations,government policy and support will have to playa crucial role. In the previous chapters, we havetouched upon a range of policy changes and initiativesrequired from the government which includesimplification of procedures and reducing transactioncosts, measures to attract higher investment, support forR&D, facilitating creation of physical infrastructure andimproving education and training infrastructure. Mostof these are very much a part of the government’s agendaand have been discussed extensively in several forums,and hence we will not delve into them in detail inthis report.Instead, we will focus the discussion on four themes thatwe have identified where the in government policy interventionwould be critical for meeting the aspirationsof Indian manufacturing. All four themes have complexsets of issues embedded in them, which make it morechallenging to build a consensus among all stakeholderson the objectives and content of any policy interventionfrom the government. It also makes it imperative to takea holistic and systemic view of these four themes tobring in some fresh thinking and alignment between thedifferent stakeholders.These four themes are shown as a set of questions/propositions below:1. India has a lower share of global manufacturing tradethan many other RDEs. Manufacturing exports are asmaller share of its GDP. Should India change its currentpolicy framework and become much more aggressivein promoting export led–growth of the manufacturingsector?2. While India’s manufacturing industry has rapidlygrown in scale, driven by the growth of consumerdemand in many sectors, it has not built sufficient‘depth’ for value addition and capability in manyindustries. Should there be much more focus on buildingthis ‘depth’?3. India has strong labour laws protecting workerrights. However, these rights are seen to constrainthe growth of large–scale manufacturing and introducerigidity in the labour market, encouragingwidespread use of informal workforces. With theneed for driving higher manufacturing sectorgrowth and to compete with other RDEs for globaldemand and investments, there is growing pressureto improve labour productivity and flexibility. Howcan labour laws be revised to facilitate higher scale,productivity and flexibility while protecting workerrights?4. Finally, India is a very large country with dispersedpopulation and a large number of stakeholders. Itfaces many issues in developing its industrial infrastructureranging from acquisition of land to growingaspirations of the local population to have ashare in the benefits development. What should bethe right industrial structure for India that balancesthe benefits of building large–scale operations with themany advantages of having small scale and dispersedentrepreneurial businesses?In this chapter, we set the context for a discussion oneach of these four themes, provide some initial benchmarksand analysis, offer some ideas as thought startersand present a set of next steps to align the differentstakeholders on the desired policy interventions.Indian Manufacturing: The Next Growth Orbit 60

Focus on Exports–led GrowthRapid Export Growth Critical for India toAchieve its Manufacturing AspirationsAs we have discussed earlier in this report, cross–countryevidence suggests that domestic demand for the manufacturingsector cannot grow more than 1%–2% fasterthan overall GDP growth—which means that India’smanufacturing sector can expect to grow at 8%–10% overthe next two decades if the current domestic consumption–ledpolicy is followed and the GDP grows by 7%–9%over the next decade. To achieve higher growth of manufacturingsector, Indian manufacturing exports will needto grow at 15% to 20% year–on–year in real terms from11% growth in the last decade (1998–2008). While thisseems a fairly stretch target, it is not unachievable. Wehave seen similar export growth in other RDEs. For example,China’s manufacturing exports grew at 21% year–on–year in the last decade (1998–2008). Given continuedglobalisation of supply chains and migration of industrialcapacity to RDEs, and the fact that India’s currentposition in global trade is a low of 1.4% (compared to 8%for China), there is clearly significant room for India togrow exports much faster 1 .Key Trends in Global TradeIn 1995, global trade was about US$ 10 tn. By 2008, it hadmore than tripled to US$ 32 tn 2 . BCG analysis suggeststhat this trade will continue to grow over the next fewdecades. However, there will be some significant shiftsthat will happen which gives pointers to how India shouldrefine its manufacturing export policies.As we all know, the share of the RDEs in this trade hasbeen rapidly increasing led by primarily labour cost advantage.In the last two decades, total industrial productionin the RDEs has grown from ~20% of OECD countriesto more than 35% between 1990 and 2008 on the back ofgreater cost competitiveness 3 . We estimate that by 2025,the RDEs will overtake the developed markets in industrialproduction as shown in Exhibit 6a.China has led the charge from Asia with US$ 1.2 tnworth of merchandise exports in 2007. India’s sharethough increasing has been much lower at US$ 145 bn 3 .With a concerted push, India could increase its share inglobal off–shoring effectively, filling the gap betweengrowth in domestic consumption and its manufacturingaspirations. To do this, two important considerationsemerge–choice of target industries and choice of exportdestinations.Choice of industry will be important. Recent BCG analysisshows that off–shoring to Asian countries will continueto rise. However not all industries will be equalcontributors to this. BCG analysis shows that based onrelative competitiveness of Asia versus other off–shoringlocations, six industries will continue to be the biggestcontributors to the Asian off–shoring story. These are—apparel and textiles, consumer electronics, furniture andwood products, automobiles, industrial machinery andindustrial chemicals (as shown in Exhibit 6a). Some industrieswhere India is already an important exporterwill continue to offer strong potential specifically chemicalsand textiles. India could also make a bigger push intoconsumer electronics, furniture and industrial machinery.The choice of future focus industries will depend on multiplefactors—export potential from these industries, India’scurrent relative competitive advantage to serve thisdemand, key export destinations and India’s trade relationswith them. A focused and detailed effort is requiredto identify which should be the priority sectors for Indiato target breakout growth in exports.Need to understand shifting global trade patterns.Over the last decade, there has been a historic shift intrading patterns, with global trade shifting from Europeand US based flows to intra–Asia routes (as shown in Exhibit6b). For example, the intra–Asian trade in 1990which was just 4 million TEUs had the fastest growthamong all key trading routes and grew to over 28 millionTEUs by 2008 and is expected to grow to over 80 millionTEUs by 2015—by far the largest trading route in theworld. China has accounted for the lion’s share of thismassive shift that has occurred. Today, India exports to agood mix of trading partners with exports to Europe accountingfor 25%, USA accounting for 13% and Asia accountingfor 32% of the total exports 2 . While India needsto keep USA and Europe in its sights, it needs to rapidlydeepen its focus on Asia to take advantage of this massivegrowth in intra–Asian trade in the next decade.Priority areas to promote export growth. WhileIndia’s most important source of competitive advan-1. EIU statistics, Data Monitor.2. Word Bank statistics.3. EIU.Indian Manufacturing: The Next Growth Orbit 61

Exhibit 6a. Expected RDE role in global manufacturing economyContribution of RDEs to world industrialoutput likely togrow significantlyNine industries likely tohave strongestrole in off–shoring going forward1Total Industrial GDP (US$ Tn)40.030.020.010.00.06.04.7(79%)1991~66%contributionto total growth1.2(21%)13.54.8(36%)8.7(64%)2008Developed countries35.019.1(55%)15.9(45%)2025RDEsTotal%High 75=1%share of2007 TEUflowsSources: EIU; BCG analysis.1Nominal GDP from mining, quarrying, manufacturing, construction and utilities at factor cost (GDP at market prices, less indirect taxes, plus subsidies)2Potential for further off-shoring is derived from the gap between maximum and current level of off-shoring.Current levelof off–shoring 1Low60453015ConsumerelectronicsMetalintermediatesApparel &textilePaper & Food &paperboard beverages00 5 10LowIndustrialFurniture &machinerywood productsAutomotiveIndustrialchemicalsPotential for further off–shoring 215HighExhibit 6b. A snapshot of global container cargo flowsUS Asia EUR Asia Asia–IntraMn TEUs Mn TEUs Mn TEUs10010010080808034%60402006060+13%20%18%+9% 40+11%408023%17%18%434820202824% 2116%2216%50 40 41990 2007 20151990 2007 20151990 2007 2015Sources: Drewry shipping consultants; BCG analysis.1% of global container cargo volume.As %of global trade 162 The Boston Consulting Group • Confederation of Indian Industry

tage–low labour costs–will remain so over the next fewdecades, as highlighted in Chapter 4, a more comprehensivelook at factor costs indicate several areaswhere India’s competitiveness could erode rapidly. Tomaintain and further enhance India’s global exportcompetitiveness, several priority areas have to beaddressed as elements of a comprehensive exportpromotion policy. These are:◊ Attracting and facilitating investments: As highlightedearlier, Indian manufacturing needs additional grossfixed assets of Rs 55–80 lakh crore by 2025 to meet itsgrowth aspirations 4 . As we also mentioned earlier,large manufacturing capacity will migrate from thedeveloped countries to RDEs. India must implementa concerted and focused initiative to attract this migratinginvestment to meet both its own capital requirementfor growth and become a bigger player inthe industrial off–shoring landscape. Simultaneously,it is important to create additional channels to tapdormant domestic savings that currently do not findtheir way into formal corporate funding.and octroi and entry tax can be as high as 25% to 30%of the retail price in India. Many of these taxes arenot reimbursable and are estimated to add 4% to 6%to the cost of exported goods 7 .◊ Improving logistics connectivity to ports: India’s portcapacity is highly constrained, with most major portsrunning at close to full capacity utilisation. Averageturnaround time in India is 3.5 days as against 10hours in Hong Kong and 16.5 hours in Colombo 8 . Portconnectivity to hinterland is often poor and affectsport operations. Given that most of our trade is routedthrough sea ports, poor port efficiency reducescompetitiveness of Indian exporters.Several Policy Levers AvailableA range of policy measures may be considered by thegovernment (as shown in Exhibit 6c) to implement awell orchestrated and comprehensive exports growthstrategy besides mainly fiscal incentives and SEZs whichhave drawn a lot of attention in India. Not surprisingly,these policy areas are well known and include:◊Faster project implementation including land acquisition:The time required to set up and execute projects inIndia needs to be reduced drastically. Compared toChina where an industrial project can be up and runningwithin 6 months of conceptualisation 5 , in Indiaprojects are often plagued by long delays. Some ofthe key areas that will require intervention to improvethis include simpler government procedures,reduction in multiplicity of regulatory/control bodies,consistent and robust land acquisition policy, fasterenvironmental clearances, etc.◊◊◊Infrastructure development specifically for exportswhich include roads, ports and creation of industrialparks.Proactive market development—through settingstandards, branding initiatives and matching localsuppliers with global players.Enhancing speed and ease of doing business throughuse of industrial parks, simplification of proceduresand decentralised/automatic decision making.◊◊Reducing transaction costs to drive competitiveness: Indiacurrently compares unfavourably with manyother competing economies on paperwork and timerequired for doing business, in particular exports. Forexample, CII’s studies indicate that 31 documentswith 87 copies are required to ship goods from India6 . The transaction costs have to be brought downsignificantly for enhancing India’s export competitiveness.Simplified indirect taxation: India’s multiple–tier taxationstructure reduces the cost competitiveness ofIndian manufacturing players. The cascading impactof various taxes like excise, state and central sales tax,◊ Focus on capability development of individual enterprisesincluding awareness creation of specific exportopportunities, skill development, technology supportin design engineering and product development, etc.◊ Attracting foreign capital through supportivegovernment policies and “automatic” approvalprocesses, and offering preferential access to funding4. Refer Exhibit 2d, Chapter 2.5. Expert interview.6. CII.7. Refer Exhibit 3j, Chapter 3.8. Refer Exhibit 3b, Chapter 3.Indian Manufacturing: The Next Growth Orbit 63

Exhibit 6c. Range of policy levers adopted by RDEs to drive export growthInfrastructuredevelopmentStrong focus on building clustersand industrial parksLarge investments to roads, portsetcMarket developmentFree trade agreements anddevelopment of regional zonesExport promotion includingbranding, matching of localsuppliers to global players etcPreferential accessto funding Companies in China's ShenzhenSpecial Economic Zone getpreferential access to funding forexportsRapidexports growthDecentralizeddecision making China offers faster approvalprocesses for exports in targetindustries—from an empty lot tofull operation in 8to10 months withsupport on land rights, electricity,etcRelaxation of labour laws Firms in China's Shenzhen SpecialEconomic Zone allowed to employoverseas managerial staff and localworkers subject to internal firmpoliciesFiscal incentives Across countries, lower tax rates/taxwaivers for target industries as wellas tax holidays for members ofSpecial Economic Zones/clustersCapability developmentfor enterprises In Singapore, Malaysia: variousgovernment agencies involved insupplier training, certification,design engineering, development ofsubsystems etcto domestic companies for expansion of productionfacilities and global expansion.◊ Relaxation of labour laws to support enterprises inhiring, training and retaining high quality talent.Setting Ambitious Growth Targets for Exportsand Aligning all Policy LeversThe issues and potential solutions presented in this chapteron exports are well known. Different governmentshave made many efforts to set ambitious targets andimplement different policies to support their achievementfor specific issues or industries. As has been pointedout earlier in this chapter, there is going to be large–scalemigration of manufacturing investment and capacityfrom the developed countries to the developing countries.The nature of global trade and also the industries whichwill drive these will change with intra–Asia becoming thelargest trading block in the world.We believe that as the world emerges from one of itsseverest economic crises, it is time to take stock and developa long–term strategy for India to significantly increaseits share of the global manufacturing trade. Exhibit6d lays out a framework for this. For example, Indiamay want to focus disproportionately on getting a majorshare of the intra–Asian trade—which would be a majorpolicy shift for the country. Similarly, the country maywant to identify a few target sectors for focused effortsto enhance exports.The key to success would be to align the different stakeholderswithin and outside the government on the exportobjectives and targets and the integrated set of policymeasures required to achieve this target.Balancing Scale and Depth AcrossIndustriesSetting the Context for Debate Between‘Scale’ and ‘Depth’Indian manufacturing output has grown from ~Rs 1.7lakh crore in 1991 when the economy was liberalised toover Rs 30 lakh crore in 2007 9 . During this growth peri-9. EIU; Data Monitor.64 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 6d. Policy Framework: Export–led growthWhat policy levers will be needed todrive exports? Identify current constraintsin competitiveness and growth 2013– Factor productivity– Speed and ease of doingbusinesses– Port infrastructure– ... Define policy priorities and defineagenda– Examine current policies– Explore peer benchmarks3 1How towin?Where toStrategy to focus?capture greatershare ofglobal tradeWhich sectors and routes shouldbe the focus for Indian exports? Current off–shoring levels Assess potential for further offshoring Cost arbitrage vs. OECD Resource availability in Asia Technology know–how in Asia Potential for industry mobility Cluster economics ...2bAssess India's competitivenessin target industries and routes Cost arbitrage Technology know–how Resource availability ...Starting positionand aspiration?2aSet Aspiration for Indian exports Define metrics for success—vol/valof trade, growth, share of globaltrade... Set export targets by industry anddestinationod, India’s economic policies have largely been consumptionled, which has resulted in building scale inmany industries. Mobile phones is one of the best exampleof this, with India becoming one of the fastestgrowing markets with the second largest mobile subscriberbase in the world, second only China. Consequently,we have built a truly global scale industry—Nokia’s plant in Chennai which assembles mobilehandsets in India is a global–scale plant. However, thisconsumption–led growth which has built scale has failedto build ‘depth’ in the telecom industry, with India stillimporting most of its requirements of telecom equipment.Even mobile handsets assembled in India have alow level of local value addition.For any manufacturing economy, building “deep” manufacturingcapabilities in specific industries is an importantaspect of sustainable growth. “Depth” is defined ascapability and expertise in all aspects of a product valuechain—from R&D and product design to manufactureof components and final products to installation andservice where appropriate. Depth is important for multiplereasons:◊◊◊◊In certain industries such as defense and telecommunications,it is important to control and keep the valuechain indigenous from the perspective of nationalsecurity.Controlling the upstream value chain in some industriesis critical to safeguard growth in the downstreamsegments. For example given the required investmentsin infrastructure and industrial capacity, a greater basefor capital goods and equipment manufacturing in Indiawould provide greater stability to potential growthplans in these sectors.Depth allows for greater value capture along the chain.Higher the proportion of economic activity for an industrythat is conducted within the country, greater isthe share of economic benefits that accrue to the country.This has consequent implications on key parameterslike GDP growth, employment generation, etc.Greater depth makes the industry position more stableand less exposed to shifting global demand–supply situationsand increasing volatility. For example, in 1998,Indian Manufacturing: The Next Growth Orbit 65

the DVD market was only US$ 1 bn dominated by Japaneseand European firms and the market was largelyconcentrated in the developed countries. As they beganselling into developing markets, the sales rapidly grewto US$ 19 bn by 2004. The global players built large–scale plants in RDEs to exploit the low labour costs andalso serve more effectively these fast growing markets.Today these plants produce a very large percentage ofthe entire global production of DVDs. However, Japaneseand European firms continue to control 47% of thevalue added segments, since they control the designand production of core components such as super multiDVD drive, optical pick up and micro–optics in theirhome countries (as shown in Exhibit 6e).Over the last two decades, RDEs (including India) havegrown their share of global trade by greater off–shoringby companies in the developed markets of lower valuemass production or assembly driven primarily by the labourcost advantage of RDEs. The high value parts of thechain such as, R&D, design and production of core componentswere often not outsourced. These companieswere keen to retain their technology and value creationin their home countries. Very often investments are madein only those parts of the value chain where RDEs havegreater competitiveness.The key question is whether India should continue to buildscale through consumption led growth and greater share ofmanufacturing off–shoring or also increase focus on buildingdepth in industries where it is most desirable to do so.India’s Current PositionGoing by several indicators, India currently lacks depthacross several industries. The country currently importsa large proportion of its capital good requirements, whichis the foundation of its manufacturing industry (as shownin Exhibit 6f). Even in strategic areas, like defense, wecontinue to import most of our advanced defense equipmentand would be making huge imports for modernisation.The new offset policy, which has been announcedby the government if implemented properly, could go along way in building depth in the country in many areasof defense production.There are several sectors where India is building to globalscale, but continues to lack depth across each stage ofthe value chain. These include mobile phones, telecomExhibit 6e. Shift of value added in DVD production (1998–2004)1998: MarketUS$ 1Bn2004: MarketUS$ 19.4 Bn%1008060Added valueonDVD driveDrop in share ofvalue added byJapanese firmsMonopoly byJapanese andEuropean firmsDistributionchannelAdded valueon corecomponentscreated bydevelopingcountries%1008060$ 3,850 Mn (20%)Distributioncost/ margins$ 6,400 Mn (33%)DVD assembly+ partsSelectexamplesDVD player,media, singleDVD recorder,chipset,R/RWdrive40200Added valueon corecomponents1998Added valueon corecomponentscreated byJapanese andEuropean firms40200$ 9,180 Mn (47%)Mainly corecomponents2004Super multiDVD drive,optical pick up,electric motor,micro-optics,laser, micro lens,OEICdyeSource: Architecture based approaches to international standardization, University of Japan 2006.66 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 6f. India has been a net importer in most industriesImports continue to dominate in 2008Net imports have been continually on the riseUS$ Mn25,000 24,32120,00020,278ImportsExports17,164Imports–Exports15,00010,00015,0005,00010,0005,000011,10874%8,3929,799equipment 1 5,53795%26%64%63336%5%Industrial Tele– Automotivemachinery communication industry 2and equipment54%46%Iron &steeland metalscrap 3–5,000–10,00002003 2004 2005 2006 2007 2008Industrial machinery and equipmentTelecommunications equipmentAutomotive industryIron &steel and metal scrapAll industriesSources: 2009 Euromonitor International; BCG analysis.1Sum of power–generating and general machinery and equipment.2Sum of passenger cars, commercial vehicles, motor cycles, other road vehicles and transport equipments.3Sum of metalliferous ores, metal scrap and iron and steel.equipment, consumer electronics and even passengercars. For example, in telecom equipment while a proportionof wireless devices and software content are nowproduced in India, the design, components and telecominfrastructure continue to be imported from other countries,and no single Indian player has been able to buildcapabilities to have a major play in the domestic market,leave alone the global market. In passenger cars, severalIndian players have made a strong beginning and arebuilding capabilities to design and manufacture cars fromscratch but their capabilities and products are still largelyfocused on the domestic market and now face the challengeof scaling up to global level. Even in the pharmaindustries, where Indian firms have made a mark in theglobal generics market, India has not been able to exploittheir position to develop strong equipment suppliers andcontinue to depend largely on imports. Other core sectorslike power, railway transportation, mining, ports and shippingand steel depend largely on imported machineryeven though India provides one of the largest and fastestgrowing markets for these products.Finally, as discussed earlier in the report, India currentlylags behind many other countries on R&D and innovation.Spend on R&D is only 0.8% of GDP which ismuch lesser than developed or even several RDE countries10 . Given that innovation, technology and R&D arecritical drivers of depth in any industry, this low spendon innovation will have to be substantially increased inthe future.Policy Levers to Drive ‘Depth’India has progressively liberalized its industrial policy tomodernize industrial sectors and attract investments andbuild scale of production. This has paid off as manufacturinggrowth has averaged over 8% over past few yearsand Indian industry has become much more cost competitive.With its aspirations to achieve a growth rate of11% and become the 4 th largest manufacturing economyin the world, India should also focus on taking its manufacturingcapabilities to the next level and significantlyincrease depth in many industrial sectors.Government policy can play an important role in buildingdepth. Many other RDEs, in particular China, providesome pointers to the policy interventions that are needed10. Refer Exhibit 5e, Chapter 5.Indian Manufacturing: The Next Growth Orbit 67

to do so. An analysis of China’s policy framework for industrialdevelopment offers three themes which Indiacould draw from:1. A systematic selection and focus on specific industriesto build depth.2. The range of policy levers deployed to build depth inthese industries.3. Variations by industry in terms of strategy as well aschoice of levers used.Industry selection. RDEs may select different industries todrive depth. For example, China divides its industries intothree main groups (as shown in Exhibit 6g): strategic or “vital”industries, basic or “pillar” and others, and has laid outa very different set of policies for each group, specifically interms of participation by non–Chinese players.Range of policy levers used. A comprehensive set ofpolicy levers can be used to drive depth. Exhibit 6h showsthe policy levers for different industries used by China topromote strategic depth. These include demand side leverssuch as offering preferential customer access andcreating tariff and non–tariff barriers like setting industrystandards. On the supply side, the government has facilitatedinnovation and technology development, providedpreferential access to finance and offered fiscal incentivesto encourage corporate investment.Two key benchmarks stand out. Firstly, China’s focus onbuilding depth in specific hi–tech industries. Secondly,the crucial role played by universities in driving technologydevelopment and promoting local enterprise.To build depth in hi–tech industries through developmentof technology and innovation, (as shown in Exhibit6i), China established the Torch High Technology IndustryDevelopment Center in 1989, under the Ministry ofScience and Technology to create an integrated programto support and drive innovation in a set of priority “high–tech” industries. These included information technology,biology and new medicine, aerospace and aviation, newmaterials, high–tech services, new energy/energy savingtechnology, environment protection, and reconstructionof traditional industries by new technologies. Key initiativesinclude:Exhibit 6g. China has divided its industries into 3 main buckets based ontheir strategic importanceStrategic "Vital"industriesBasic "Pillar"industriesOther industriesIndustrybuckets1 2 3DefensePower generation &distributionTelecomOil &petrochemicalCoalCivil aviationShippingEquipment MachineryAutomobileITBuilding and ConstructionSteel and ironNon Ferrous metalsChemicalsHi-Tech••••TradingPharmaceuticalsConstruction materials...Ownershiprestrictions100% state ownership andabsolute control• Have permitted JVs(subject to state-ownedcontrolling stake) indownstreampetrochemicals andtelecom onlyState to maintain relativelystrong control• Foreign playerspermitted—however,controlling stake withstateOpen to non–state and foreignownership, but statepermissions required• Continue to openindustries tointernationalcooperation68 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 6h. Range of policy levers adopted by China to promote strategic depthin select industriesCreate ownershipconstraintsOffer preferentialcustomer accessSet industrystandardsOffer fiscalincentivesOffer preferentialaccess to financeDrive &facilitatetechnologydevelopmentPolicy levers — Illustrative• Mandate state ownership of enterprises• Limit extent of foreign ownership• Preference in government contracts• Restrict market access for foreign players• Set buying standards to encourage purchase ofdomestically produced products and equipment• Tax incentives/rebates for investment in upstreambusinesses and technology• Import tariffs to encourage purchase of domesticproducts and equipment• Mandates to banks to offer stronger lines of creditto specific industries/players• Government owned funds for specific industries• Develop technology parks and business incubatorswith access to funds and technical support etc• Offer preferential policies to tenant companies• Create technology transfer marketsExamples• Steel: Participation of global playerlimited to less than 50%• Civil aviation: 100% state ownershipmandatory• Local telecom equipment firms, e.g. ZTEand Huawei have preference ingovernment contracts• Steel standards for construction• Technology standards in telecom• Tax rebates for companies in hi–techscience parks• Huawei has $10 billion line of credit tosell telecom equipment in Africa• State–owned innovation fund created forearly stage enterprises• Tax rebates and lower land fees offeredto tenant companies in technology parks• Encourage companies to partner withlocal universities at low costExhibit 6i. Policy levers adopted by China to drive strategic depth in hi-tech industriesProvide accessto finance• Innovation Fund (Innofund) for Tech–based SMEs, 1999– Investment support for early stage projects still unattractive for commercial capital– 5.3 billion Yuan to ~8,000 projects; over 100 SMEs, listed on stock exchanges• Roadmap Scheme for Financing Tech–based SMEs, 2004– Policy loans to commercial banks for loans to tech-based SMEs—default covered by Innofund• Tech–based SMEs Venture Capital Introductory Fund, 2007: 100 million RMB fundFacilitatetechnologydevelopmentcapabilities• Technology Business Incubators (TBIs), June 1987– Offer customized incubation services and technical expertise to start–ups– 62 University Parks jointly in collaboration with Ministry of Education; 100 incubators forreturned overseas scholars; 9International business Incubators (IBIs)– ~500 TBIs hosting 40,000 companies; successes including Lenovo, Huawei, Suntech Power• Specialized Industrial Bases, 1995 (129 bases) access to local talent, technology and capital• Productivity Promotion Centres (1270 centres): Capability development, technology assistanceOfferpreferentialpolicies• National Science &Technology Industrial Parks, 1988– 54 parks, over 40,000 companies—33% of R&D spend in 2006– Get preferential policies and administrative support including lower tax rates, land usage fee...Indian Manufacturing: The Next Growth Orbit 69

◊◊◊◊Providing preferential access to finance—especiallyfor early stage enterprises that are unattractive forcommercial capital.Supporting capability building for start–ups and smallenterprises through access to science parks, low costtie–ups with universities etc.Developing and promoting innovation clusters throughgovernment investment and providing preferential policiessuch as tax incentives, lower land usage costs etc.Building supporting soft infrastructure such as creationof a technology transfer market for sale of technologycontracts.For example, in railway and power equipment sectors,China has very aggressively used the attractiveness oflarge potential markets to encourage foreign companiesto sign JVs with minority share holding and transfertechnology in exchange for lucrative deals. Over a periodof time, the local firms with this knowledge havebuilt their capability and are now producing competitiveproducts cheaper than those of overseas originators.For example, foreign companies could build generatorsfor the first stage of the massive Three Gorgeshydroelectric dam, only if they agreed to transfer technologyto Chinese partners, who took the lead in laterphases of construction. In recent years, a very similarpattern is playing out in the alternative energy sector.Foreign wind–turbine manufacturers held nearly 60% ofthe Chinese market in 2006. As Chinese firms gainedknowledge and capabilities, and with the favoured accesspolicies of the Chinese government to supportthem, that position was reversed by 2008 with the Chinesefirms accounting for 74% of new installations.China has attached huge importance toward collaborationwith universities. Universities have been assigned acrucial role in the policy framework for creating “know–how clusters” and in promoting local enterprise. Overthe last two decades, 62 university parks have been developedin joint collaboration with the Ministry of Scienceand Technology and Ministry of Education. Universitiesin these parks are given funding and expected tosupport technology transfer and product developmententerprises. For example, four of China’s largest automotiveclusters are linked to top universities. In addition,universities play an important role in promoting localenterprises. Their “design institutes”, such as, in buildingtechnologies, road construction and industrial automation,play a key role in setting standards and specificationsfor contracts in many industries. Many of thesedesign houses at the same time make money as systemintegrators (they buy products from small players) andplay a significant role in driving the competitiveness oflocal companies.Variation by industry. The third theme for India to consideris that not all industries are treated the same andthe policy agenda could vary by industry. Depending onthe starting position, strategic importance and globallandscape of the industry, the government can pick asub–set of levers to be deploy for each industry.In telecom, on the other hand, China adopted a differentpolicy of protecting domestic players, to give them an advantagein selling locally. ZTE and Huawei, the two majorlocal players had access to cheap funds and preference inlocal sales. They developed their capabilities, through reverseengineering and then through numerous technologytie–ups with MNCs. Now the government is supportingthem in their strategy to become global leaders intelecom equipment industry. Huawei, for example, has alow interest US$ 10 bn line of government credit to selltelecom equipment in Africa.It is important to note that such initiatives to build depthare not unique to China. Thailand’s government policiestoo have led to strong capability development and depthin specific industries. Thailand’s hard disk drive (HDD)industry is a good example: the HDD cluster spans thefull production value chain developed as a result of closecooperation between government, industry and universities.Exhibit 6j shows how cooperation of all stakeholdersled to the development of an integrated HDD clusterspanning the entire value chain. The government madeHDD a priority industry and provided incentives like oneextra year of tax exemption for HDD manufacturingcompanies for investing in R&D centres which furtheraccelerated technological advancements. Universitiesand companies collaborated to develop an effective labourforce for the industry, with companies investing inlaboratories and R&D centres at universities. Between2001 and 2005, value addition by Thailand’s HDD industryhad risen from 30% to 45%, while the number of HDDsupporting industries had grown by 20%. Thailand’sshare of the global production of hard disk drives in-70 The Boston Consulting Group • Confederation of Indian Industry

Exhibit 6j. Thailand’s government policies played critical role in developmentof HDD industryThailand’s HDD cluster spans fullproduction value chain...... with close cooperation betweengovernment, industry and universitiesAcademia KMITL KMUT Khom Kaen Chulalongkorn Suranaree AIT Thai-German Inst.HGA/HSA/HDDassembly Hitachi GST Fujitsu Seagate Western digital Union technologyBase PlatesAltum PrecisionWearnesPrecisionBayonicsShineiMMI PrecisionOther activities Gem City Engineering Thai Inter Calibration Other PrecisionEngineering/IntegrationService ProvidersGovernment NSTDA BOI MOI Thai EEIAssociations ECEA FTI IDEMAOverseas DSI (Singapore)Suspension KR Precision MagnecompFlex assemblyMektecManufacturingInnovexPEMSTARMotors Minebea Nidec Electronics TDK JVC ComponentsFirm cooperation Leading HDD firms formed IDEMA Thailand topromote HDD domestic cluster developmentGovernment cooperation Coordination between IDEMA and Thai Board ofInvestment (BOI) makes HDD a “prioritized” industry Firms receive tax incentives in return for domesticinvestment in skills and technology development– Eg, one extra year of tax exemption in returnfor establishing an R&D center within 3years of1operationEducational cooperation Universities and companies coordinated to developan educated and efficient labor force• Thailand became largest global exporter of HDD• Thai HDD value add has risen from 30% to 45%• Thai HDD supporting industries grew by 20%Sources: IDEMA Thailand, The Roles of Intermediaries in Clusters by Patarapong Intarakumnerd, ITC development in Thailand.1Among other incentives and requirements as part of package.creased from 10% to 33% making Thailand the world’slargest HDD exporter 11 .Successful Offset PoliciesMany countries have used ‘offset’ strategy as a policy leverto build their defence production capabilities. Moresuccessful countries have looked beyond their defenceindustry to have a multiplier effect on the country’s manufacturingindustry through offset strategy. At the sametime many offset programs have failed to meet the statedor unstated objectives and local partners have been usedby global defence contractors to ‘pass through’ so calledvalue addition.India has embarked on a large scale modernisation of itsdefence forces and has put in place a stated offset policyto encourage local value addition. BCG has studied successfuloffset policies in different countries and has summarised10 best practices shown in Exhibit 6k. There aretwo best practices that merit emphasis. First, most successfuloffset programs have clearly articulated objectivesand very active government support to achieve these objectives.For example, if one of the objectives is to have amultiplier effect on the country’s economy, the incentivesystem for the defence contractor in form of credit fordifferent elements of capability development in the countryis designed in such a way to make this happen andthis is monitored closely. For example, in one programmethe defence contractor was awarded multipliers for R&D,investment and targeting SMEs as partners. Another interestinginnovation in the offset policy has been implementedby South Africa which separated the strategy/advisory and monitoring of impact on the country’s economyfrom the executing of each offset contract. While thelatter team is part of the Ministry of Defence, the formeris part of the Ministry of Trade Industry.Clearly, closer alignment between the different stakeholdersboth within the government and outside is criticalto get the maximum benefit for the economy fromsuch programmes.Developing the machine tools industryA strong machine tool industry is a critical building blockfor India to achieve its aspirations for the manufacturingsector. As mentioned earlier, Indian machine tools indus-11. IDEMA Thailand.Indian Manufacturing: The Next Growth Orbit 71

Exhibit 6k. Top ten elements of World Class Offset Programs12345678910ElementGov. Procurement/Ministry supportClear and achievablemandateRelationships withdefense contractorsMarket scanning andsynergy creationSector expertiseEfficient projectincubationTransparentmechanismsDynamic policiesAnalytics for decisionmakingMonitoring systemsDescriptionAlignment with governing department (Gov. Procurement) on mandates, projects and performance targetsTime and resource allocation for policy review and approval of key decisions (eg, Projects)Specific performance targets (eg, Create 10,000 jobs, develop 5R&D aerospace technology companies)Alignment of mandate with nation's capabilitiesEfficient working arrangement with defense contractor to launch projectsCommunication with defense contractor for insight on capabilities including potential projectsUnderstanding of nation's value proposition (eg, Access to raw materials, efficient logistics, etc)Targeted channeling of defense contractors to local companies to form successful venturesDatabank on sector financial performance, organizational metrics, and other benchmarksExperts on specific sector trends and analysisTargeted deal generation and deal qualification pipelineExperienced team to support company formation and monitoringDocumented and simple-to-follow mechanisms for proposal evaluation, crediting, etcConsistent for each contractor and purchaserConstant review and update of Offset policies (eg, Multipliers, penalties, etc) based on evolving mandateCustomizations for special situations (eg, High multipliers for desired technology)Robust analytics (valuation, industry analysis, portfolio evaluation, etc) to evaluate new venturesExperts to drive decision analysis (eg, Portfolio optimization)Processes to enable frequent auditing of defense contractor obligation fulfillmentDefined format (templates) and criteria for performance measurementtry is heavily reliant on imports – over 80% of India’scurrent machine tools requirements were imported in2009, up from 40% in 2002.Current policy framework interms of zero import duty structure without matching incentivesfor domestic players has incentivised importsand worked against deepening capabilities in the Indianindustry.Many countries have recognized the importance andmultiplier effect of this industry and have implementeddifferent levers to develop and strengthen their machinetools industry. Some of these levers are described below:◊◊◊Preferential access to capital: Taiwan and Korea offerconcessional interest rates (5–6%) for machine toolsdevelopment.Fiscal incentives: Taiwan, Korea have supported severalfiscal measures including incentives for local machinepurchase, tax holidays for 5–7 yrs and export incentivesetc.R&D institutes: Germany has 7 R&D institutions exclusivelydedicated to production technology. The Chinesegovernment has also set up several R&D centres formachine tools and manufacturing technology.◊◊Strong government focus: Machine tools have been identifiedas a key priority for China with a well definedgoal in the 11 th 5 Year Plan: “To develop advancedtechnology, high precision machines and reduce dependenceon imports by 2010”.Preferential market access: The US and UK drive machinetool and manufacturing technology through defensecontracts and government grants for developmentof advanced technologies.◊ Overseas acquisition/investment: Chinese governmenthas enabled the acquisition of several reputed machinetool companies in Germany as a strategy to acquirecritical technologies.Building a strong and globally competitive Indian machinetool industry will require a combination of thesedifferent levers and a duty structure which creates a‘level playing field’ for both imports and domestic players.Technology parks which are focused on developing72 The Boston Consulting Group • Confederation of Indian Industry

and manufacturing cutting edge manufacturing technologiescould be an important element in this nationalendeavor.India Needs to Define Clear Policy AgendaAround the Issue of Building DepthWe saw that the starting position in many Indian industriesranging from defence production to core infrastructuralsectors like railways to hi–tech sectors is weak interms of depth of capability and local value–addition. IfIndia wants to build leadership position in select industries,it will require a concerted policy agenda specific tothe target industry. We present a framework on how theIndian policy makers can develop a differentiated policyto build depth (as shown in Exhibit 6l):◊cilitate these industries to continue to rapidly buildscale to drive down costs, and at the same time, proactively“learn” and transfer knowledge from the moredeveloped markets.Over the next few decades, many new/emerging technologieswill grow very rapidly. This gives India anopportunity to position itself as an early mover andpossibly global leader. It requires careful assessmentto identify the right emerging technologies where Indiacan display advantage. These technologies willrequire support through earmarked “innovation”funds, open experimentation and active teaming andinvestment in research institutes to gain early moveradvantage.◊◊The nation’s “building blocks”—infrastructure, capitalgoods, machine tools, etc require focused effortsand large investments to build technical expertiseand manufacturing capabilities and should get specialfocus.India has already begun to build to scale in many consumerled industries. The focus here should be to fa-◊India will need focused investment to build capabilitiesin manufacturing defense equipment. Articulationof clear objectives for the offset program, not just fordefence industry but also for the economy as a wholeand effective implementation will be important leversto build the defence equipment industry and therebymaximise the multiplier effect on the country’s manufacturingsector.Exhibit 6l. Policy Framework: Building strategic depth1 2 3Assessment of startingChoice of industries toposition and settingbuild depthaspirationDefinition of policylevers for IndiaWhich industries shouldwe build depth in?• Create framework andcriteria for selection e.g.– Strategic importance– Long term potentialfrom industry– Job creation potential– Exposure to globalindustry volatility etc• Assess differentindustries against theframework– Fact base drivenassessmentWhat are India's gaps along thevalue chain in these industries?• Understand extent of currentdepth in the selected industries– Activities along value chain– India's share of value add andcapacities across value chainDefine key metrics to measureand monitor 'depth' of industryin IndiaAssess peer benchmarks usedin other countries to promotedepth••–Policy levers used by othercountries; across the valuechainWhat should be the policypriorities for each sector?What combination oflevers should be used?Develop clear targetsacross different valuechain steps for the targetindustriesIdentify key policy leversto drive depthDevelop specificinitiatives and work withthe industry andgovernment to createimplementationroadmap•••Indian Manufacturing: The Next Growth Orbit 73

Since India’s economy was liberalised, its industrial policyhas moved away from direct intervention in terms ofmandating ownership or technology transfer or localvalue addition. It has also moved at towards creating alevel playing field irrespective of ownership. Any incentivelike accelerated depreciation or R&D support hasbeen individual issue based and limited in scope. A comprehensiveand integrated policy intervention to builddepth at this stage of India’s industrial development willbe a controversial topic and will generate a lot of debateamong the different stakeholders within and outside thegovernment. The benefits to the country will be wellworth the debate.Labour Policy for Manufacturing IndustryDriving Consistent Labour Policies Importantfor Manufacturing GrowthA productive, effective and engaged labour force iscritical to support manufacturing growth in any economy,particularly so in India. India’s low labour costshave been a key source of competitive advantage overthe last decade and will continue to be important goingforward. Most industry observers say that the currentlabour policy framework introduces rigidity in the labourmarket, encouraging use of widespread informalwork forces and there by disincentivising skill development.If we have to achieve the growth aspirations laidout in the earlier chapters, Indian manufacturing willneed to focus on three imperatives as regards its labourforce:1. Rapidly increase employment and mobility opportunitiesfor people joining the workforce.2. Improve productivity and flexibility to enhancecompetitiveness.3. Have a robust policy framework to protect workerrights.Driving Employment in ManufacturingSector.Despite recent growth, India’s manufacturing sector isestimated to employ only 12% of the country’s total workforce. Over the next decade, nearly 80 million people willjoin the workforce and a large proportion will need tofind employment opportunities. Through faster growth,the manufacturing sector can play an important role increating employment for this growing workforce. Ourestimates suggest that for every additional 1% pointgrowth in manufacturing 20–30 million additional jobscan be created 12 .Two aspects are to be considered in this regard:◊ On the demand side, which industries will drive employment?Labour requirements vary significantly by industry.Hence focus on labour–intensive industrieslike textiles, paper and wood products, and food–processing can generate faster employment. Theseindustries contribute 30% of manufacturing outputbut constitute over 60% of the manufacturing workforce13 . For every 1% point growth in labour intensiveindustries, ~15–25 million additional jobs can becreated.◊ On the supply side, which states will generate surplus,employable manpower? Demographic projections indicatethat five states (Uttar Pradesh, Maharashtra, Bihar,Madhya Pradesh, Rajasthan and West Bengal)will account for ~65% of the additional workforce inthe next decade 14 . Other than Maharashtra and (to alesser extent) Uttar Pradesh, none of these states arecurrently among the top contributors to manufacturingemployment. Focused efforts to build labour intensiveindustries in these states can go a long way inaddressing this skew and creating employmentopportunities.Driving Productivity and FlexibilityIndia’s productivity adjusted labour rates are amongthe lowest across RDEs. The challenge will be to maintainthis competitive advantage in the face of increasingwage rates (particularly for organised labour inindustrial pockets), and faster productivity growth inother RDEs. Secondly, as we increase our share of theglobal manufacturing trade, we will need to buildgreater flexibility to deal with the volatility and seasonalityof global markets. Finally, a significant part ofthe growing workforce who join the manufacturingsector will come from the migration of agriculturalworkers who are to be trained to improve their pro-12. BCG analysis.13. CSO,BCG analysis.14. BCG analysis.74 The Boston Consulting Group • Confederation of Indian Industry

ductivity. As RDEs competing with India for globalcustomers rapidly improve their workforce productivity,India could lose its factor cost advantage unless werapidly improve the labour productivity of our manufacturingsector on one hand and become much moreflexible to address the increasing volatility and seasonalityin demand. This is further accentuated as asignificant part of our workforce continues to be seasonal,going back to their villages during sowing andharvesting seasons.The productivity and flexibility imperative has implicationsfor the training and skill development infrastructureas discussed in earlier chapters. Solutions may haveto be thought of in terms of specific industries as differentindustries face very different challenges on thisfront. For example, textile industry has high seasonalityof labour requirements. It is important for the industryto develop structures to effectively hire and utilise workersduring this period and possibly across seasons todrive higher productivity, at the same time ensuring sufficientcompensation and adequate living conditions forthem during the seasonal period.At the same time, companies should not be penalised fortechnology upgradation. As discussed in earlier chapters,technology improvement will be a critical lever in improvingproductivity and competitiveness, yet it will oftenlead to workforce reductions. While greenfield expansionsreceive several fiscal incentives existing facilities grapplewith expensive and long–drawn processes for any workforcereduction. Policy initiatives need to bring togetherall stakeholders to create a level–playing field for existingmanufacturing facilities and encourage technology upgradationto meet India’s productivity challenge.Robust Policy Framework to Protect WorkerRightsIndian industry has enjoyed strong labour relations foralmost two decades now, but recent spate of strikes andworker agitation in the manufacturing sector across thecountry and covering different industries is a strong indicatorof growing unrest amongst the workforce. Indianworkers have not reaped proportional benefits from theoverall economic growth in India over the last two decades—manufacturingwage rates in India have grownslower than the overall increase in household income inthe country. At the same time, the modern Indian workeris more aware of the world around him, expects moreand has higher aspirations. The nature of dispute isvaried—in addition to greater compensation workersare demanding union recognition, reacting to productivitydemands and expressing concerns over outsourcingand growth of contract labour. Part of the recent waveof unrest is among contractual and temporary workerswho have burgeoned in numbers as companies haveused them to get around the perceived rigidity in labourlaws. These temporary and casual workers lack recourseto legal redressal in industrial and labour courts andnow want to change this situation.At the same time, existing labour laws are seen as outmodedand many experts claim that they have adverselyimpacted labour productivity by discouraging large–scale operations and encouraging use of less productiveinformal workers. Manufacturing firms have been reluctantto set up large scale plants with several thousandworkers in labour–intensive industries like textile,leather, jewelry, electronics and other assemblies despitebetter economies of scale. They often set up severalsmall plants instead of a single large one. Theyalso find it easier to employ large numbers of contractworkers. In fact, the formal Indian manufacturing sectoremploys only ~2% of the total workforce 15 —overfive times this number being made up for through contractworkers. This limits overall productivity, their flexibilityto meet seasonal variations in demand as well asrestricts the economies of scale and investment. Forexample, a typical Indian textile and clothing plant isone–fifth the size of a typical Chinese textile plant—ahuge disadvantage in terms of economies of scale whicha has direct bearing on labour productivity and globalcompetitiveness.Several Policy Levers are AvailableAs was mentioned at the start of this discussion, Indianeeds to put in place a robust policy framework whichon one hand supports building scale, promotes higherproductivity and greater flexibility, and on the other protectsworker rights. Many RDEs have been faced withsimilar policy dilemmas. The example of Brazil could beinstructive for Indian policy makers to look at. Like mostRDEs, Brazil suffered from similar issues like outmodedlabour laws that discouraged workforce upgradation,encouraged informal worker contracts and constrainedgrowth of scale and productivity. In recent years, Brazil15. BCG analysis.Indian Manufacturing: The Next Growth Orbit 75

has taken several steps to develop its labour marketpolicies to (as shown in Exhibit 6m) balance the needfor growth and productivity with worker rights.Driving employment. The Brazil governmentundertook two main initiatives to drive employment:1. Focused impetus for small and medium enterprisesthat can be strong drivers of employment generation.2. Creation of an employment service for more efficientdemand–supply matching.Under the Program for Creation of Employment and Income(PROGER) in 1994, credit was extended to microand small enterprises, cooperatives and production initiativesin the informal sector. The government also createda public unemployment service, Sistema Nacional de Emprego(SINE), where unemployed workers were able to getinformation on potential opportunities and companiescould efficiently access large pools of surplus labour.Improving flexibility and productivity. Like in otherRDEs, improving labour productivity and managing flexibilityhas been an important challenge in Brazil. The governmentinitiated the National Plan for Professional Formationin 1995 to increase labour productivity, training 11million workers between 1990 and 2001.Protecting worker rights. To protect worker rights,workers were given access to unemployment insuranceand cash transfer programs as a safety net between jobsinstead of discouraging additional employment. At thesame time, companies were mandated to provide non–cash benefits to workers that involved maintaining superiorworking conditions and providing active training.The issues on labour policy are well know and so are thepolicy measures listed above. India needs a much higherlevel of formal employment as its workforce grows rapidly.The manufacturing sector will necessarily have toplay a key role in this. There are many labour policy leversthat can be implemented quickly like simplificationof labour laws, worker training and effective employmentexchanges while other policy measures will haveto be debated among all stakeholders and aligned andconsensus arrived at. However, there needs to be a recognitionand acknowledgement that unless India canExhibit 6m. Steps taken by Brazilian government to improve labour market policiesPolicyinitiative Description OutcomeDrivingemploymentMicro creditprogramsPublicemploymentserviceProgram for the Creation of Employment and Income(PROGER) established in 1994 to extend credit to microenterprises and small enterprises, cooperatives, andproduction initiatives in the informal sectorSistema Nacional de Emprego (SINE), created toprovide guidance to unemployed workers and findemployment opportunities~2.8 million loans offered withan average credit of R$9,000in 2006Over 5million workersregistered at SINE since 2002ImprovingproductivityTrainingprogram1995 National Plan for Professional Formation(PLANFOR) sought to increase labor productivity andset the goal of training 20 %of the country'seconomically active population11 million workers weretrained between 1990 and2001Maintainingworker rightsCash transferprogramsUnemploymentinsuranceEstablished in 2003 to serve as asafety net for workersfrom poor familiesTo provide benefits for three to five months to registeredworkers who meet minimum contribution requirementsSource: 2009 Carnegie Endowment for International Peace and International Labour Organization.Over 11 million familiesreceived benefits in 20065.3 million workers receivedaverage benefit of R$389(~1.36 times minimum wage)for 4.2 months, in 200576 The Boston Consulting Group • Confederation of Indian Industry

implement a comprehensive policy framework (as shownin Exhibit 6n) that modernises its labour laws to balancethe protection of worker rights with scale and productivity/flexibility.Without this it would be difficult to meetthe aspirational growth targets for the manufacturingsector and drive employment.Driving The Right ‘Industrial Structure’for IndiaSetting the Context for the Right ‘IndustrialStructure’ for IndiaThe final theme that we want to explore in this chapteron policy imperatives is the right ‘industrial structure’for India. Over the last few decades, India’s pattern ofmanufacturing growth has been uneven and concentratedin select pockets. We have also seen different policyinitiatives on SMEs with varying degree of success andthe conclusion seem to be that reservation for SMEs is afailed policy in today’s globalising world and large scaleis the need of the hour in many industries like textilewhich were reserved for SMEs. On the other hand, inrecent years, setting up of mega–scale greenfield industrialprojects has faced major problems on account ofland acquisition to displacement of families in differentstates—seemingly a manifestation of the lack of ‘ownership’by the local people of these projects, which in theoryshould have been welcomed as they would have ledto improvement of the local economy.India needs to build scale and productivity to competeglobally. But at the same time we face issues like geographicallyconcentrated industrial development leadingto under–penetration in several states, ineffectivegrowth of SMEs which are employment drivers, and lackof alignment of all stakeholders in industrial developmentleading to issues such as challenges in land acquisition.What should be the future ‘industrial structures’which will work in India and meet the seemingly diverseset of objectives?Geographically Dispersed Industrial DevelopmentIndustrial development is currently concentrated in fewcities and clusters, and several states remain under–penetrated.Seven states alone—Tamil Nadu, Maharashtra,Andhra Pradesh, Gujarat, Uttar Pradesh, Punjab andKarnataka—account for ~70% of all factories, employ-Exhibit 6n. Policy framework: Labour policy for manufacturingDriving employmentImprovingproductivity& flexibilityMaintainin worker rightsWhereto focus?• Target industries and states foremployment generation– Growth potential, labourintensity, job creationpotential...– Surplus labour availability bystate, employability levels...• Industries to improve labourproductivity and flexibility– Labour intensity andproductivity, export potential,peer benchmarks– Demand and productionseasonality...• Size of enterprise and laboursegments for focus– Labour intensity, workersatisfaction levels...Setaspiration;Identify gaps• Set employment targets byindustry and state• Current constraints—trainingfacilities, tax incentives,information asymmetry...• Set measurement metrics andproductivity targets by industry• Current constraints—size ofenterprise, skill levels, movingworkforce...• Set measurement metrics andworker benefit targets• Current issues—recent instancesof worker unrest, sources ofdissatisfaction...Define policylevers• Peer benchmarks—labourpolicies used and theirexperience• Identify policy levers and developspecific initiatives• Peer benchmarks—policies usedand their experience• Identify policy levers for Indiaand develop specific initiatives••Peer benchmarksList monetary and non–monetarysupportIdentify policy levers and developspecific initiatives•Indian Manufacturing: The Next Growth Orbit 77

ment and capital invested in manufacturing 16 . Currentlyonly 29% of India’s population lives in urban areas, and41 cities have a population of over 1 million 17 . Given India’sgeographic spread and diversity, we strongly needto widen the scope of our industrial development. Indialikely requires at least 30–40 new and geographically dispersedurban cities by 2025 and not simply SEZs.Concerted efforts required to build new centres.Huge investments in urban infrastructure will be neededto manage this dispersed urbanisation. This would requirecreation of newer demand centres, with stronggrowth in infrastructure requirements in four areas: shelter,utilities, transportation and communication. Giventhe constraints on natural resources, these centres wouldperhaps need to develop new urbanisation models whichwill impact the way we live and work, travel and consume.A comprehensive plan will be needed to createthese urban centers and carefully design the role of themanufacturing sector within them. Explicit policy effortsacross all areas—export impetus, creating industry depthand labour rights—will need to be made in this regard.This is also critical from the perspective of ensuring thatexisting urban centres in India do not start buckling underthe load of huge population migrating to them.Balancing Small and Large EnterprisesBoth small and large enterprises have important roles toplay in the economic development. Small and mediumenterprises (SMEs), if used effectively, can be importantdrivers of both employment and innovation within anindustry. For example, in the US, small firms have beenrapidly increasing R&D spend from 4% of total spend in1981 to 24% in 2005 compared to larger firms which sawa fall in their R&D spend from 71% to 38% in the sameperiod 18 . In India, SMEs account for 45% of manufacturingoutput, 40% of total exports and employ 42 millionpeople (~70% of the total manufacturing workforce) 19 . Atthe same time, it is well recognised that larger enterprisesare key to driving scale and cost advantages. Thechallenge is to identify a way to combine the higher innovationand employment generation potential in smallerfirms with the scale benefits associated with largerorganisations.SMEs in India currently suffer on account of sub–optimalscale of operation and technological obsolescence. Theylack the infrastructure and funding to support productdevelopment and technology upgradation. They alsofind it difficult to attract high quality talent—being unableto match the wage rate, job security and career developmentopportunities available in larger organisations.For example, most are unable to hire high qualityIT talent. Government initiatives to support SME growthand technology upgradation have seen limited successsuffering from low awareness and ineffective adoptionand utilisation.‘Clusters’ as an industrial structure. Clusters are an industrialstructure which has many small and large companiesworking together in an ecosystem with distinctroles for each type of enterprise. Well developed clusterscan lead to significant cost savings as well as productivityincreases because of multiple reasons:1. Increased supply chain responsiveness because ofmanufacturing consolidation near suppliers.2. Decreased time–to–market as companies can more effectivelyleverage the capabilities available with vendorsin the cluster.3. Better and cost effective availability of labour and alsoreduced talent recruiting efforts because of the powerof clusters in drawing labour.4. Lower logistics costs due to proximity of customersand/or suppliers etc.In the section on building ‘depth’ we had discussedclusters in China and Thailand being used as key policylevers by the government. Not just building depth,China has leveraged clusters effectively to drive itsmanufacturing growth.The cluster approach has also been used in India acrossa range of sectors with varying level of success, with autocomponents being seen by many as a success story. Thegovernment and industry need to think through howclusters could be leveraged to promote an optimal mixof large and small enterprises, combining the benefits ofboth types of enterprises.16. ASI.17. Census of India.18. US National Science foundation, 2006.19. Minestry of Micro, Small and Medium enterprise, Governmentof India.78 The Boston Consulting Group • Confederation of Indian Industry

Balancing Value Across StakeholdersEquitable value sharing across all stakeholders is importantfor sustainable development. Value generation fromIndia’s recent manufacturing growth has been constrainedto individual enterprises—workers for examplehave not seen commensurate growth in wages. Similarly,land owners have complained of being unfairly treatedin the acquisition process and locals have agitated forgreater share of jobs created.Land acquisition for example, is one of the biggest roadblocksto industrial growth in India. Though land rates inIndia are competitive with other RDEs, effective cost becomesmuch higher due to delays in land acquisition anddispute settlements. Several issues arise from disputes inprocurement of small parcels of land with individualsfeeling inappropriately compensated for their assets. Newideas on how to give the land owners a stake in the developmentcan help address these challenges.Cooperative structures could present interesting options.An alternative cooperative structure with smallercooperatives/enterprises connected to large enterprisesrather than merely selling at market prices can be onepossible solution. The Mondragon Cooperatives of Spain(MCC) is a good example to follow. It is one of the bestbusiness–based socio–economic initiatives and led to thecreation and preservation of manufacturing jobs via education,technology development and cooperative organisationwith a worker–centered model. The workers areempowered with equal voting rights (1 vote per person)and the profits/losses are shared equitably among allmembers. This system of distributing profits to its employeeowners strengthens the co–operatives as a groupand increases the long–term viability of the individualemployee–owned company. As of 2008, MCC had sales ofUS$ 21 bn with 103,700 employees across 264 cooperativesand subsidiaries 20 .Building the Right Industrial Structures forIndiaThe discussion in this theme has taken a very differentshift in thinking about the right industrial structures forthe Indian manufacturing sector. The different elementsmentioned have typically been dealt as a stand alonepolicy area by the government. We suggest that there is20. Company data.Exhibit 6o. Policy framework: New industrial structure for IndiaGeographic spread Size of enterprise Value for all stakeholderWhereto focus?• Target states and urban centres– Industrial output– Resource availability andsurplus workforce– Proximity to ports– ...• Target balance of small and largeenterprises. How will this vary byindustry?– Identify threshold scale andinvestment by industry– Establish role for eachsegment• Identify gaps in value sharing– List stakeholders– Current value split• List areas of dispute –e.g. landacquisition, worker rights etc.Setaspiration;Identify gaps• Set aspiration by state and urbancentre• Assess constraints to growth—infrastructure, funding, fiscalincentives, workforceemployability etc.• Set metrics and aspirations forsize by industry• Identify constraints –funding,access to technology, speed ofexecution, access to talent etc.• Set metrics and aspirations foreach issue• Examine constraints –transaction costs, lack judicialrecourse for contract adherence...Define policylevers• Assess peer benchmarks onsuccessful policies and models• Identify policy levers and developspecific initiatives• Peer benchmarks -driving scale;supporting SMEs• Identify policy levers and developspecific initiatives••Explore peer benchamrksIdentify policy levers and developspecific initiativesIndian Manufacturing: The Next Growth Orbit 79

strong logic to bring these different elements togetherand see this not as individual policy areas but a biggersystem design of new age industrial structures, whichcombine the benefits of clusters for increased efficiencyand competitive advantage with cooperative ownershipfor more equitable value distribution across large numberof stakeholders who may be operating small businesses.This structure, if implemented efficiently wouldcreate high employment in an ecosystem that operateslike a large enterprise and its attendant benefits.To support this, Exhibit 6o proposes a comprehensiveframework to develop such a full system view for anypolicy formulation on this topic.Way Ahead: Defining a ComprehensivePolicy Agenda for Indian ManufacturingIn this chapter, we have identified and described the fourcritical themes for formulation of policy to accelerate thegrowth of India’s manufacturing sector. For each theme,we have established the logic for these priorities and providedsome initial ideas. Careful assessment and designwill be required to examine each of these areas in depthand develop a policy plan and get alignment and consensusamong all stakeholders.We suggest that CII should constitute four cross–stakeholderteams to examine the themes and develop a moredetailed perspective of the trade–offs and suggest differentpolicy prescriptions to the government. These teamscould include representations across industry, government,the CII and specific industry bodies. The CIIshould play the role of the orchestrator, develop a focusedmandate, facilitate the discussions and alignmentbetween the different members and summarise the finalset of recommendations which can then be handed tothe government for its consideration.80 The Boston Consulting Group • Confederation of Indian Industry

A Call to ActionIndian manufacturing is at an important crossroadtoday. In the last decade (1998–2008), the sectorwas one of the best performing manufacturingeconomies across the globe. Yet contribution tothe overall GDP was one of the lowest across majorRDEs—signaling strong potential for faster growth.What should be the aspiration for India’s manufacturingsector? Over the next decade, the performance of TheIndian manufacturing will be crucial to achieving India’soverall growth aspirations and employment generation.China has been the best performing manufacturingeconomy in recent. We should aspire for this positionand target a growth of about 11% per annum (versus6.8% for FY1999–2009) which will make India the fourthlargest manufacturing economy in the world by 2025from its current ranking of 13 th .Achieving these aspirations will not be easy. It will requirecoordinated efforts to develop necessary enablinginfrastructure, capture new avenues for growth andhigher labour and capital productivity and shift India’smanufacturing competitiveness to the next level—andall together. All these different levers have been summarisedin our ‘House of Manufacturing’ (as shown inExhibit 1f, Chapter 1).Government policy and support will clearly have to playa crucial role. We identify four themes where governmentpolicy intervention could be critical for meeting the aspirationsfor the Indian manufacturing sector. These aredriving manufacturing exports, balancing the growth ofscale with building ‘depth’ across select industries, developinga robust labour policy for manufacturing whichcan balance worker rights with the flexibility and productivityimperatives of today’s business environment, andcreating the right future industrial structures for Indiagiven the country’s specific issues and challenges. Each ofthese themes has a set of complex issues embedded withinthem, which make it challenging to build consensusamong all stakeholders. It will therefore be necessary totake a holistic and systemic view to bring in some freshthinking and alignment between different stakeholders.Indian manufacturing has the potential to be a drivingforce in India’s economic development over the next twodecades. Success will require strong commitment, carefulplanning and willingness to make bold moves. Governmentsand industry alike will need to acknowledge the constraintsholding back the sector and take joint responsibilityfor driving this important agenda. This will enable Indiato enter the next growth orbit and squarely place itself as aleading player on the global manufacturing landscape.Indian Manufacturing: The Next Growth Orbit 81

Note to the ReaderAbout the AuthorsDr. Arindam Bhattacharya is ManagingDirector of BCG India.Ravi Srivastava is a Partner andDirector at BCG’s New Delhi office.Nimisha Jain is a Principal in thefirm’s Mumbai office.For Further ContactIf you would like to discuss thethemes and content of this report,please contact:Arindam BhattacharyaBCG New Delhi+91 124 459 7093bhattacharya.arindam@bcg.comRavi SrivastavaBCG New Delhi+91 124 459 7038srivastava.ravi@bcg.comNimisha JainBCG Mumbai+91 22 6749 7210jain.nimisha@bcg.comAcknowledgmentsThis study was undertaken by TheBoston Consulting Group (BCG) withsupport from the Confederation ofIndian Industry (CII).We would also like to thank theexecutives and institutions thatparticipated in the research effortand helped enrich this report.Special thanks to Mr. Arun Maira,Member, Planning Commission; Mr.Ajay Shankar, Secretary, Departmentof Industrial Policy & Promotion.We would also like to thank the CIICEO’s Council on Manufacturing fortheir valuable inputs and insights—Dr Surinder Kapur, Chairman, SonaKoyo Steering System Limited; MrJamshyd N. Godrej, Chairman andMD, Godrej & Boyce ManufacturingCompany Limited; Mr R. Seshasayee,Managing Director, Ashok LeylandLimited; Mr Sunil Kant Munjal,Chairman, Hero Corporate ServiceLimited; Mr Arun Bharat Ram,Chairman, SRF Limited; Mr Rajesh V.Shah, Co–Chairman and MD,Mukand Limited; Mr Ajay S. Shriram,Chairman and Sr. MD, DCM ShriramConsolidated Limited; Mr B. Muthuraman,Vice–Chairman, Tata SteelLimited; Mr Baba N. Kalyani,Chairman and MD, Bharat ForgeLimited; Mr Deep Kapuria, Chairmanand MD, Hi–Tech Gears Limited; MrDeepak Puri, Chairman and MD,Moser Baer India Limited; Mr GuluMirchandani, Chairman, MIRCElectronics Limited; Mr Jagdish PNayak, President (Operations),Larsen & Toubro Limited; MrMichael Boneham, President andMD, Ford India Private Limited; MrNadir B. Godrej, Managing Director,Godrej Industries Limited; DrNaushad Forbes, Director, ForbesMarshall Private Limited; Mr R.Mukundan, Managing Director, TataChemicals; Mr Ranaveer Sinha,Managing Director, Telco ConstructionEquipment Company Limited;Mr S. P. Oswal, Chairman, VardhmanGroup; Mr Sachin Saxena, Director,Nokia India Private Limited; MrSatish K. Kaura, Chairman and MD,Samtel Color Limited; Mr Sudhir M.Trehan, Managing Director, CromptonGreaves Limited; Mr Suketu V.Shah, Chairman, The Alloy SteelProducers Association of India; MrSumit Banerjee, Managing Director,ACC Limited; Mr Suneel M. Advani,Vice Chairman & MD, Blue StarLimited; Mr Sushil Kumar Roongta,Chairman, Steel Authority of IndiaLimited; Mr Tejpreet Singh Chopra,President and CEO, GE–India, SriLanka and Bangladesh; Mr Vikram S.Kirloskar, Vice Chairman, ToyotaKirloskar Motor Private Limited; MrVinayak Chatterjee, Chairman,Feedback Ventures Private Limited;Mr Zubin J. Irani, Managing Director,Carrier Air conditioning & RefrigerationLimited.We gratefully acknowledge thecontribution of Gaurav Devasthali,Gaurav Dosi, Nandini Dixit, PayalAgarwal, Shaleen Sinha, Tanu Goel,Varun Gupta from BCG India.Special mention to Evelyn Tan andJoseph Wallace for assistance inanalysis.We would also like to thank JamshedDaruwalla and Ratna Soni for theircontributions to the editing, designand production of this report.82 The Boston Consulting Group • Confederation of Indian Industry

For Further ReadingThe Boston Consulting Group haspublished other reports on this topicwhich may be of interest to seniormanagement. Recent examplesinclude:Solar Storm: Navigating Throughthe Turbulence to Reap Value inSolar EnergyA White Paper by The BostonConsulting Group, October 2009From Crisis to Opportunity: HowGlobal Challenger Companies AreSeeking Industry Leadership inthe Postcrisis WorldA White Paper by The BostonConsulting Group, September 2009Taking R&D Global: Meeting theChallenge of Getting It RightA White Paper by The BostonConsulting Group, August 2009Globally Advantaged Manufacturing:Winning in the Downturn andBeyondA Focus by The Boston ConsultingGroup, June 2009Lean in a Downturn: Six Actions toTake NowA Focus by The Boston ConsultingGroup, May 2009Innovation 2009: Making HardDecisions in the DownturnA report by The Boston ConsultingGroup, April 2009The Next Billions: UnleashingBusiness Potential in UntappedMarketsA report by the World EconomicForum, prepared in collaborationwith The Boston Consulting Group,January 2009The Comeback of the Electric Car?How Real, How Soon, and WhatMust Happen NextA Focus by The Boston ConsultingGroup, January 2009The 2009 BCG 100 New GlobalChallengers: How Companies fromRapidly Developing Economiesare contending for Global LeadershipA report by The Boston ConsultingGroup, January 2009India’s Demographic Dilemma:Talent Challenges for the ServicesSectorA report by the Boston ConsultingGroup, published with the Confederationof Indian Industry (CII),December 2008Getting More from Lean: SevenSuccess FactorsA Focus by The Boston ConsultingGroup, September 2008Carbon Capture and Storage: ASolution to the Problem of CarbonEmissionsA report by The Boston ConsultingGroup, July 2008Winning the Localisation Game:How Multinational AutomotiveOEMs and Suppliers are Realizingthe Strategic Potential of ChinaAnd IndiaA report by The Boston ConsultingGroup, January 2008Indian Manufacturing: The Next Growth Orbit 83

84 The Boston Consulting Group • Confederation of Indian Industry

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