There is new hope for manufacturing

I have long said that India is not globally competitive in manufacturing. Now, at last, I see limited signs of improvement. I will focus in this column on the auto industry. Ford has decided to outsource car engines for its Tamil Nadu plant from Hindustan Motors, notorious producer of the dying Ambassador car.

I rubbed my eyes in disbelief when I first heard this, but apparently General Motors is thinking of doing the same. Hindustan Motors factory for making Ambassadors in West Bengal is pathetic, but largely because of the terrible work culture there. The company’s factory in Pitampura, which will supply car engines to Ford, has implicitly been certified as almost world class.

Foreign investors use competitive China to produce for the global market, but generally enter uncompetitive India only to access the protected local market. The good news is that Ford’s Indian subsidiary exported something like two-thirds of its production last year. At a loss, no doubt, but then Ford is losing money globally.

The Indica car, developed in-house by the Tatas, has beaten all competitors in its segment made with foreign technology — Zen, Santro, Uno and Matiz. This does not mean the Indica can sweep world markets yet. But it does prove the competitiveness of India’s auto engineering skills. Suzuki is now sourcing the Alto from for its global sales. Hyundai may one day do the same with the Santro.

Most Indian companies are terrified of competition from China. Yet TVS Motors is now planning to export its indigenously developed Victor motor-cycle to China. TVS originally depended on Suzuki for know-how in two-wheelers, but ended that collaboration and is now faring far better using technology developed in-house. It even plans to invest Rs 250 crore in overseas ventures.

Rahul Bajaj is famous as the head of the protectionist Bombay Club. Yet Bajaj Auto has now developed a new range of motorcycles in-house that suddenly look internationally competitive. These models greatly outsell those Bajaj makes in collaboration with Kawasaki of Japan. Kawasaki plans to use Bajaj as a source for global exports. But Bajaj hopes that its indigenous range will find even more global buyers.

Mahindra and Mahindra has scored a domestic hit with its Scorpio model. It plans to assemble these in Indonesia next year. It is exploring plans to use Russia and South Africa as assembling hubs to serve Eastern Europe and Africa respectively.

All these are hopeful signs. But are these companies just dumping surpluses abroad while barely covering marginal costs, or is India genuinely emerging as a globally competitive manufacturer? After all, India has long exported engineering goods without ever looking world class.

Bajaj Auto has always exported some two-wheelers and three wheelers, but mainly to utilise surplus capacity. Foreign assembly plants are not new for Mahindra — it used to have one in Greece (which, alas, failed). Telco has always exported some trucks. Yet these marginal exports could not cloak the fact that these companies were basically uncompetitive, and were generally dumping surpluses abroad. Is the latest wave of auto exports any different? I think so. In the past, the only advantages Indian producers had were cheap labour and a profitable, protected domestic market. But the new wave of auto exports is based, for the first time, on competitiveness in design skills. Gone are the days when the Indian auto industry regarded R&D as a waste of money, and simply licensed know-how from abroad. Getting permission for foreign collaboration was difficult then, so often the licensed technology was totally obsolete (remember the Ambassador), yet profitable.

That strategy has collapsed in the era of reform. Today foreign companies can enter India and manufacture autos themselves, and obviously will not licence their best designs to Indian competitors. Indian companies have to produce competitive designs or perish. They have succeeded. In this, they have been helped by the liberalisation of know-how imports, which enables them to subcontract some design jobs abroad (as the Tatas did for the Indica). This is standard practice globally, but became possible in India only after liberalisation. Readers may object that the auto industry is not representative of all Indian industry. Very true. But the auto industry used to be among the most protected and least innovative. If it can become innovative, almost any other sector can. For instance, HMT has been exposed by liberalisation as sadly uncompetitive in machine tools, but Ace, a Bangalore-based company, has suddenly emerged as world-class because of its design skills in high-end CNC machine tools.

At the end of it all, we must not get euphoric, or declare a new dawn. Poor policies, high costs and third-rate industrialists remain widespread. Industrial growth remains tardy. But we now have signs that these disadvantages can be overcome by harnessing the same human skills that have made us famous in computer software and pharmaceuticals. Companies that treat manufacturing as an exercise in design skills can become world class.

What do you think?