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Competitiveness of Indian Manufacturing:
Findings of the Third National
Manufacturing Survey
March 2009
by:
Pankaj Chandra
Professor of Operations & Technology Management and
Director
Indian Institute of Management Bangalore
This Project was supported by
National Manufacturing Competitiveness Council
Government of India, New Delhi
.
Published by
Research & Publications
Indian Institute of Management Bangalore
Bannerghatta Road, Bangalore 560 076, India
T: +91-80-26582450 F: +91-80-26584050
www.iimb.ernet.in
© Pankaj Chandra (2009)
IIMB Research Report No. RR-2009-01
ABOUT THE AUTHOR
Professor Pankaj Chandra
Pankaj Chandra is a Professor of Operations & Technology Management and the
Director of IIM Bangalore. He holds a BTech from Banaras Hindu University and a
PhD from The Wharton School, University of Pennsylvania. He has taught at IIM
Ahmedabad; McGill University, Montreal, and has been Visiting Faculty at University
of Geneva; The Wharton School, University of Pennsylvania; International University
of Japan; Cornell University and Renmin University, Beijing. Has worked briefly
with The World Bank in Washington DC. He was the Chairperson of the Doctoral
Programme at IIM Ahmedabad. He helped found the Centre for Innovation, Incubation
and Entrepreneurship at IIM Ahmedabad and was the Chairperson of the Centre. He
has served as member of the GOI Committees on Clusters for Development of the
Informal Sector and on Rejuvenation of Higher Education (Yashpal Committee).
Professor Chandra’s research and teaching interests include Supply Chain
Coordination, Manufacturing Management, Building Technological Capabilities in
Indian Manufacturing Firms and hi-tech entrepreneurship.
Executive Summary i
Acknowledgement vii
1. Introduction 1
2. Details of the National Manufacturing Sample 5
3. Operational Strategy of Indian Manufacturing Firms 6
4. How Appropriate are the Managerial Practices
of Indian Manufacturing Firms? 13
5. Performance of Manufacturing Firms:
Old Gains and New Targets 20
6. Regional Comparisons: Are Manufacturing
Capabilities Similar Across the Country? 26
7. Some Observations on Variations in
Strategies and Performance of Manufacturing
Firms by Size 37
8. Implications and Conclusion 46
Table of Content
.
i
The Indian Manufacturing sector has traversed a diversified path to industrial development within the country.
While its share in the GDP has declined over the years, its growth rate in recent years has been impressive
(a CAGR of close to 8 percent in the last eight years). Very few countries in the world can boast of such
a diversified industrial base of significance: from textiles and apparel to steel, from chemicals to machine
tools, from consumer goods to avionics. And then there is the automobile and the auto-component industry
with engineering and service design that has created an industrial dynamic that only a few countries in the
world have been able to achieve. But most important has been the slow transformation of the economy
through manufacturing with a service approach. India’s manufacturing growth has been based largely on its
own domestic market with its own limitations and potential (e.g., it is estimated that the electronics market
in India will be worth US$ 40bn; its size in 2004 was US$ 11.5bn - an expected growth rate that is higher
than China’s)1. Once this market grows in quality and sophistication, the natural corollary would be strong
entry on the global stage. In other words, Indian manufacturing is about to come of age. It is nearing the
bend on the long distance race when the potential winner is expected to shoot past the leading pack! Indian
manufacturing is at that bend and is gearing to make its move.
The challenges before Indian manufacturing are immense, however. Some are environmental in nature - the
recent financial crisis around the world will restrict exports as much as possible and national barriers are
likely to get raised, ability of firms to raise resources will be tested due to scarce credit though interest rates
might come down, firms will be under pressure to survive and consequently, price competition will become
intense (and firms will be offering more value for money); in the medium to long term, those firms that have
been assiduously working to develop distinctive capabilities will grow tremendously as many others may fall
by the wayside. The challenges within the walls of the organization will relate to tiding over the short term
crisis financially. But more important, this may be the opportunity to focus on productivity through training
and process improvements (which will be helpful in the short term as well) so that when the global markets
pick up, firms have built competitive strengths.
1http://www.electronics.ca/reports/industrial/india.html, Bryan Wang, June 2005.
Executive Summary
ii
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
This report is different from most economic projections on Indian Manufacturing. This is based on the findings
of the third National Manufacturing Survey conducted every five years (i.e., 1997, 2002, and now 2007). Data
was collected from tiny, small, medium and large manufacturing firms through a questionnaire survey and
interviews. Our study is based on this national sample of 683 firms that are representative of all the four
regions of the country, i.e., North, South, East and West. In addition, we collected additional data from Uttar
Pradesh to benchmark manufacturing activities in a less developed industrial environment. The sample data
was collected from firms in eleven key sectors of industry namely Automobiles, Auto-components, Casting &
Forging, Chemicals & Allied Industries, Electrical & Electronics, Engineering, Food & Agro-Business, Machine
Tools, Pharmaceuticals, Steel, Textiles (Spinning, Weaving and Garments). It is a study of the shop floors
and the supply chains and the innovative processes in Indian Manufacturing. It provides insights into the
processes underlying effective management of suppliers, manufacturers and distributors and innovation
therein. These insights into operational management will inform us what Indian Manufacturing is required to
do to be able to run past the bend at a higher pace than other competitors globally.
Manufacturing has to contribute more than 25 percent to Indian GDP for the nation to achieve a growth
rate that will help it eradicate poverty over the next few decades. Interestingly, the world is also looking for
alternative sources of supply for goods as well as a location where their firms can set up their manufacturing
base to serve large emerging markets like India as well as their global clients. What is required is to
understand what will it take to develop further this manufacturing ecosystem and how to raise the value
add of manufacturing firms that are part of this environment.
Some key highlights of the findings of the third national manufacturing survey on how firms are building
competitive stances, i.e., appropriate capabilities by aligning strategies with effective managerial practices,
and what may be the challenges that they may have to overcome to compete effectively are as follows:
s Firms in different regions and of different sizes appear to be adopting differing strategies for competing
in the market. Most consistent are the medium size firms (and a few large firms) that follow a medium
volume, medium product variety strategy. Many of the large firms do not take advantage of the scale
economies that is inherent in their operations. Most of the small firms do not compete on flexibility and
innovation which is their natural strength but would rather become ancillaries to large customers (a role
that is better played by large firms). However, those small firms, who follow a low volume, high variety
strategy perform better in the market place.
s The scale of operations of most firms is below their global competitors. Many reasons are provided
for relative small scale. Highest amongst them are expensive capital costs, restrictive labour laws and
small size of the domestic market (most firms serve Indian markets - much of Indian manufacturing is
domestic oriented), and inadequate systems to manage large work forces. Mass manufacturing has not
taken roots in India on a wide scale.
iii
s Quality continues to remain as the highest priority for most firms - they have been “getting the quality
right” as we have reported in earlier survey findings as well. Innovation and R&D has the least priority.
In particular, Indian firms do not perceive themselves as having strengths to compete on low prices
globally. However, most firms claim to be focusing on developing new production processes that would
help in reducing costs or developing higher value add product. Similarly, they identify fast & on-time
delivery as areas of concern where the gap between their strength and priorities is high. Another area
that suffers from strategic focus is ‘after sales service.”
s To implement the above strategies, firms have identified certain managerial practices that will support
the strategy. The five most important practices that the firms would focus on during the next two years
are:
Improving the quality of work life
Continuous Improvement of current manufacturing processes
Supervisor training
Management training
Worker training
Skill building at all levels has been recognized as one of the most crucial drivers for growth in the future.
In addition, non-availability of technical manpower is leading to hiring of farm hands who are migrating to
large cities to work in the factories. The need for preparing industrial persons could not be emphasized
enough. It is important to recognize that it is better to train the worker and expect higher productivity out
of him or her rather than not invest in skill building and keep wages low. The presence of “continuous
improvement” as a priority reflects a recognition that firms are making towards improving processes on
the shop floor.
s Supply Chain coordination emerges as a key weakness for most manufacturing firms. They are plagued
with a large number of suppliers, plants that are located far away from each other thereby preventing
learning natural opportunities, and fewer distribution channels. Firms (especially the small) are struggling
to find channels to reach the market. Absence of intermediaries (i.e., firms) that will coordinate the
supply chain is quite apparent. Weakness in IT systems is accentuating this problem and leading to poor
coordination and higher costs of operations.
s While firms do see benefits from investment in innovation, investments in R&D are very low. Most training
for innovation happens when new technology or equipment is purchased.
s Investment and usage of IT on the shop floor is very low (about 45 percent of sample firms). Its impact
is being seen on many fronts - high lead times, low inventory turns, inability to track orders on the shop
iv
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
floor, inability to coordinate with suppliers or distributors, weak real time planning etc. This is a serious
limitation of Indian Manufacturing. Once basic IT investment is done, only then will Indian firms be able
to implement and take advantage of automation on shop floors. IT firms in India have failed to develop
a viable and low cost IT solution for Indian Manufacturing. Firms other than the large ones are struggling
on this count.
s The average financial and operational performance of Indian firms has been quite satisfactory - there has
been round the board improvement across the following:
Order fulfillment
Supply Processes
Physical Manufacturing
Over all Business Unit Performance
Over the last three years, Indian Manufacturing has seen significant improvement over various indicators.
The three areas that have seen the maximum improvement over the last three years are: overall quality
as perceived by the customers, average customer defect rates, and delivery lead times.
s Despite the last observation on delivery lead times, the variance across lead times is very high. Indian
firms will have to measure and reduce lead times significantly - from shop floor to dispatch lead times to
order processing lead times etc.
s Customs clearance times very high and processes very unpredictable.
s Indian Manufacturing has been quite profitable, on an average. Growth rates in unit sales, net pre-tax
profit ratios and return on assets have been high. Capacity utilization, however, must increase (it may
not be hurting much now as most of the plant and equipment are old). Similarly, delays exist in recovery
of payments from customers leading to excessive efforts and consequently higher cost of operations.
s First pass yield across sectors is not very high – this requires establishment of processes on shop floor
for elimination of defects rather than removing defective items through a pre-shipment inspection.
s There is strong evidence that firms are now starting to get their “process on the shop floor right.”
This is a very robust sign of capability building amongst Indian manufacturers. Linkages with suppliers,
however, continue to remain weak.
s Total sales per employee is found to be highly correlated with training expenditure, advanced skills
(degrees), and high perceived strengths in flexibility and technology.
v
s Small firms that are customizing requirements of customers are doing well. This service approach
to production may turn out to be the distinctive hallmark of Indian Manufacturing. Wherever a firm
has started to service a global customer through customized service (i.e., small batch production or
producing in variable production lot sizes or dispatching at short lead times etc.), the firm has been
able to create a niche market for itself - perhaps, a unique Indian model of production. The need is to
extend this model to a cluster of small firms, each producing a distinctive variety and coordinating their
production and sales such that the network acts like a large firm (even when all its constituent members
are small firms).
s Regional imbalances exist in terms of capabilities of firms. North, West and South are way ahead of
East and Uttar Pradesh. The strategies of the firms in the North are better aligned with their size. Firms
in North and West invest more on innovation while those in the South have better access to manpower,
invest higher on training and have deeper and more effective implementation of IT on their shop floors
(including extent of implementation). East (except for the steel sector) has low performance on most of
these counts. Firms in West spend the least amount of resources on training their employees but have
most well developed channels of distribution. Physical infrastructure supporting manufacturing requires
the most improvement in East and South.
s 3TRATEGIESOFlRMSANDTHEIRPERFORMANCEVARYBYSIZE4INYANDSMALLlRMSSPENDAHIGHERPERCENTAGEOF
their sales in R&D as compared to large and medium-sized firms. Medium size firms hold the maximum
promise in terms of their ability to compete on the basis of higher productivity and operational parameters
as compared to the sales value. One wonders if this is the model of a dominant Indian manufacturing
firm - nimble, high investment in technology, higher investment in training, seeking more out of IT, mid-
volume, mid variety (and consequently, competing both on flexibility and cost). The only place where
all of them perform poorly is on hiring employees with advanced degrees - this perhaps is a salient
weakness of Indian manufacturing and their ability to develop innovative products and processes.
We believe that competitiveness of Indian manufacturing is a function of the nature and extent of capabilities
developed by these firms. Capability building is a complex process – it is supported by a variety of drivers
and the extent can be measured by a range of outcomes. Indian firms have been building a wide range of
capabilities. In addition, restructuring of the industry is slowly leading to the emergence of firms desirous
of competing globally. With the many FTAs that India is part of, goods from these countries will soon start
to flood the domestic market. At that time, high training hours, newer and more effective equipment, focus
on innovation and continuous improvement, advanced skills in design, materials and manufacturing, deep
distribution channels and equally capable suppliers, focus on higher quality, better service, responsive
supply chains and effective IT systems etc. will decide whether Indian firms will lead the competition or will
close shop.
vi
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
vii
I owe immense gratitude to a large number of manufacturing firms across different sectors who have
participated in this survey. Without their care, concern for manufacturing in India and their openness in
discussing their shop floors in detail, this project would not have been possible. A number of firms have
continued to participate in all the three surveys – special thanks to them. All of the participating firms have
helped me understand the nuances of capability building process in their plants and better appreciate the
issues facing Indian manufacturers.
Thanks are also due to the National Manufacturing Competitiveness Council for two things: for supporting
this project and more important for being tremendously patient and understanding of long delays on account
of my moving to Bangalore as the project was coming to an end. I would like to thank Mr V Krishnamurthy,
Mr V Govindarajan, Mr Rajeev Ranjan, and Mr M Sahu for seeing value in our past work and for their
comments on the findings of the survey. Their genuine interest in helping India become a manufacturing
power by providing strong policy initiatives is highly appreciated.
We would like to also thank Market Insights for conducting the survey throughout the country and to
Mr. Jagdish Soni and Ms Akhila Reddy for able research assistance. Mr. C. R. Jayaprakash Narayan
provided valuable help in organizing the data in the report.
In the end, all errors and delays are mine.
Pankaj Chandra
Acknowledgements
viii
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
1
1. Introduction
Manufacturing may be having a small share in the Indian GDP, yet its growth rate has been impressive
(a CAGR of close to 8 percent in the last eight years). More important, it is about to reach the stage in
its modern avatar from where the growth ahead can be exponential - an envious stage for any nation.
Moreover, for a country like India, diversified manufacturing is of strategic importance both in terms of its
contribution to the Indian economy as well as its ability to generate employment for the youth in the country.
Interestingly, the world is also looking for alternative sources of supply for goods as well as a location
where their firms can set up their manufacturing base to serve a large emerging Indian market as well as
their global clients. What is required is to understand what it will take to develop further this manufacturing
ecosystem and how to raise the value add of manufacturing firms that are part of this environment.
Indian Manufacturing has traversed some distance from the days of licensing and national control until early
eighties through de-licensing in eighties and early nineties and the opening up, post-liberalization. Each of
these phases were in the direction of subjecting Indian manufacturing firms to higher levels of competition
from firms globally as well as removing constraints on their operations. Firms have also responded to these
policy directions in an interesting manner – competing by exploiting gaps in policies to use clever accounting
practices to compete in the market to embarking on building sustainable capabilities themselves or acquiring
firms with those capabilities globally. Indian firms have been quite opportunistic in their strategy – whether
it meant setting up garment factories in Bangladesh and Sri Lanka to overcome MFA quotas or using the
Rupee-Rouble agreement to develop an export market for Indian pharmaceutical products in Russia and
Central Asia etc. During periods of stringent control on Indian manufacturing especially on capacities,
firms rode the shortage- driven domestic market on average to low level of quality at higher prices and
consequently higher margins. High import tariffs also meant that if you succeeded in the domestic market,
firms could make large profits thereby making them immensely cash-rich at the turn of the new century.
However, it also meant that with opening up of the economy the manufacturing firms had to be re-invented
– with new strengths, new skills, new technology, new partnerships and new sources of funding. Many
2
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
of the old entrepreneurs who had done well during the “closed period” of Indian manufacturing either did
not have the right capabilities to compete or found new opportunities that were more rewarding or easy to
operate in. Consequently, many of the old firms (both public and private) fell by the way side. The space thus
created as well as new opportunities that were arising in the liberalized environment was getting filled by a
new class of entrepreneurs. A large number of educated Indian technocrats were ready to take the mantle
of new entrepreneurs – some of these were first time entrepreneurs who were educated in the best of
Indian technical institutions and had left their jobs in the public sector (and sometimes in the private sector)
to set up technology driven enterprises while others were children of old time entrepreneurs who were
armed with technical training as well as family funds to enter into new domains of industry or upgrade their
old businesses. Indian manufacturing had started to change. In early 2000, another restructuring of Indian
Industry started to happen – with the advent of new auto technology (same is true in pharmaceuticals or
chemicals due to strict regulation or textile with improved equipment etc.), old and small enterprises found
themselves unable to cope with competition from the output of large firms in India and abroad. Their skill
levels were low and technology levels poor. Many started to close. (Here the traditional sectors in older
towns were affected more adversely). Their place was being taken by fewer yet more modern facilities (both
SME and large) as well as imports. The structure of Indian industry had changed. The ones that remained
were the stronger ones amongst the lot but new challenges were to arrive soon.
Manufacturing sector, while quite diverse and old in India, was liberalized much later than the liberalization
in other late industrializing countries in Asia like Taiwan, Singapore, China and Thailand. While much of the
changes in these other countries were led by the electronics sector and were export oriented, Indian firms
were led by those in the process industry or related to mechanical engineering and the focus was largely
domestic. Activities in the newer sectors (e.g., telecommunications) were starting to get dominated by
MNCs who were starting to serve the freshly liberalized and growing Indian markets. Exports out of India
were not necessary their top priority (unlike the MNCs from seventies and eighties who had to meet the
export obligation and the phased indigenization policies of the government). Growth in demand in India,
as well as the coming of these competing firms from outside India, meant that domestic firms had to adjust
their strategies quite rapidly. With increased purchasing power, the demand for goods was growing and
the manufacturing sector could hope to get fair returns if they invested in upgrading their plants, processes
and products. The MNCs, on the other hand, brought with them new skills, new practices, new product and
process technologies, and of course, new form of competition based on quality and service. The challenges
before the domestic firms were clear. If they could re-invent, re-rejuvenate, and re-organize themselves, the
prize was a fair share of the growing market else they would lose their presence to MNCs as well as goods
coming from outside through various free trade agreements that the government was planning to enter with
countries in Asia. There was an opportunity to learn from their competitors as well.
There was another driver at play in the changing Indian economy. Agriculture, that had a significant
presence in the Indian GDP started to shrink (for a variety of reasons including low attention from policy
makers, productivity issues etc.). At a time when India was emerging as a country of young people and
manufacturing was expanding in various ways as mentioned earlier, their key occupational base, i.e.,
agriculture, was not able to retain them and they started to migrate to urban and semi-urban centers in
search of jobs. Manufacturing was looking for young workforce except that a large fraction of the migrants
3
did not carry any industrial skills (or at times even school-level education) for them to contribute immediately
to the growing industrial economy. The expanding manufacturing sector needed workforce and went on
to hire a large number of these migrants while the rest looked for opportunities in the service sector. It
has led to a situation that has been aptly termed as “kaarkhane mein kisaan ,”2 or farmers working in the
factory. The challenge before India is to develop strategies to utilize this large potential workforce to grow
its economy and help it transit to becoming a more developed economic nation. It should be obvious
that strategies in the short run will have to include development of industrial persons. It is expected that
by the year 2020, India will start reaping the demographic dividend with people in 20-30 years age group
comprising the largest percent within the age distribution. And, if all goes well, 90 percent of them will be
literate, if not highly educated.
While there are many factors that will define how the Indian economy will grow, it is clear that Indian
manufacturing will have to grow tremendously to provide both employment and generate the productivity
required to sustain the high level of employment that it needs to support. The big question is whether Indian
manufacturing will deliver on this expectation. More important, will India be able to become an important
factory to the world. This would require an enabling environment that will allow firms to build capabilities
in their plants and supply chains and meet the demand of the customers in a competitive manner. The
purpose of this research is to assess this ability of manufacturing firms in India.
We have been presenting our findings from the study of manufacturing firms every five years. This is the
third report on the Competitiveness of Indian Manufacturing based on a survey of manufacturing firms.
We believe that once manufacturing firms build unique competitive stances, they will create appropriate
performance outcomes to help the nation overcome the challenges that we have outlined above. Firms
build capabilities by aligning strategies with effective managerial practices – all within the context of the
enabling policy environment of the country. The objective of this study is to understand and explain the
dynamics of capability building in manufacturing firms. Capability building is a complex process - it is
supported by a variety of drivers and the extent can be measured by a range of outcomes. We try to
identify those critical factors that are responsible for building capabilities and consequently competitiveness
amongst firms. In particular, the research questions that we address in this report have to deal with how
manufacturing firms in India are transforming themselves through organizational practices, technology and
innovation. These are:
s 7HATISTHEMANUFACTURINGSTRATEGYOF)NDIANMANUFACTURINGlRMS
s 7HATOPERATIONALMANAGERIALPRACTICESDOTHEYDEPLOYTOIMPLEMENTTHEIRSTRATEGY
s (OWDOTHEABOVEAFFECTTHEPERFORMANCEOFTHElRMS
s (AVETHElRMSBEENBUILDINGMANUFACTURINGCAPABILITIESDISTINCTIVE
s 7HATARETHESECTORALDIFFERENCESINTHEINNOVATIVEANDOPERATIONALCAPABILITIESOFlRMS
2 An expression coined by Dr Partha Muhopadhyay of CPR initially as an observation but which has become a serious reflection of the
state of Indian manufacturing as well as employment of neo-literates.
4
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
s 7HATARETHEREGIONALDIFFERENCESINTHEINNOVATIVEANDOPERATIONALCAPABILITIESOFlRMS
s $OESSIZEOFlRMSPLAYAROLEINDEVELOPINGFOCUSEDSTRATEGIESTOCOMPETEINTHEMARKET
We are specifically interested in managerial systems deployed in plants of manufacturing firms across a
variety of sectors. This gives us an opportunity to understand how certain sectors are organized differently
from others. This report is organized as follows: in the next section we describe the process of data
collection for this research and detail the characteristics of the sample that we use for our analysis. In
section 3 we identify the operational strategy of Indian manufacturing firms. In section 4 we analyze whether
the operational practices adopted by firms on their shop floors and across the supply chains are sufficiently
aligned to help develop distinctive capabilities. The resulting performance of the sample firms is presented
in the following section. In section 6 we provide comparisons of manufacturing capabilities across different
regions of the country while in section 7 we try to delineate any variants in strategies and performance of
manufacturing firms by size. Finally, we provide implications of the study and discuss our conclusions in the
last section.
5
2. Details of the National Manufacturing Sample
The 2007 National Manufacturing Competitiveness Survey was conducted between April and August
2007. A national directory of firms was created from various sources including directories from industry
associations. This directory contained more than 10,000 firms across the sectors of interest. A questionnaire
was developed with a focus on innovation in manufacturing. Two modes were used for data collection:
questionnaires were mailed to a large number of firms especially those firms that had participated in our
two earlier surveys (i.e., in 1997 and 2002) and at the same time a market research agency was hired
to undertake an in-person data collection. The agency interviewed the CEO and senior manufacturing
managers of the sample firms. The ratio of the questionnaires from the two modes was 1:7 with the larger
sample coming from interviews. About 800 questionnaires were received but 683 were found to be useful
and comprise the national sample. Our study is based on this national sample. The sample data was
collected from firms in eleven key sectors of industry namely Automobiles, Auto-components, Casting
& Forging, Chemicals & Allied Industries, Electrical & Electronics, Engineering, Food & Agro-Business,
Machine Tools, Pharmaceuticals, Steel, Textiles (Spinning, Weaving and Garments).
Sampling was done to maintain a representation of firms from dominant sectors in the four regions of
the country, i.e., North, South, East and West. The sample in the North is higher as it included a special
coverage of firms in Uttar Pradesh – a state that we wanted to study specifically.
Table 1 provides the distribution of our sample of firms by revenue (PANEL A) and by number of employees
(PANEL B). The average revenue of the sample firms is Rs 304.8 crores while the average number of
employees is 707 (where the average number of operators are 468; average number of technical/engineering
employees at 128; average number of managers at about 40; and average number of R&D personnel at
about 18).
As can be seen, the sample has a wide range of firms in terms of size. In the next section we analyze the
data from the above sample to understand the nature of operational strategy followed by these firms. This
will help explain the competitive positioning of manufacturing firms.
Table 1: Distribution of Sample firms by Revenue and Number of Employees
PANEL A PANEL B
Revenue (Rs million) Number of Firms (N) Number of Employees Number of Firms (N)
1 - 100 463 0 - 10 18
100 - 500 146 11 - 50 140
500 - 1,000 23 51 - 100 116
1,000 - 3,000 23 101 - 300 177
3,000 - 10,000 8 301 - 1000 125
10,000 & above 3 1000 & above 92
6
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
3 A firm may be operating in multiple markets.
3. Operational Strategy of Indian Manufacturing Firms
The dominant operational strategy of sample manufacturing firms is geared towards producing medium
product variety at medium scale (as claimed by about 31.9 per cent of sample firms in Table 2). Scale
economies are achieved when a standardized product (i.e., low product variety) is produced in high volume.
Strategy of only 3.5 per cent of the sample firms fall in this category. Consequently, only a small fraction of
firms compete on the basis of low costs (as is borne by additional evidence later) through scale economies.
One intriguing aspect that needs to be mentioned is that about 18.7 per cent of sample firms produce high
variety with high volumes - perhaps large firms with multiple high volume lines (or a factory within a factory).
However, our sample does not have commensurate fraction of firms that are large. Perhaps, this points to a
mismatch in strategy of other firms – an issue that we will explore later. Two other observations from Table 2
are due here – about 3.8 percent of firms follow high variety, low volume strategy. While about 10.1 percent
of firms follow a low variety, low volume strategy. While the former may be representing firms that are small
(a strategy appropriate for them), the latter may reflect strategy of firms struggling to survive.
Table 2: Categorization of Operations of Sample by Global Scale & Scope
Product Variety (%)
High Medium Low
Volume (%)
High 18.7 9.5 3.5
Medium 10.1 31.9 7.0
Low 3.8 4.4 10.1
Ninety five per cent of sample firms serve the Indian market while a small fraction of firms (about 40 per
cent) serve the European & American markets or the Chinese market (about 12 per cent)3 - one wonders
if that is reflective of the choice of firms or their competitive positioning in global markets. About 42 per
cent of firms see most competition coming from domestic firms while 35 per cent of firms see most
competition from Chinese firms (while barely 12 per cent of firms see competition from European and
American firms). There could be three possible explanations for this observation - one, that firms in India are
really cost-competitive globally and are entering into markets of Chinese producers; two, that Chinese firms
are entering into product markets served by Indian firms; and three, that European and American producers
serve technology driven markets where Indian firms do not exist.
Interestingly, as can be seen from Figure 1, Indian firms in the sample consider themselves better than their
global competitors (on a scale of 1 to 7, a 4 represents “about equal” while more than that is “better”).
They rate their quality and service as factors where they are most competitive in comparison to their foreign
competitors while they rate themselves weakest on prices. There has been a systematic increase in the self-
perception rating as compared to the same in our previous surveys and that too on every factor. Perceived
gain in performance, from the 2001 to 2007 survey, is most when it comes to prices, product design and
quality. Could this be reflective of a more improved and consequently a more confident manufacturing firm
IN)NDIA
7
Figure 1: Comparison of Performance with Foreign Competitors
Most firms in the sample are much smaller in scale as compared to their global competitors (see Figure
2). Eighty per cent of sample firms are much smaller or equal to their global competitors in size. Barely 12
per cent of firms have plant size that is much larger than their competitors around the world. We also find
that about 28 per cent of sample firms cite expensive capital costs as the most important reason for their
smaller size of operations while 19 per cent of firms do not want to scale because of restrictive labour laws.
Interestingly, about 14 per cent of firms believe that the domestic market was not large enough to increase
their capacities while about 14 per cent feel that low automation levels prevents them from increasing their
scale. However, about 8 per cent of sample firms cite their own managerial inadequacies in managing large
workforces as the key reason for smaller scale. These
Figure 2: Scale of Operations (percent of firms)
8
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
are important reasons linking operational strategies on size to regulatory and firm level practices. These might
also be the reasons behind India not being highly cost competitive in global markets in many sectors.
What is heartening to find in the survey is that quality continues to be the most important focus of
manufacturing firms (Figure 3)4. Over the next five years, firms plan to accord the highest priority to improving
quality followed by executing structural changes in supply chain followed by operations related initiatives
(i.e., shop floor improvements) in their plants and then to innovation and R&D. That Innovation and R&D
continues to be accorded the lowest priority amongst the four categories is, perhaps, a reflection of the fact
that either firms are still struggling to get operational control across the supply chain and hence are not able
to pay adequate attention to innovation or are still not perceiving its importance to the long term
Figure 3: Competitive Priorities: Group Averages
competitiveness to their business or both. Figure 4 gives the disaggregated details of the data presented
in Figure 3. Developing new processes has entered the competitive priority with this survey and that too at
a higher rating. Perhaps that is the emerging strategy of Indian manufacturing at this juncture of time, i.e.,
from working hard to get their “quality right,” the firms are now starting to get their “process right.” If we look
at areas of competitive strength as reported by firms (see Figure 5), it is apparent that their continued focus
and consequently efforts on quality, over the period of our three manufacturing surveys, has helped develop
perceived strengths in various dimensions of quality. It is reflective of increasing capabilities in improved
quality processes and shop floor operations. However, it also shows that low price is not really how Indian
manufacturing competes - this may be due to two reasons; one, the firms are not paying enough attention
to reducing costs across the chain including the shop floor through significant increase in productivity or
scale, or; two, firms are still charging high margins which renders their prices high. It can be seen from
4 The Figures 1-8 give perception based rating on various parameters on a scale of 1 to 7.
9
Figure 4: Competitive Priorities of Firms: Degree of Importance over the Next Five Years
10
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Figure 5: Perceived Competitive Strength of Firms: Degree of Strength Relative to Indian
Companies
11
Figure 6: Competitive Gap: Difference Between Future Priorities and Current Strength
12
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Figure 6 that low price comes out at the top in terms of the competitive gap - the difference between
priorities and strengths, i.e., low prices is a reasonably high priority but firms see themselves having low
perceived strength in that domain. Similarly, serious gaps in competitiveness appear to exist in the ability of
the firms to develop new products and processes. Another area that needs attention is after sales service
– there is a strong need to build capabilities in this domain in order to create a differentiation in the market
especially in the face of global competition.
In summary, the operational strategy of sample firms has been to focus on India, invest in quality and
produce in mid-size to small-sized plants. It is not a surprise that India is not a low-cost producer but may
be moving up the quality ladder.
13
4. How Appropriate are the Managerial Practices of Indian
-ANUFACTURING&IRMS
Firms implement their operational strategy by choosing appropriate managerial practices or action vehicles
on their shop floors and across their supply chain. By judiciously choosing these practices, a firm can
impact the various performance parameters that it wishes to focus on. Figure 7 lists the top ten managerial
practices that firms focused on during the last two years. It reflects the strong recognition to improve the
quality of work life as key to achieving their strategic objectives followed by the need to provide enhanced
worker and supervisor training. This is seen as important in order to improve productivity through continuous
improvements on the shop floors. Quality improvement requires adoption of new tools and techniques – all
of which requires intensive training of operators, supervisors and managers. While it appears that sample
firms are getting this relationship right (Figures 7 and 8), the nature and extent of training (which indeed
defines the extent of expertise developed) requires some investigation (more on this later). Figure 8 gives
the degree of emphasis on various practices that top management plans to implement during the next five
years.
Figure 7: Relative Payoff from Manufacturing Practices in the Last Two Years (Top Ten) Relative
payoff from Manufacturing Practices in last year (Top 10)
14
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Figure 8: Degree of Emphasis on Manufacturing Practices for the Next Two years (Top 10) Degree
of Emphasis fornext two years (Top 10)
Another aspect of manufacturing management that contributes to competitiveness of firms is the nature
and extent of supply chain practices. We now evaluate how the supply chains appear to be changing.
A quick look at Figure 9, which shows the supply chain structure of the sample firms, informs us of the
dynamics of the movement of goods and its distribution in the market. While most firms seem to have
rationalized their production structure by producing goods at fewer plants (e.g., about 88 per cent of firms
have 0-5 plants while only 10 per cent of firms have 5-10 plants in their production network), the story on
the suppliers and distribution side is far from being efficient. Over the last survey, there is an improvement
this time around in terms of the number of suppliers that each manufacturer works with. The number
of suppliers has been reducing for each firm. This may be indicative of a more deeper and long term
relationship between the manufacturer and some of its suppliers. However, there are still sectors (i.e., auto)
where firms still have large number of suppliers (i.e., more than 20 per cent of firms have 100-500 suppliers,
about 3 per cent of firms have 500-1000 suppliers, about 2 per cent of firms have 1000-2000 suppliers, a
per cent of firms each have 2000-5000 and 5000-10,000 and about 2 per cent of sample firms have more
than 10,000 suppliers). Rarely can a firm with more than few hundred suppliers coordinate its operations
15
effectively with those of the suppliers. This would result in poor inspection or high coordination costs or
long delays. It is also pointing to the fact that intermediate agents do not exist in the Indian manufacturing
supply chain whose role is to coordinate and prepare sub-assemblies or kits for final manufacturers (the
manufacturers are also not thinking aggressively in this direction). This situation has not changed since the
previous surveys. One wonders why this global practice does not get adopted in India. Is there a problem
of trust between manufacturers and suppliers that prevents them from seeking a greater role for the supply
chain integrators rather than working with redundant suppliers, or is there a competency issue at play
HERE
Figure 9: Supply Chain Structure (percentage of firms versus numbers for each echelon of the
supply chain)
In a similar vein, the low number of retail outlets per manufacturer (i.e., fewer than 50 per cent of sample
firms have less than 100 approved retailers) implies a limited reach of Indian manufacturers (see Figure
9). One can hypothesize that as the size of the manufacturing firm increases, their distribution network
also tends to grow. For a country of the size of India, barely 22 percent of firms have 100-500 approved
retailers (if uniformly distributed, this implies about 4 to 20 retailers per State of India!). Efforts are needed to
16
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
increase the reach of producers across the country either through shared warehouses (which happens to
be one of the key bottlenecks) or through large multi-brand stores or through innovative internet markets.
The distribution of regional distributors is also similar to that of the retailers – there exist few distributors per
firm. One may have to investigate if the distributors themselves have grown in size over the years. The net
effect of the above is that goods of small to mid-size producers, in particular, and for all manufacturers, in
general, may not be reaching their real markets and this requires intervention. Markets (especially industrial
markets) need to be studied carefully to understand how and from where do goods reach it. Over the years,
it is becoming clear that high real estate values are causing intense damage to the distribution network of
manufactured goods in the country. Perhaps, new market medium must be developed to overcome this
problem of reaching the channel.
One of the soft aspects of improving productivity in manufacturing enterprises is to co-locate manufacturing
facilities and suppliers in clusters so that best managerial and technical practices are co-developed and
shared across interacting firms. However, if plants and suppliers at located far from each other, it leads to
higher cost of logistics, higher infrastructure overheads, lower ability to learn from a firm’s experience that
comes through proximity etc. Our sample firms do not come out well on this count. More than 25 per cent
of firms have multiple plants that are located more than 500 km away. Only about 55 per cent of firms have
multiple plants located within 100 kms of each other. Location of suppliers has been better. Most firms
procure material from suppliers that are located less than 100 kms from their plants.
Another aspect of the adoption of managerial practices that requires attention is the focus (or lack of) of
the firms on innovation. It may be recalled that Innovation & R&D did not rate high in terms of organizational
priorities of sample firms. If one tries to understand the nature of innovative activities that the firms undertook
during the last two years, one gets an interesting picture (see Figure 10). Most firms link innovative activity
Figure 10: Innovation Related Activities during 2004-2004 (percentage of firms)
17
to purchase of equipment etc. followed by introduction of new products (often variants of exiting ones). Our
data reveals that firms, over the last two years, have spent (on an average) close to 9.8 per cent of their
revenue in acquiring externally developed technology, about 8.1 per cent of the revenue in training for the
implementation of new technology, about 7.2 per cent of their revenue on tooling and other engineering
changes to startup the new technology and about 7.9 per cent of their revenue on coordinating various
functions to commercialize any new technology. What is interesting is that about 60 per cent of firms report
that they worked with customers to create new products and about half the number of firms introduced
a new process or method of production. While these numbers are indicative, they point towards two
interesting aspects of the new manufacturing in India – firms are getting interested in (or perhaps are being
challenged to) developing new products but this is happening through new equipment/processes/technical
support being imported from outside. While this as such is not bothersome so long it allows entry of better
products, it leads to development of newer capabilities and ultimately helps in winning orders globally.
Trends point towards getting the “process right” this time around! More on process innovations later.
However, leaders of manufacturing firms do see many other potential benefits from innovation for their firms
in the future. In Figure 11 we plot the responses of firms on different benefits that they anticipate
Figure 11: Potential Benefits from Innovation in the Future (on a perception scale of 1 to 7)
18
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
from innovation related activities. While in our earlier surveys (i.e., 1997 and 2001), improvement in product
quality and improvements in material/overhead costs were rated highest in terms of potential benefits, the
current survey found that leaders of firms see highest benefits of innovation accruing through shortening of
production cycle times, improvement in product quality, reduction in environmental damage and improvement
of working conditions. These responses reflect a maturation of the shop floor requirements in terms of areas
that are seen to require innovative efforts – the reduction in cycle time is directly linked to the concern of
improving productivity; improving product quality is coming from the overall concern of enhancing product
quality further; the other two – reduction in environmental damage and improvement in work life are new
entrants in the “club of concerns” that require attention and in that they signal sustainable concerns of the
firms as well as the need to be more inclusive in making workplaces a better place for all. While productivity
related benefits are highlighted, lowering of labour costs is not high in priority (perhaps, they are already
quite low). This may have an interesting implication – it may be worth getting more out of worker productivity
through training workers than driving their wages down!
The extent of process innovation (i.e., innovation that deals with plant machinery as well as production
processes) can be surmised by the following picture: about 82.3 per cent of firms reported that they have
invested resources in upgrading their machinery in the last five years. The average investment by a firm in
upgrading machinery over this period has been Rs 32.36 million. Similarly, 64 percent of sample firms have
adopted a new production process; 47. 3 percent of sample firms have invested in design related activities
while 28.1 percent of firms report that they have outsourced some of their design activities. Firms report that
they have, on an average, invested 6.2 percent of their sales in R&D (perhaps this number has a sectoral
bias with firms in pharmaceuticals, chemicals and auto investing a lot more than others). The advantage of
process innovation is that other than purchase of machinery, any improvement is tacit in nature and it takes
a long time for a competitor to copy. Hence, it is a powerful way of building competitive strength. It appears
that, in the last five years, manufacturing firms have been changing the stock of machinery (and to an extent
the underlying technology behind production or the production process). This replacement was necessary.
Due to various government controls as well as market conditions in the past, many firms had suffered as
their technology and equipment were old and not capable of producing precision products and delivering
high quality for the global market.
Four things must come together for winning high value domestic and global orders:
s ABILITYTOPRODUCETOTIGHTCONFORMANCES
s ABILITYTODESIGNANDDEVELOPNEWVARIANTSORNEWREPLACEMENTS
s ABILITYTOPRODUCEATLOWCOSTPRODUCTAND
s ABILITYTOBIDEXECUTEDELIVERSERVICEATASHORTLEADTIMES
While the first three capabilities listed above are drivers of the fourth, Indian firms seem to be focusing at this
juncture on “getting the quality and process right.” We have reported on the strategy of “getting the quality
right” in the earlier surveys and firms now have an experience of over 10-15 years in establishing processes
and practices for improving quality. And the benefits are here to see. The quality of Indian products has
19
been progressively improving. However, it is only now that firms are looking at improving their technical or
technology processes in manufacturing (and here we are not talking about IT but those processes that
are directly used for production). While both of the above help reduce costs through reduction in cost of
poor quality, they are only partly responsible for the overall costs. Firms still do not have a strong ability to
reduce costs and lead time systematically. This would require intervention of IT, management of the supplier
processes and having better flow-through of material through the supply chain.
We now turn our attention to the improvement of the innovation infrastructure, i.e., Information Technology.
IT helps in coordinating the flow of goods and services and in making better decisions. It is turning out to be
the Achilles heel of Indian manufacturing and standing in the way of productivity improvements and better
decision making. About 45 per cent of the sample firms have low usage of IT on their shop floors; about 39
percent report that their usage of IT will fall in the medium category and only 16 per cent of the firms claim
that their use of IT is high. Table 3 shows that the largest per cent of firms use IT to track/control production,
prepare reports for management and to track inventory/work in progress. It is also obvious that very small
per cent of firms use IT for enhancing their technological capabilities of design or for reducing defects or for
real time planning and scheduling – activities that are linked with building deep capabilities in manufacturing.
Moreover, online transactions have yet to take root in Indian manufacturing.
Table 3: Use of IT on the Shop Floor (percentage of firms)
To Track/ Control Production Process 59.59
To Track Inventory/ Work In Progress 54.75
To reduce defects 46.70
For engineering design 30.60
For real-time planning & scheduling 47.73
For placing orders with the suppliers 48.16
For preparing reports for management 56.07
For selling online 26.06
For interacting with customers 42.02
For interacting with designers 20.79
Others 3.07
Many aspects of organizational improvements are being seen on Indian shop floors – in addition to
“improvements in quality,” the new agenda has been to get the “process right.” However, deep supply chain
innovations evade these firms. Unless the nature of relationships with suppliers is modified, real benefits will
elude these firms. Supplier management by building their capabilities is turning out to be the last frontier of
manufacturing renaissance – unless firms learn to work deeply and invest regularly in building capabilities of
their suppliers, very soon Indian manufacturing will be out of its depth in terms of producing and delivering
innovative products. This effort will have to be built on the foundation of a strong IT platform that is needed
for improved coordination and better decision making.
20
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
5 Performance of Manufacturing Firms: Old Gains and New
Targets
One of the challenges in manufacturing is to take a leap of faith with investments in technology and managerial
processes and hope that they will lead to improvements in performance. This is because the uncertainties
in the environment, in processes, in material conditions and above all in the behavior of operators decide
whether the strategies worked or not. Looking at the performance of sample firms, one can confidently
say that Indian manufacturing firms are slowly coming of age, at least some of them. Figure 12 gives the
average performance improvement of sample firms on a set of operational dimensions.
Figure 12: Average Performance Indicators
The bar charts show the per cent improvement, i.e., an average performance index of 112 for “order
fulfillment” implies an average improvement of 12 percent. While there has been improvement across the
board, i.e., in product development, physical manufacturing, supply process, order fulfillment, as well as
the overall business unit performance, the rate of improvement has been decreasing over the three survey
durations (i.e., 1997, 2001, and now 2007). It implies that, perhaps, the low-hanging fruits have already
been plucked and in the future improvements in performance will not come in easily. They will require
deployment of strong innovative processes and deeper firms level capabilities.
Figure 13 shows the details of the data provided in Figure 12 earlier. It gives the percent improvements
on various performance indicators over the last three years. There are a few salient observations here.
One, the quality in the hand of the customers (or as perceived by them) has been increasing and so is
the improvement on time taken to deliver the product to the customer. The implication is that on the
order fulfillment side, the improvements have been the maximum. Two, on the manufacturing side (i.e.,
manufacturing cycle time reduction, conformance quality or defect rate on the shop floor or reduction of
21
Figure 13: Percent Improvement on Various Manufacturing Performance Indicators over the Last Three Years
22
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
changeover times etc.) the rate of improvement has been the slowest or perhaps it is declining. There are
two possible reasons for this – the firms have to now work harder and smarter to achieve higher gains on
the shop floor and that the sample comprises of firms that have yet to begin this process of bringing about
change in the manufacturing process.
There are a couple of dimensions of these performance parameters that require attention. The distribution
of order processing lead time (amount of time taken in days to complete an order) of sample firms shows
the following: about 299 sample firms have lead times that range from 1 to 10 days, 145 firms have lead
times varying from 11 to 25 days, 148 firms take anywhere from 26 to 50 days to complete processing an
order, 26 firms take anywhere from 51 to 75 days to process an order in their plants, the order processing
time of 15 firms ranged from 76 to 100 days and from 101 to 125 days for 7 sample firms while 3 firms
report that it takes them on an average between 151-175 days to process any order. While it is true that
processing time is a function of the type of parts/products being processed as well as the order size,
much of these order processing lead times seem to be unusually high. They do not reflect appropriate
management of manufacturing processes that promote breaking down of tasks into sub-tasks so that
they can be done in parallel in order to reduce cycle times. No customer will prefer a supplier who exhibits
long lead times. Moreover, long lead times reflect high levels of inventory and consequently higher product
costs or low profit margins – all characterizing Indian manufacturing at this juncture. High lead time is the
defining character of Indian manufacturing and unless it is addressed very seriously through better planning,
better technology and capacity and better managerial control, Indian manufacturing will never become cost
competitive in the global market. Moreover, Indian firms will never be able to win high value global orders
as they will be contributing to increasing their customer’s costs due to their own high lead times. This issue
is also not well understood in the manufacturing sector in India. An average lead time of 20 days across all
sample firms is not a healthy sign for the industry. It may be mentioned that the maximum order processing
lead time for a sample firms was observed at 180 days!
On a related note, the distribution of customs clearance time for sample firms ranged from a minimum of
1 day to a maximum of 90 days with an average of 5 days. The distribution of customs clearance time as
experienced by sample firms is as follows: 258 firms report that they clear customs in 1 to 10 days, 17
firms do this task in 11 to 25 days, 4 firms cleared customs in 26-50 days, while one sample firm took
somewhere between 76 and 90 days to clear its consignment from customs. When Malaysian airports
take 30 minutes to clear goods from customs and Sri Lankan counterparts take half a day on average, the
average time taken by Indian firms to clear customs renders them un-competitive both in terms of higher
cost as well as delays in processing customer’s orders. Many of these service areas need to be carefully
re-engineered with the help of effective processes that are enabled by IT to support the competitiveness of
manufacturing firms.
Table 4 gives the mean values on various business performance parameters by different industries. As it can
be seen, for all the sectors, sales have grown over the last two years and so has the return on assets for
sample firms in each sector. This is a sign of financial health across the manufacturing industry. And it is a
good sign. However, there are a few operational indicators that need attention. Utilization of plant capacity
can be improved significantly across the sectors and manufacturing costs as a percent of sales is also
23
Table 4: Mean Values of Manufacturing Business Performance by Industry
Indicators
Automotive
Auto-Components
Chemicals & Allied
ndustries
Electronics
Engineering
Forging & Casting
Food & Agro
Machine Tools
Pharmaceuticals
Steel
Spinning
Weaving
Garments
Annual Sales
Revenues (Rs.bn) 5.14 1.65 1.41 1.68 6.79 2.18 2.39 1.28 1.77 19.70 2.97 1.39 1.2
Net Pretax Profit Ratio (%) 14.3 13.5 12.5 12.8a 14.2 9.9 14.4 13.7 14.5 14.3 7.8 9.5 9.9
Return on Assets (%) 17.5 20.0 18.6 24.2 17.8 16.8 14.1 17.5 16.9 21.5 8.8 12.7 10.5
Growth Rate in Unit Sales (%) 13.1 27.7 17.2 20.3 18.8 20.1 16.1 16.1 21.1 17.0 15.7 16.9 28.3
Growth Rate in Rupee Sales (%) 20.9 29.4 17.3 19.8 18.3 19.8 13.8 19.4 24.8 20.4 14.6 29.1 32.2
Capacity Utilization (%) 78.7 90.7 65.6 69.5 64.2 71.7 59.0 67.2 68.3 73.2 86.0 72.6 69.8
Manufacturing Costs as %
of Sales 71.3 65.8 63.4 66.0 58.7 74.2 53.2 64.8 61.2 70.0 72.0 65.9 64.0
On-time Deliveries (%) 93.9 88.8 85.4 87.0 83.3 89.8 81.9 84.1 90.1 87.7 93.8 87.5 88.6
Average Manufacturing
Lead Time (days) 9.0 14.6 14.8 20.1 29.6 22.7 8.7 38.3 13.7 24.3 16.3 21.9 29.7
First Pass Yield (%) 82.5 85.0 86.3 86.9 87.9 88.9 81.2 78.2 85.6 85.3 95.7 74.2 81.5
Average total Lead Time to
New Products (months) 7.5 10.9 5.6 5.9 6.2 4.8 5.8 6.7 8.6 5.3 5.0 3.1 4.3
% of Annual Sales by
New Products 48.9 29.9 24.7 29.9 21.1 29.5 23.5 22.7 33.2 28.4 24.0 31.3 34.7
% of Perfect Orders delivered to
Customers (%) 92.2 89.5 88.3 91.5 86.0 87.9 84.8 87.7 92.4 89.9 95.2 90.8 90.5
% of Perfect Orders received
from to Suppliers (%) 92.2 86.0 84.8 89.1 81.4 87.9 79.8 84.3 89.6 82.8 90.5 89.7 89.0
Cash-to-Cash cycle (days) 28.3 49.8 54.3 63.1 47.1 59.0 35.5 56.8 58.7 48.5 38.8 49.3 52.1
Material cost (%) 66.2 60.1 60.5 62.8 61.3 62.6 53.7 56.4 54.3 63.7 57.7 57.2 56.4
Direct Labor cost (%) 16.2 17.7 17.7 16.8 18.3 11.8 18.8 18.6 18.0 14.4 20.4 20.7 20.6
Other costs (%) 17.5 19.7 19.2 19.8 18.9 20.6 20.0 23.3 25.2 20.9 22.8 21.5 21.2
Costs of Physical Distribution
(% of sales) 6.8 9.8 9.1 9.4 12.0 20.6 7.8 5.8 9.0 9.9 2.9 9.6 11.1
Cost of Warranty
Claims (% of sales) 0.0 4.4 7.7 5.7 5.8 20.6 14.2 4.1 7.7 6.1 2.0 9.0 6.9
24
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
This continues to be a weakness that we have observed over various surveys. Poor design and innovative
high. Another aspect that needs attention is that first pass yield has to increase above 90 per cent if the
cost of a product has to come down. Firms are not using process control and statistics to improve on-
line quality but delivering quality through inspection and removal of poor quality product from dispatches.
abilities are showing up in terms of low performance related to new product introduction. Another aspect
that needs highlighting is the high cash-to-cash cycle that is due to poor business practices as well as low
IT penetration that can help make transactions efficient.
There is evidence of large-scale restructuring occurring in the manufacturing sector. Unproductive small
firms have been affected the worst while medium size firms have been consolidating. While manufacturing
performance has improved across the board (though is still reactive), continuous productivity improvement is
not a norm. Firms will be served well if they specifically measure and improve the productivity of their assets
particularly labour. Firms are climbing up the capability ladder - they are now seen to be consolidating their
earlier strategy of “getting quality right” by including in their portfolio the task of “getting the process right.”
This is a robust step towards enhancing the capabilities of shop floors. One may throw in a caveat here - the
extent of investment on upgrading equipment has generally been low except by large firms. This restricts
firms from entering the high value add markets or product segments that require better conformance quality.
This shows up in another way - in terms of halting growth. Scale continues to be a problem (small and large
firms feel they are much smaller, but mid-size firms feel they are about equal their global competitors). The
fact that the supply chains remain fragmented and there is weak coordination amongst various entities,
does not help the above cause.
So, while operations are undertaking difficult structural changes, R&D is still not playing a critical role. Large
firms are not investing enough. Investments in R&D are such that they are required to be at a minimum
threshold before returns can start to affect the financial position of the firm. Simultaneously, skill gaps exist
in a very big way. Only large firms are able to draw engineering graduates. All types of firms are found to be
low on hiring of PhDs. Advanced science and engineering skills are crucial for building any R&D programme.
This weakness will have to be addressed seriously.
We also found that for sample firms, total sales and sales per employee are highly correlated with training
expenditure, advanced skills (degrees) of employees and high perceived strengths in flexibility and technology
(vis-à-vis competitors outside India). However, sample firms do not appear to be investing adequately on
training. Firms seem to have spent 10-50 hrs on training per employee per year and most have linked it with
adoption of new machinery or process on the shop floor. Managerial training that focuses on productivity
enhancement is not understood well. Consequently, training expenditures are generally low (unfortunately,
technical training is at an even lower level). Total training expenditure is at an average of Rs 4000 per
employee per year. The sectoral training investments show high investments in the Auto-components,
Pharmaceuticals, Machine Tools, and Electrical sectors and low investments in the Casting & Forging, Food
& Agriculture, Steel, Garments, and Weaving sectors.
Table 5 analyses the sources of training that are being deployed by sample firms. For instance, 21.2 percent
of firms claim that they have extensively used formal in-company training programmes to train its
25
Table 5: Training of Employees (percentage of firms)
Formal in-company
programs
Vocational education
programs
Trade association
Vendor of new
equipments
Consultants or private
training firms
Apprenticeships
Others
Used Extensively 21.2 2.6 1.8 2.3 4.1 7.2 0.3
Used Frequently 27.7 16.8 11.4 15.7 15.4 12.6 0.6
Sometimes Used 18.4 20.6 18.6 22.7 18.2 11.4 0.1
Rarely Used 5.4 12.7 12.9 10.8 11.4 12.4 -
Not Used 10.8 24.0 30.9 24.3 27.5 30.6 1.3
employees; 27.7 per cent of firms have frequently used formal in-company programmes to train employees;
18.4 percent of sample firms have sometimes used, 5. 4 percent of firms have rarely organized and 10.8
percent of firms never organized any formal in-company programmes for its employees. Formal in-
company programmes (followed by apprenticeship, vocational training programmes and external training
consultants) are the most common source of training. One source of training stands out due to its low usage
- trade associations. Trade associations in India have been traditionally weak as agencies that will help
build capabilities. Often they are hijacked to serve individual interests or remain lobbies for seeking tax and
other related benefits. Similarly, neither the firms nor the trade associations have developed apprenticeship
programmes with local technical colleges.
One of the downsides of a poorly trained workforce is their inability to take many decisions themselves (of
course, the causality may be in the other direction also). This is substantiated by the response of firms that
most innovative thinking in their organization is done by top management. This is not very healthy for the
manufacturing sector. It implies that the firms either have very “dominating” top management or the skill
levels of the work force are very low. Advanced skills appear to be rare in Indian manufacturing firms. For
instance, about 45 per cent of sample firm have less than 10 technical employees while 78 per cent of
firms have less than 50 technical employees. Similarly, about 65 per cent of sample firms have less than 10
managers while about 89 per cent of firms have less than 50 managerial employees. When it comes to R&D
employees in firms, the situation is worse – about 86 per cent of firms have less than 10 R&D employees and
about 98 per cent of firms have less than 50 R&D employees. The absence of employees with advanced
skills is surely going to affect the ability of firms to develop innovative products and processes as well as
enhance productivity in the future (which is the need of the hour).
In summary, firms have performed well financially as well as on many operational parameters. However,
lead times and skill building remain the two key weaknesses. The former affects costs, service and order
books and the latter affects the ability of firms to innovate through advanced skills. Indian firms do not pay
adequate attention to systematically improving their productivity.
26
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
6. Regional Comparisons: Are Manufacturing Capabilities Similar
!CROSSTHE#OUNTRY
Having looked at the national manufacturing scenario, we now turn our attention to regional comparisons.
We would like to understand if manufacturing competitiveness varies across the country. While Indian
manufacturing is quite spread out geographically (i.e., North, South, East & West), it is clustered industry
or sector wise. Some States, due to their history or natural endowment or due to good public policy, have
managed to perform differently from others. Regional disparities, if any, will have to be addressed with support
from industry associations and targeted industrial policy especially those that will improve the productivity
across the supply chain. While studying regional differences, we also study firms in Uttar Pradesh (UP) to
understand how UP compares in terms of industrial development and manufacturing competitiveness with
respect to firms in other regions. It will inform us how to address industrial development in low performing
States of India.
A quick overview of the regional characteristics and manufacturing strategy of firms in each region reveals
the following:
s 2EGIONAL$ISTRIBUTION3AMPLESIZENUMBEROFlRMS
North South East West UP
318 165 68 132 96
The sample from North includes firms from UP.
s !LIGNMENTOF3TRATEGYWITH0RACTICES%VIDENCEOFA-ISMATCH
The table below shows the top three strategies of firms in each of the regions:
North South East West UP
1 MV, MPV MV, MPV MV, MPV MV, MPV HV, HPV
2 HV, HPV HV, MPV HV, HPV HV, HPV MV, MPV
3 MV, HPV LV, LPV HV, LPV MV, HPV HV, MPV
Note:
* LV : Low Volume; MV : Medium Volume; HV : High Volume
** LPV : Low Product Variety; MPV : Medium Product Variety; HPV : High Product Variety
Most number of firms in the North follow a medium volume, medium product variety strategy except in UP
which follows a high volume, high product variety strategy. Most regions have large number of firms, i.e.,
with second highest priority, that have a high volume, high product variety strategy. The (HV, HPV) strategy
27
requires high resources, high automation and separate fast paced production line for each product - all that
very few can execute efficiently. Moreover, this strategy requires strong supply chain coordination especially
on the upstream side (one that is not obvious yet from these manufacturers). It reflects a mismatch between
strategy and capabilities of firms.
s -ARKETS3ERVED
– More than 93 per cent of firms in each region serve the Indian market
– Next comes Europe & America (except UP, where it is Asia)
– There is a low participation of the sample firms in other developing country markets across
the regions
s 2ATINGOF/PERATIONSVISÌVISGLOBALCOMPETITORS
– Firms in all regions view themselves strongest on quality
– Next comes Delivery/Service for firms in North & West; Service for firms in South & East;
and Packaging & Finishing as strengths in UP
s 2ELATIVE0RIORITIESOF-ANUFACTURING&IRMS
– Firms in all regions are focused on improving product quality reaching the hands of the
customers
– Firms in all regions (except East) give highest priority to reducing defects (i.e., conformance
quality)
s 3CALEOF/PERATIONS
– Firms in all regions except North (also UP) consider their scale much smaller than
competitors outside India
– Top reasons that these firms give for small size of their Operations
1. Capital is Expensive - across all regions
2. Restrictive labour laws in North, South & East and Uncertain markets in West & UP
3. Uncertain markets in North & South, Restrictive labour laws in UP and Small domestic
market in West and Lack of automation in East
28
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
While uncertainty in demand and supply is part of any business cycle, uncertainty in policy is often difficult
to manage. High interest rates have an adverse impact on investment in technology and manufacturing
firms tend to become more cautious that what it should be. Firms across all regions also see most
competition coming from other domestic firms and then firms from China.
s )NNOVATION2ELATED!CTIVITIES
1. All regions report the following as the highest innovation related activity:
– Purchase of machinery, equipment and computers
– Introduction of new products/introduction of new production method
– Working with customer on product/process design
2. All report a low involvement in In-house R&D (i.e., projects greater than 3 years duration;
those which are more than continuous improvements)
3. Top factors driving innovation:
– Competition (price/cost, quality, efficiency)
– Changes in market needs/customer requirements
– Top management initiatives to improve sales
– Regulatory policies (there are minor regional differences in terms of how firms in different
regions have responded)
4. Focus of innovation - potential benefits seen by firms
– Improvement in product quality
– Improvement in working condition & safety
5. Highest future investment in innovation related activities:
– North & West: conducting basic research & development internally (perhaps, there is an
influence of the pharmaceutical sector in these regions)
– South & East: training for implementation of new technology (perhaps due to electronics & IT
sectors being prominent in these regions)
– UP: coordinating various functions for new technology
29
6. Investment in R&D: Most firms have been investing in product development R&D when
long-term manufacturing related gains would come through process innovation for a majority
of firms (as only a small number of firms that would be capable of developing a globally
competitive product). East and West invest higher on process improvements - perhaps
gains from the steel and chemical sectors are obvious here. Investment in testing activities
(a prerequisite for precision high value manufacturing) is higher in South followed by North
(see Table 6; N is the sample of firms that are performing that task or answering that
particular question). Same is the case with investment to upgrade technology. Firms in North
Table 6: Regional Distribution of Total Investment in R&D in Various Activities (percent of firms)
NORTH SOUTH EAST WEST UP
NMean NMean NMean NMean NMean
Product
development 204 34.97 91 32.17 36 45.84 81 45.50 69 24.76
Process
development 182 21.92 88 18.55 33 20.45 79 25.24 66 17.00
Up gradation
of technology 171 19.09 81 26.67 28 16.89 71 19.02 66 17.42
Testing
activities 171 16.10 74 18.64 35 12.94 64 13.74 64 15.55
Others 12 8.38 8 12.06 2 27.00 4 14.5 6 7.00
Investment
in R&D as a
Percent of
Sales
201 7.15 82 6.98 27 1.88 85 4.46 67 13.00
Total 318 318 165 165 68 68 132 132 96 96
and South invest 7.15 and 6.98 percent of sales in R&D activities respectively. East and UP have
low investment on this count. As far as dealing with intellectual property (IP) is concerned,
the South has been more active - more patents licensed from outside, more industrial design
registrations and more trademark registrations (Tables 7 & 8). North has obtained more patents
in-house as well as from outside. Firms all over the country are less inclined to license patents
from others. In general, the patenting activities by Indian firms are relatively low.
7. Process Innovation
As can be seen from Table 9, firms in all the regions have been investing in new technology,
processes and design activities. Firms in the eastern region appear to be catching up. It also
points to increasing investments in Steel in the East. If we look at the vintage of equipment
on the shop floors (in Table 10), an interesting picture emerges. Firms in South India have
3. Top factors driving innovation:
30
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Table 7: Patent Registered by Firms in India
NORTH SOUTH EAST WEST UP
NMean NMean NMean NMean NMean
Patents obtained
by in-house
activities
25 5.16 10 3.60 19 6.00 14 4.14 3 2.00
Patents licensed
from outside 8 2.88 2 3.00 3 1.00 0 0.00 1 3.00
Industrial design
registrations filed 7 2.85 2 5.50 5 1.20 5 5.60 1 4.00
Trademarks
registered 36 5.62 17 8.17 22 4.50 20 2.15 4 2.50
Total 318 165 68 132 96
Table 8: Patents Registered by Firms Abroad
NORTH SOUTH EAST WEST UP
NMean NMean NMean NMean NMean
Patents
obtained
by in-house
activities
9 11.22 4 1.00 5 1.00 7 3.28 0 0.00
Patents
licensed
from outside
5 1.60 0 0.00 3 1.00 1 1.00 1 2.00
Industrial
design
registrations
filed
5 1.80 0 0.00 2 1.00 0 0.00 1 1.00
Trademarks
registered 10 2.20 4 5.75 4 1.00 7 1.85 1 5.00
Total 318 165 68 132 96
a higher rate of investment in new plants as well as new machinery in existing plants.
The area around Sriperambadur, Coimbatore and Hosur have been strong areas of new
manufacturing in auto and consumer electronics while Bangalore area has been at the forefront
of garments, electronics, engineering, machine tools and some pharmaceuticals (especially
biotech). Firms in West (particularly in Pharmaceuticals, Chemicals, Textiles/garments and
Auto-components) and in North (predominantly, Pharmaceuticals, auto and auto-components
and textiles/garments) have also seen investments.
31
Table 9: Regional Distribution of Process Innovation by Firms (percent of firms)
NORTH SOUTH EAST WEST UP
N Yes No N Yes No N Yes No N Yes No N Yes No
Invested in
upgrading
Machinery
311 80.2 19.8 159 81.8 18.2 67 86.8 13.2 132 85.6 14.4 95 72.9 27.1
If YES then
Investment
in Rupees
(cr)
161 14.3 108 27.3 50 128.5 87 16.7 26 23.3
Have you
adopted
a new
production
process
302 65.1 33.6 147 60.6 39.4 61 60.3 39.7 131 67.9 32.1 92 62.5 37.5
Invested
in design
related
activities
306 50.3 49.7 154 50.9 49.1 63 33.8 66.2 130 42.4 57.6 96 63.5 36.5
Outsource
any of your
design
related
activities
306 31.4 68.6 150 31.5 68.5 61 16.2 83.8 126 22.0 78.0 95 53.1 46.9
Total 318 165 68 132 96
s )NNOVATION)NFRASTRUCTURE
It may be recognized that Information Technology (IT) forms the backbone of much of the
innovation in product, process and practice domains. Our sample data reveals that
– All regions show low to medium usage of IT
– Number of firms reporting high usage of IT is highest in South and lowest in East (this
number in UP is higher than East)
– On average, 30 percent of firms do not use IT (East & UP are worse than this average value)
– IT mostly used for tracking/controlling production and for preparing reports for management
(the highest to lowest sequence is found to be South-West-North-East)
– The Manager is the key user of IT followed, at a distance, by the Supervisor except South
where the usage of IT by both Manager & Supervisor is close to each other
– Machine operators, in most cases, still do not use IT (the highest instance of operators
using IT amongst all the regions, is in South)
32
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
– Internet being used by about half of the firms using IT for sales & purchase enquiry
– Firms in South deploy IT for more functions than any other region.
It is very clear that the extent of deployment and usage of IT is higher as well as more spread out, in
terms of functions, in South and the worst in East and UP.
s 3KILLS4ALENT
– Training hours: West is worst, East/South best; UP better than West and closer to average
of North
– Engineering/technical employees: Worst is UP, then North, followed by West, East and then
South.
– Low deployment of personnel with advanced degrees in general
One interesting observation is that top management is still the largest source of new
Table 10: Vintage of Equipment (percent of equipment on the shop floor)
NORTH SOUTH EAST WEST UP
N Mean N Mean N Mean N Mean N Mean
Less than 5 yrs old 280 43.42 130 51.07 64 30.27 112 40.38 86 37.59
Between 5-10 Yrs old 255 39.72 123 35.67 58 40.64 104 48.81 84 36.39
More than 10 yrs old 199 39.25 93 37.73 52 40.12 73 37.34 68 54.46
Total 318 318 165 165 68 68 132 132 96 96
ideas and innovation and there is low participation of shop floor or younger employees (however, amongst
all the regions, South is the best).
s 3UPPLY#HAIN#HARACTERISTICS
- Firms in West use most number of channels, i.e., suppliers, regional distributors, retailers,
intermediate of finished goods producer. This is followed by South (UP has an extremely
weak channel infrastructure and uses very few channels).
- Majority of firms do not track inventory across the supply chain (firms in West are the worst
amongst all regions).
- Manufacturing (followed by distributor, wholesaler, and then retailer) are the highest source
of inventory - it appears that manufacturing strategies are not coordinated with others in the
channel.
33
It can also be seen from Table 11 that Supply Chain practices vary across regions. Perhaps this might be
explaining the differences in the operational performances of firms in different regions. For example, firms in
the South are more inclined to use third party logistics service providers for both procurement of raw
Table 11: Regional Distribution of Supply Chain Practices
NORTH SOUTH EAST WEST UP
N Yes No N Yes No N Yes No N Yes No N Yes No
Do you
expect your
supplier
to hold
INVENTORY
314 50.3 49.7 165 70.9 29.1 64 64.7 35.3 132 60.61 39.39 96 35.4 64.6
Do you
have
contracts
with
trucking
compa-
NIES
314 51.3 48.7 165 75.2 24.8 60 63.2 36.8 132 61.36 38.64 96 38.5 61.5
Do you
have 3PL
service
providers
for
DISPATCHES
315 54.1 45.9 165 66.7 33.3 60 16.2 83.8 132 48.48 51.52 96 35.4 64.6
Do you
have 3PL
service
providers
for
procuring
MATERIAL
313 39.6 60.4 164 50.0 50.0 59 16.2 83.8 132 34.09 65.91 96 34.4 65.6
Is a major
part of your
logistics
outsourced
to 3rd party
service
PROVIDER
308 40.9 59.1 165 51.5 48.5 58 11.8 88.2 131 35.88 64.12 95 32.6 67.4
Total 318 165 68 132 96
material and intermediate goods as well as finished good (they are followed by sample firms in the North,
then West, then UP and finally East). Indeed, there are also signs of weak understanding of what improves
performance and productivity across the entire supply chain or perhaps it is a failure to understand the mid
to long-term implications of their approach. For instance, about 70.9 percent of firms in the South expect
their suppliers to hold inventory for them. It may be realized that this practice would increase the cost of the
product to the supplier who would then either pass it on to its customers or may not be able to sustain its
34
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
operations in the long run. Firms have to find strategies that increase the productivity of the entire chain and
not of their’s alone at the cost of other members in the chain.
Two other factors are also affecting the supply chain performance of firms across regions. It took on an
average 4.6 days for a sample firm in the West to dispatch goods to a distance of 500 kms. The same
dispatch time for firms in North, East, UP and South were 5.61 days, 6.69 days, 7.69 days and 7.74 days
respectively. It is true that the road infrastructure is superior in the West and parts of North. It is also true
that truck movement faces significant bottlenecks in some parts of the South. It may be pointed that the
average figures across the regions are particularly high. Travel between two locations that are about 500
km should not be taking more than a couple of days. In addition to bottlenecks due to infrastructure (both
in terms of road quality as well as available space on the road and congestion) that leads to high lead times,
the technology of the truck and its efficiency, the condition of the truck, the skill of the driver, regulatory
stoppages on the highways by the road transport office staff or police or local rent seekers, layover of
trucks for long hours especially when passing through cities (due to low availability of by-passes through
cities), poor highway support in case of emergencies, accident or breakdown etc. are also responsible
for these long lead times. Another factor that is affecting supply chain performance are delays in clearing
customs for cargo. Our sample data shows that firms in North, on an average, take 4.67 days to clear
a consignment of goods from customs. This figure for firms in South, West, East and UP are 5.54 days,
6.31 days, 6.63 days and 9.67 days respectively (there is also high standard deviation observed around
each of these mean values). It must be mentioned that this long lead time at customs has a cascading
effect on cost across the entire supply chain. Long customs clearance time means firms down stream
(i.e., customers to these suppliers) face high uncertainty in terms of when their supplies are going to arrive
and cannot plan their production or deliveries accurately or are not able to take advantage of high value
orders that need to be delivered at short lead times. Give this uncertainty or long lead time, firms have to
hold higher levels of inventory in order to meet their production requirement thereby increasing their cost.
Effective execution of lean supply chain practices requires reduction of lead times across all elements of
the supply chain.
s 3UPPLIER0RACTICESAND2ELATIONSHIPS
Supplier practices and relationships are emerging as the key area of concern amongst firms in India. One
of the deficiencies of emerging clusters in manufacturing is the low capabilities of suppliers, particularly the
small and mid-size suppliers, in terms of operational performance. Many firms procure from low capability
suppliers in order to keep the cost of production low (or to keep their own margins high) while others take
advantage of the fact that many of these suppliers are keeping their selling cost low through non-payment of
taxes, poor safety practices, theft of utilities especially electricity, and ignoring prescribed labour regulation.
Larger firms in many countries (especially in Japan) have tried to address these issues by having active
supplier associations that ensure maintenance of standards while helping suppliers develop capabilities.
Our data reveals that very few firms in any region have a supplier association (it is a very rare concept in
India). North has the highest number of firms with suppliers on a long-term basis (about 50 percent of
firms). There is a very low investment in suppliers’ capabilities across regions (i.e., organizing supplier
conferences, sharing of production plans etc.). North has more equity holding in suppliers and distributors
35
than any other region. It appears that sample firms in the North are committing more to their suppliers and
this will have positive externalities as manufacturing grows further. One wonders if this is historical or a sign
of entrenchment of modern practices in the North. One must not forget that manufacturing in North is quite
diversified.
Firms across regions procure their raw material or intermediate products from far and near as shown in
Table 12. Firms in South and North have more percent of suppliers that are located more than 100 kms
away from them (firms in South have 87.88 percent of suppliers while firms in the North have 59.37 percent
of suppliers located more than 100 kms away). The same is true for UP. One hypothesis is that given the
Table 12: Location of Suppliers from the Plant (percent of the total suppliers)
NORTH SOUTH EAST WEST UP
N Mean N Mean N Mean N Mean N Mean
within 0-5 Km 318 4.90 53.03 68 28.71 131 4.07 96 7.05
within 5-25 Km 318 11.04 74.24 68 34.65 132 28.28 96 9.12
within 25-100 Km 317 24.69 84.85 68 53.88 132 69.00 95 10.78
Total 318 165 68 132 96
advanced as well as diversified state of manufacturing in South and North, firms may have to procure all
over the country as well as globally while given the low concentration of manufacturing in UP, firms there
may not be finding local suppliers hence may have to go far for procuring their supplies. Firms in West and
East procure more locally. Reasons might be different in both the cases. Manufacturing in the West may
be more focused (e.g., chemicals and pharmaceuticals in Gujarat). Consequently, manufacturing clusters
there are perhaps more developed with wide variety of suppliers located in the cluster providing a range
of products that are required. This is also true to some extent in East especially with respect to steel and
metal production. At the same time, East has a lower variety of industries leading to perhaps a lower need
for procuring from a distance. The above observations point to a diverse manufacturing base of India and
its varied procurement strategies. Interestingly, most firms also claim that the raw material supplier is the
most powerful entity in their supply chain followed by the final manufacturer. Does that still point to a lack
OFSTRONGSUPPLIERBASETHATISGLOBALLYACCESSEDBY)NDIANlRMS
There is one more fact regarding suppliers in various regions - there is a low to medium of IT usage by
suppliers/dealers across all regions. South is slightly better. It is quite obvious that Indian manufacturing, in
general, has not benefited from IT services growth in India.
Table 13 provides a comparative view on a variety of performance parameters across the different regions.
The differences in the performance of different regions stands out quite clearly. East and UP are at the
bottom of the heap. West, North and sometimes South share the lead.
36
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Table 13: Regional distribution of Business Unit Performance for the Last Fiscal Year
NORTH SOUTH EAST WEST UP
N Mean N Mean N Mean N Mean N Mean
Annual sales revenues
(Rs.in Cr’s) 311 168.06 161 400.64 68 615.86 124 329.19 95 100.14
Net pretax profit ratio (%) 248 13.35 133 11.96 61 11.02 96 19.55 82 14.86
Return on assets (%) 219 15.55 96 15.21 26 19.36 97 26.29 86 13.85
Growth rate in unit sales (%) 255 20.40 133 17.51 58 16.91 100 29.94 85 13.55
Growth rate in Rupees (%)
242 22.09 118 19.35 51 20.06 104 79.70 92 32.76
Capacity utilization (%)
280 64.24 146 83.69 62 72.01 120 67.36 92 55.77
Manufacturing costs as
percentage of sales(%)
301 62.95 154 65.51 62 66.01 114 90.98 94 80.73
Percentage of on-time
deliveries in days
295 89.08 150 90.20 53 85.16 115 69.15 94 22.53
Avg. lead time to convert
RM to finished products
296 19.45 156 24.05 58 20.23 83 18.11 76 21.20
Annual inventory turnover
(turns/year)
231 62.38 109 41.38 15 13.96 108 89.60 89 81.03
First pass yield (%)
256 94.39 139 80.69 29 78.851 95 33.16 92 3.90
Avg. total lead time in days to
introduce new products
250 7.34 136 5.60 36 4.98 76 7.66 85 31.24
Percentage of sales generated
by the new products
202 31.00 114 19.66 10 35.92 122 92.85 94 87.43
% of perfect orders delivered
to your customers
302 89.04 158 92.15 60 86.00 117 89.66 92 85.15
% of perfect orders received
from your suppliers
295 86.46 150 88.14 57 84.19 109 55.73 92 38.51
Cash-to cash cycle time
284 51.1232 142 50.3169 13 56.53846 121 59.69612 94 60.90926
Material cost (%)
305 58.7815 163 61.8902 65 54.01092 121 16.5862 94 21.33394
Direct labour cost (%)
306 18.3789 163 17.1204 65 23.07231 119 21.69429 92 17.545
Other costs (%)
305 20.273 163 20.9617 64 22.2475 36 5.193889 50 18.772
Cost of physical distribution
as % of sales
119 11.1406 75 7.0424 7 8.255714 36 5.193889 50 18.772
Cost of warranty claims/returns
as (% of sales)
95 9.50321 41 2.27122 5 2.24 30 3.469703 47 14.27234
Cost of manufacturing as
(% of sales)
179 42.1289 100 54.0901 23 60.55043 45 56.71111 53 35.5283
Appendix I & II provide a listing of comments provided by the sample firms that act as hurdles in their plants
(both internal to the firm and external to the firm). The average rating gives the relative weight of each factor
and consequently the importance of each factor in that region.
37
7. Some Observations on Variations in Strategies and
Performance of Manufacturing Firms by Size
In order to understand if there is any variation in strategies of firms by size, we segregate the sample firms
into four distinct categories by size and then compare their manufacturing practices and performances.
We highlight some distinctive observations on a variety of dimensions. Sample firms were grouped into four
categories by size:
s Tiny : firms that have annual sales revenues less than Rs 5 crores; about 12.3 percent of sample
firms were tiny.
s Small : firms that have annual sales revenues greater than Rs 5 crores and less than Rs 50 crores;
about 43.1 percent of sample firms were small.
s -EDIUM firms that have annual sales revenues greater than Rs 50 crores and less than Rs 300
crores; 32.3 percent of sample firms were medium.
s ,ARGE firms that have annual sales revenue greater than Rs 300 crores; about 12.3 percent of
sample firms were large.
Indian Manufacturing is very diverse – their strengths and characteristics vary. Sample firms that can be
categorized as tiny, small, medium and large have the following characteristics:
s 4INYlRMSLow volume, low product variety; firms perceive their scale to be much smaller than
their global competitors; Dominant category of firms report investment of 5-15% of sales in R&D
(perhaps acquisition of new technology/or process), have low technical manpower capabilities, and
are low on training investments;
s 3MALLSIZElRMSMedium volume, medium product variety, firms perceive scale to about equal
their global competitors; Dominant category of firms report investment of 5-15% of sales in R&D,
have low levels of technical manpower, are low on training investment;
s -EDIUMSIZElRMSHigh volume, high product variety, firms perceive scale to be about equal to
their global competitors; Dominant category of firms: invest 1-3% of sales in R&D;
s ,ARGESIZElRMSHigh volume, high product variety, firms perceive their scale to be about equal to
their global competitors; Dominant category of firms invest 0.5-1% of sales in R&D.
We now discuss each of these dominant operations strategy of firms of various sizes in detail. We find that
the dominant manufacturing strategy of tiny firms is to produce low volume and cater to low product variety
(i.e., 30 percent of tiny firms). This is indeed a bothersome observation. It appears that tiny firms, instead
of being source of innovative production environment (which is their natural advantage over medium and
large firms), are producing a limited variety of products – they appear satisfied or due to structural problems
38
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
are locked into producing for few customers similar kind of products. The very fact that their capacity is
low, they are producing for each customer in small volumes. Tiny firms are neither innovative producers
serving a variety of customers with a variety of product/service offerings nor are they low-cost producers.
Tiny firms are often run by technocrats who have strong technical skills and hence are more likely to
grow by exploiting their technological skills and innovativeness which would come at low overhead. If they
become flexible solution providers to a large variety of customers then they are building on their innovative
capabilities. And this would come at low overhead costs (the cost of developing or experimenting at a
large producer’s facility will be much higher). If these firms follow a focused product, larger volume strategy
(which is what they are doing) then a larger firm will out-compete them on cost. Similar is the problem with
small firms in the sample. Amongst the small firms, the largest percentage follows a medium volume and
medium product variety strategy (i.e., 34.3 percent of small firms). The next higher incidence is of small
firms that seek high variety and high volume (i.e., 15.1 percent of small firms). The problem with small is
same as that of the tiny. Their strategy should also be aimed at becoming flexible producers rather than
becoming a lowest cost producer (a large firm with low product variety will have a lower cost structure due
to scale economies). This mismatch in strategy renders both these categories of firms uncompetitive. Their
preferred strategy should have been low volume, high product variety. More medium size firms prefer a
medium volume and medium product variety strategy while the operations strategy of large sample firms
was high volume and high product variety - perhaps, having a factory within a factory or dedicated high
volume lines for each of the products - a strategy that serves large plants well.
When it comes to markets, irrespective of size, all types of sample firms depend largely on the Indian
market followed by European and American markets. However, as firms grow in size we find that they serve
more markets. As we had mentioned earlier, most firms find themselves about equal or smaller than their
global competitor. The top three reasons for their being smaller in size is given in Table 14.
Table 14: Top Three Reasons for Being Small in Size
Category of Firms Reason for Being Small in Size
Tiny Firms
1. Capital is Expensive
2. Restrictive Labour Laws & Uncertain Markets
3. Catering to Smaller Domestic Market
Small Firms
1. Capital is Expensive
2. Restrictive Labour Laws
3. Uncertain Markets
Medium Size Firms
1. Capital is Expensive
2. Uncertain Markets
3. Restrictive Labour Laws
Large Size Firms
1. Capital is Expensive
2. Catering to Smaller Domestic Market
3. Restrictive Labour Laws & Uncertain Markets
39
As we can see, the largest number of firms, in every size category, claim that expensive capital is the most
important reason behind their inability to grow large as compared to their global competitors. Interestingly,
tiny and large producers do not find the market to be large enough - tiny firms might not find enough scope
for growth locally and credit crunch might be preventing them to grow regionally while large firms might
find national or regional markets limiting. Another interesting observation relates to percentage of sales
generated by new products that were introduced within the past three years. This supports our earlier
observation that when tiny and small firms focus on flexibility rather than volume, they benefit. We find that
at least some of the tiny and small firms are getting their strategy right (i.e., 31 percent of tiny firms have
26-50 percent of revenue coming from new products while about 21 percent of tiny firms have more than
50 percent of revenue coming from new products) and these are also the firms that have high revenues.
Small firms unfortunately, do not perform well on this count - the most number of firms in this category, 32
percent of small firms, have only 16 - 25 percent of revenue coming from new products. For medium and
large firms, the strategy seem to be aligned to their size and volume sale - 41 percent and 35 percent of
medium and large firms respectively form the largest group in each category and both cases have only 0-10
percent of sales generated by the new products. Medium and large firms are less flexible.
In terms of performance, for all sizes, most number of firms5 have grown (in terms of growth rate in unit
Rupee) in the range of 5.1-10 percent while the next highest number of firms have seen growth rates in
the range of 15 - 24 percent. Most tiny and large firms have net pretax profit ratios in the range of 10-15
percent. For small firms, the largest number of firms has this value between 15-25 percent. When it comes
to medium firms, we find that equal number of sample firms have net pretax profit ratio between 10-15
percent and between 15-25 percent. We find that 26 percent of tiny firms, 38 percent of small firms, 36
percent of medium firms and 35 percent of large firms have net pretax profit that is greater than 15 percent
thereby indicating a strong financial performance for firms in each category. One can hypothesize that
unless tiny firms do not secure economic rents through innovative products and flexible production, their
profit may not grow as much. The return on asset of all types of firms except the tiny is in the range of 15-
21 percent. This value for tiny firms is between 10-15 percent. Capacity utilization of most number of tiny
and small firms has been in the 64-84 percent range while that for the medium and large firms has been
between 85-95 percent. It is interesting to note that only 15 percent of the total sample firms have capacity
utilization greater than 95 percent. We also find that manufacturing costs as percent of sales for highest
number of firms in all categories is greater than 75. When it comes to on-time deliveries, 55 percent of tiny
firms, 58 per cent of small firms, 44 per cent of medium and 33 percent of large firms in the sample have
percent of on-time deliveries less than 90 percent. As firm size increases, the on-time delivery performance
is also seen to improve - perhaps due to better systems that they deploy and due to the expectations of
larger/more reputed customers. Inventory turns also tell an interesting story - there seems to be a bi-modal
distribution for each category in terms of a dominant picture - about 26 per cent of tiny firms have inventory
turns between 5-11 while a same percent of tiny firms have inventory turns between 21- 60. Interestingly,
for all other categories of firms, most firms have inventory turns either ranging between 0 - 4 or between
5-11 - values that reflect poor inventory management. A similar picture emerges when we look at first pass
yield - 46 percent of tiny, 42 percent of small, 24 percent of medium and about 17 percent of large firms
have first pass yields between 76-90 percent; about 14 percent of tiny, 14 percent of small, 27 percent
5This represents the largest number of firms.
40
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
of medium and 17 percent of large firms have first pass yield less than 75 percent; only 18 percent of tiny,
22 percent of small, 29 percent of medium and 30 percent of large firms have first pass yield greater than
98 percent. Tiny and small firms have large number of firms with poor first pass yield while medium and
large firms have more firms at higher levels. Tiny, small and medium do not perform well when it comes to
delivering perfect (or complete) orders to their customers - this is an important service measure and part
orders delivered to customers creates a coordination problem and may delay customer’s production plans.
Most firms in all the three categories (43 percent of tiny, 37 percent of small and 27 percent of medium
firms) deliver somewhere between 76 - 90 percent of their orders that are complete. The same figure for
the most number of large firms is between 96 and 100 percent. TSMEs (tiny, small & medium enterprises)
have to bridge this gap. On further exploration it appears that tiny and small are all not receiving perfect
(or complete) orders from their suppliers which might be reducing their ability to meet their customer’s
requirements. The largest grouping under tiny firms, 33 percent of them, has only 81 - 90 percent of order
from their suppliers that are complete. This figure is 32 percent amongst small firms. The medium and large
firms do somewhat better. About 31 percent of medium firms and 37 percent of large firms receive 91 - 100
percent of orders that are complete. Large firms receive better service from their suppliers perhaps due to
their large size - perhaps they have enough power to influence their suppliers and in turn they can provide
better service to their customers. A related data is on cash-to-cash cycle. Only 33.3 percent of tiny firms,
47.3 percent of small, 39.7 percent of medium and 26.6 percent of large firms have a cash-to-cash cycle
less than 30 days. About 51.4 percent of tiny, 33.1 percent of small, 40.4 percent of medium and 37.5
percent of large firms have cash-to-cash cycle greater than 50 days. It is discouraging to find that 13.9
percent of tiny, 4.1 percent of small, 7.1 percent of medium and 7.8 percent of large sample firms have
their cash-to-cash cycle exceed 100 days. For most firms across categories, (except large firms where
this figure is lower), the average cycle is over 75 days - a period too long for most TSMEs to manage their
cash flows adequately.
The extent of investment in machinery is low across different categories. However, the tipping point is when
firms become medium in size. There is a strong correlation between investment in machinery and size - the
causality runs in both directions. About 32 percent of tiny as well as small firms have more than half of their
equipment on their shop floors that is less than five years old. This figure is about 30 percent for medium
size firms and about 24 percent for large firms. Similarly, 66 percent of tiny firms, 77 percent of small, 76
percent of medium and 69 percent of large firms have less than fifty percent of equipment that is more than
10 years old. While Indian firms have started to invest, they require strong policy support to transform the
shop floors.
Now we will explore the Innovation infrastructure across firms of different categories. As we can see in
Table 15, the highest percent of sample firms in tiny and small categories spend between 5-15 percent of
their sales in R&D. The highest percent of sample firms in medium and large categories spend between
1-3 percent of their sales in R&D which is significantly low. Perhaps the tiny and small are investing in new
product development. We also find that 9.7 percent of tiny firms, 13.6 percent of small firms, 15.0 percent
of medium firms, and 30.8 percent of large firms invest less that 1 percent of sales in R&D. A related
observation is with respect to IT. IT systems form the backbone for most innovation systems in organization.
41
Table 15: Investment in R&D as percent of Sales for Different Category of Sample Firms
Investment in R&D as a percent of Sales
0-0.5 0.5-1.0 1.0-3.0 3.0-5.0 5.0-15.0 15.0-25.0 > 25.0
Tiny % of Sample firms 3.2 6.5 16.1 12.9 51.6 6.5 3.2
Small % of Sample firms 6.2 7.4 27.8 9.9 32.7 11.1 4.9
Medium % of Sample firms 7.9 7.1 40.9 10.2 26.0 6.3 1.6
Large % of Sample firms 10.8 20.0 44.6 7.7 15.4 1.5 0.0
As can be seen from Table 16, larger the firm, more sophisticated is its use of IT. Firm size is strongly
correlated with the extent of usage of IT - smaller firms must be encouraged to implement appropriate IT
strategy to make them competitive. We also find that medium size firms are most interesting. These are the
firms whose IT strategy appears to me most actively aligned with building competitive stances. Other
Table 16: Top Five Uses of IT in Different firms
Top Fives Uses of Information Technology
Tiny
1. For preparing reports for management
2. To track inventory/work in progress
3. To track/control production
4. For real time planning & scheduling
5. To reduce defects/For placing orders with suppliers/For
interacting with customers
Small
1. To track/control production
2. For preparing reports for management
3. To track inventory/work in progress
4. For placing orders with suppliers
5. For real time planning & scheduling
Medium
1. To track/control production
2. To track inventory/work in progress
3. For preparing reports for management
4. To reduce defects
4. For placing orders with suppliers
Large
1. To track/control production
2. For preparing reports for management
3. To track inventory/work in progress
4. For real time planning & scheduling
5. For placing orders with suppliers
42
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
types of firms appear to be lagging in terms of an effective IT strategy for its size. Large firms, unlike others,
use IT for more sophisticated tasks that help provide a competitive edge to their operations (e.g., tracking/
control of production process, track inventory/WIP, reduce defects, real time planning & scheduling,
interacting with customers etc.). It helps these firms become more responsive both on their shop floors
and to their customers.
Skills and talent form another critical innovation infrastructure of a firm. About 73 percent of tiny firms have
less that 50 operators; this number for small firms is around 46 percent while 71 per cent of small firms have
less than 100 operators. Medium firms have an interesting distribution - about 9 percent of firms have less
than 50 operators, about 23 percent have less than 100 operators, about 57 percent have less than 300
operators and about 89 percent have less than 1000 operators. For large firms the distribution is as follows:
4 percent have less than 50 operators, about 10 percent less than 100 operators, 29 percent have less
than 300 operators and 58 percent have less than 1000 operators. Most of the tiny firms have less than
5 engineering/technical employees (often zero). Similarly, most small firms have between 5-15 technical
employees, most medium size firms have between 15-50 technical employees and most large firms have
between 100-500 technical employees. It is obvious that the threshold is medium size firms in terms of a
noticeable technical workforce. A similar story emerges when it comes to R&D personnel. About 81 percent
of tiny firms employ less than 5 R&D personnel (often zero); similarly about 62 percent of small firms employ
less than five R&D personnel while 83 percent of them have less than 10 R&D personnel; medium size
firm, on the other hand, have about 48 percent of firms employing less than 10 R&D personnel and about
91 percent of them employ less than 30 such knowledge workers. About 65 percent of large firms deploy
less than 30 R&D personnel. It can be seen that as size is increasing, the number of R&D personnel is not
growing commensurately - this is a weakness of the Indian manufacturing sector. In addition, firms will have
to devise ways of attracting more R&D personnel to small firms in order to render the natural strategy of
small successful (i.e., become the R&D houses of the industry).
If we look at Tables 17, 18, 19 the conclusion that we can derive is that tiny and small firms are unable
to hire technical graduates, medium-size firms are not hiring enough of graduates with master’s degrees
(especially the larger of the medium size firms) and large firms have inadequate number of employees with
doctoral degrees. Medium-size firms onwards must have more employees with Master’s degrees so that new
knowledge can be deployed in product and process improvement or their introduction. It can be concluded
that Indian firms are generally low on advanced skills and this is a serious flaw in the architecture of the
Indian manufacturing sector - whether it is unable to attract people with advanced degrees or whether they
do not find people with advanced degrees having significant knowledge advantages or whether they do
not have a need for them are all hypothesis that need to be tested with the help of additional data. Table 20
gives another slice of the workforce with advanced skills. Of the 603 firms in the sample that hire bachelor’s
graduates, 11.9 percent are the tiny firms, 45.3 percent are small firms, 31.7 percent are medium size
firms and 11.1 percent are large firms. Of the 497 firms in the sample that have hired master’s graduates,
8.5 percent are tiny firms, 42.3 percent are small, 36.0 percent are medium and 13.3 percent are large.
Similarly, of the 175 firms that have PhDs working for them, 1.7 percent are tiny, 33.1 percent are small,
38.9 percent are medium and 26.3 percent are large. Its shows how inadequate these manufacturing firms
are in terms of advanced skills particularly the large. Also, if Indian manufacturing has to become innovative,
then small will also have to become attractive to be able to hire advanced skills.
43
Table 17: Nature of Firms and Number of Employees with PhD degree (percent of firms)
Number of PhDs
<5 5-10 10-30 30-60 >60
Tiny % of Sample firms 100.00 0.00 0.00 0.00 0.00
Small % of Sample firms 79.30 18.97 0.00 1.72 0.00
Medium % of Sample firms 64.71 20.59 10.29 2.94 1.47
Large % of Sample firms 58.70 28.26 2.17 4.35 6.52
Table 18: Nature of Firms and Number of Employees with Masters degree (percent of firms)
Number of Masters
<10 10-50 50-100 100-300 >300
Tiny % of Sample firms 90.48 9.52 0.00 0.00 0.00
Small % of Sample firms 75.71 23.33 0.48 0.48 0.00
Medium % of Sample firms 36.87 53.63 5.59 3.91 0.00
Large % of Sample firms 16.67 34.85 16.67 21.21 10.61
Table 19: Nature of Firms and Number of Employees with Bachelors degree (percent of firms)
Number of Masters
<10 10-50 50-100 100-300 >300
Tiny % of Sample firms 63.89 31.94 2.78 1.39 0.00
Small % of Sample firms 30.40 61.17 6.23 2.20 0.00
Medium % of Sample firms 5.24 41.88 23.56 26.70 2.61
Large % of Sample firms 4.48 20.90 14.92 28.36 31.34
Table 20: Nature Firms and Percentage with Advanced Degrees
Bachelors Masters PhDs
Tiny 11.9 8.5 1.7
Small 45.3 42.3 33.1
Medium 31.7 36.0 38.9
Large 11.1 13.3 26.3
Total Number of Firms
603 497 175
44
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
A related issue pertains to the average number of hours spent on training employees as well as the firm
expenditure on training each year. When it comes to average number
of hours spent on training per employee, about 74 percent of tiny firms spend less than 50 hours (while 90
per cent spend less than 100 hours per employee); about 65 percent of small firms spend less than 50
hours on training per employee while 85 percent of these firms spend less than 100 hours per employee);
amongst medium size firms about 54 percent of firms spend less than 50 hours on each employee for
training and about 74 percent of them spend less than 100 hours; finally, about 73 percent of large firms
spend less than 50 hours per employee on training and about 88 percent of these firms spend less than
100 hours. As can be seen, the pattern of hours spent on training is very low across the size of firms with no
significant differences. Here the smaller firms are perhaps doing better. Medium and large size firms appear
to be having a “fortress” mentality where they resist investment in training due to the fear of their employee
leaving the firm after training – a mindset that reflects conservative thinking. The above poor strategy is
further reflected in the data given in Table 21. Once again, we find that medium and large firms are not
investing adequately on training of their employees which would be affecting their competitiveness
Table 21: Total Training Expenditure (in Rs Lakhs) by Size of the Firm
Average Sales
Revenue
(in Rs. Crores)
Total Training Expenditure (in Lakhs)
< 5 10-30 10-30 30-60 60-100 100-250 >250 Total
Tiny (< 5 ) % of each class
80.7 3.2 3.2 3.2 3.2 0.0 0.0 100.0
Small (5-50) % of each class 53.6 23.2 23.2 1.8 0.9 0.0 0.0 100.0
Medium (51-300) % of each class
24.3 33.7 33.7 16.6 8.6 2.5 0.01 10.00
Large (> 300)
% of each class 10.4 18.9 18.9 13.8 13.8 15.5 15.5 100.0
arge (> 300)
% of each class 37.1 24.6 24.6 9.7 6.4 3.7 3.0 100
adversely. About 80.7 percent of the tiny firms in the sample have a training budget that is less than Rs
5 lakhs while 74.1 percent of the small firms fall in this category. About 72.2 percent of the medium size
firms in the sample have a total training budget less than Rs 30 lakh while about 69 percent of the large
firms have total training budget less than Rs 100 lakhs (where as the highest number of firms are make Rs
10-30 lakh investment in training). It can also been seen that across different classes of firms, about 37.1
percent of the sample firms invest less than Rs 5 lakh in training of employees annually- indeed a very high
percent of firms fall in this low investment category. This area is a bottleneck to growth in value addition in
Indian manufacturing firms.
Supplier related practices also point towards the strength of the supply chain as well as the cost and quality
of products that firms can produce. Moreover, the supply chain structure needs significant re-structuring
in order to become lean. About 10 percent of tiny, 16.9 percent of small, 37.5 percent of medium and 70
percent of large firms have more than 100 suppliers while about 1.3 percent of tiny, 1.5 percent of small,
11.2 percent of medium and 27.2 percent of large source from more than 500 suppliers. The largest percent
45
of tiny firms have on an average 10-15 suppliers each; this figure for small is 24-50 suppliers, for medium
and large firms is between 100 and 500 suppliers. Firms still work with large number of suppliers leading
to higher coordination cost, higher lead times and higher probability of quality problems. We also find that
more number of small firms (i.e., 23.7 percent of the total) want their suppliers to hold inventory for them
(this is followed by medium size firms in the sample). Overall, 59.1 percent of sample firms (across sizes)
want their suppliers to hold inventory for them. From Table 22 we can also see that larger the size of the
firm, higher is the propensity to use 3PL services providers on a long term contract for making dispatches
to customers. (These figures are, however, lower for procurement of material from its suppliers where the
use of 3PL trucking services on long term contracts are less prevalent).
Table 22: Supplier Practices of Various Types of Firms
Average Sales Revenue
(in Rs. Crores)
Percent of Firms Using 3PL
Service roviders for making
dispatches to customers
Percent of Firms having
Contracts with Trucking
companies for making
dispatches to customers
Tiny (< 5 ) 50.0 49.4
Small (5-50) 46.7
50.2
Medium (51-300)
57.7 70.7
Large (> 300)
66.7 86.9
Total 53.1 61.1
46
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
8 . Implications & Conclusion
In this research we have tried to understand the managerial regimes that exist in manufacturing plants in
India, especially those relating to manufacturing management and the extent to which it is contributing to
building the competitiveness of Indian manufacturing firms. Rather than rating them as more competitive
or less, we have explored areas where there are alignment or mismatch between manufacturing strategies
and the manufacturing practices adopted by them, study the performance of these firms again from a
manufacturing management perspective and identify areas for improving strengths and reducing weaknesses.
Manufacturing competitiveness is as much a function of the distinctive capabilities built by each firm as it is
of the collective capabilities of firms around them as well as how they exploit these capabilities by adopting
robust strategies and state-of-the art managerial practices.
We will first make some general comments and then discuss specific implications. Indian firms have been
riding the “get the quality right” wave since early ‘90s initially through ISO certification to become vendors
for European firms. But soon they converted it into an opportunity to review their quality systems. What
was seen as a non-tariff barrier soon led firms to draw out their own trajectories of quality improvement in
a systematic manner – a journey that continues even now. And this came with significant gains including
global recognition via contracts and rewards (i.e., Deming and other prizes for Indian plants). As the global
markets expanded, these firms were ready to serve them with better quality products, soon to be followed
by upgraded processes. Indian manufacturing, at least a portion of the entire sector, was to emerge by
mid 2000s as the best kept secret from India! As many firms responded to the growing Indian economy
as well as global requirement for good quality and low cost production bases, several others that failed
to adapt to these requirements (especially the small or large firms) were starting to get waylaid on the
competitiveness highway. The structure of the Indian industry was starting to change. While the small
firms were still struggling to get recognized for their strengths as innovative producers and the large were
investing to increase scale, it were the medium size firms that were emerging as the most interesting firms
in the entire manufacturing sector. These were firms that had grown successfully and aggressively in the last
two decades, had invested in newer vintage of technology, were hiring younger and better trained technical
manpower and were looking at the globe as their market. Interestingly, while some of these same mid-size
firms are looking to acquire other mid-size companies globally, they continue to remain targets of acquisition
by global firms! What however is missing in most Indian firms is a focus on Innovation and particularly R&D.
This weakness is repeatedly highlighted by lack of investment in innovation infrastructure, low availability
of advanced skills, weak strategy on new product introduction, etc. There are early indicators that some
of the firms are focusing to “get their process right.” This is a good indicator – if firms develop proprietary
processes based on innovative engineering abilities, it would lead to competitive gain as tacit knowledge
is not easy to copy. Besides, it might also trigger a continuous improvement process on these shop floors.
Lastly, the lack of top management focus, among Indian manufacturers, on systematically reducing costs
is a strategy that is perilous to say the least. Indian manufacturing strategy has to combine manual and hi-
tech manufacturing to retain the cost advantage of an emerging economy. Firms cite high raw material and
logistics related costs as contributing to higher costs of Indian operations. These firms have to embark on
process innovation while reducing costs in order to compensate for these disadvantages and gain global
advantage.
47
There is a need to grow large manual factories with advanced tooling and precision measurement systems.
This will allow India to develop capabilities in mass market products - a domain that is going to get hit hard
WITHTHE!3%!.&4!/NEWONDERSIFTHE)NDIANlRMONANAVERAGEISNOTOVERCAPITALIZED)TISESSENTIAL
to serve the mass market products made out of India in order to retain jobs for the common man.
Firms need to focus on improving their service - service with a BIG S - customizing production to customer’s
requirements, service about knowing customer information, providing timely information on the status of the
order, post sales technical service so that the customer is satisfied, developing a life cycle product servicing
programme etc. The focus on supplier management needs to be augmented dramatically - role of supply
integrators, clusters and proximity of suppliers, use of IT for exhibiting plant loading to customers so that
they can plan their order placement. One of the weaknesses in Indian manufacturing managerial regime is
that most managers do not have, in their mind, a complete picture of the roadmap and architecture of how
various managerial initiatives are linked to improvements in key operational performance parameters like
Cost, Quality, Delivery (lead times) and Flexibility.
Wages are on the increase - this demands higher productivity to survive in the market. Consequently, an
increase in training investment becomes necessary. This is directly linked with lack of innovation in the
Indian manufacturing industry - low investment in R&D, low investment in advanced skills, weak process
innovation regime, low patenting record, low usage of ICT for enhancing design productivity by generating
libraries for creating new designs or for verification, low investment in modern tools of production (especially
hand-held tools and precision measuring instruments), low intensity of shop floor improvement practices,
low penetration of statistics as a skill amongst shop floor workers, absence of a well defined plan to move
up the value chain ladder etc. There is a need to cut costs regularly through innovative process and product
re-design – firms will come to source from Indian manufacturers only if their costs are low. The challenge is to
keep Indian manufacturing Low on Cost, High on Productivity - this can happen only through innovation.
In Tables 22 and 23, we present the roles that need to be played by different types of firms as well as differing
manufacturing management capabilities across different regions of the country - both contribute to structural
reasons for the extent of competitiveness in different firms in different parts of the country. It is apparent
that the strategy of firms is often not always aligned to their intrinsic strengths - sometimes its government
policy that distorts incentives for the firms to behave in a certain manner; at other times, the firms do not
assess their intrinsic strengths appropriately. These tables point to directions of improvement. Interestingly,
mid-size firm in the South, particularly in Tamil Nadu, are starting to create a niche for themselves in terms
of developing competitive capabilities. Tamil Nadu is also seeing an emergence of large- scale or mass
manufacturing facilities - the NOKIA facility in Sriperambadur as well as the Triumph’s factory in Maraimalai
Nager (near Chennai) are example of plants that will eventually employ several thousand workers on the
shop floor and produce several tens of millions of pieces of products each year. The operations will be
largely manual (assembly oriented) and competing predominantly on cost. The need of the hour in the
country is to have a proliferation of such factories that employ large number of operators. The challenge,
however, will be to devise managerial systems to manage them productively while modifying labour laws
48
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Table 23: Strategic Fit for Various types of Firms in the Manufacturing Eco-system
Tiny Small Medium Large
Supplier to small
firms in cluster
Household level
distributed enterprises
largely supplying small
components to small
or medium size firms
Material supply from
customers
Innovation Centers
of the Manufacturing
Cluster - experimen-
tation on processes
innovation
Focus on Processes
– generate IP around
innovative processes
Use innovative
processes to deliver
higher value for
customer’s product
Generally, not involved
in product design &
development
Focus on large variety
and low volumes
Best poised for
innovative, medium
volume, medium
variety business
Foundations
established for a lean
strategy; most
benchmark
managerial practices
in place
Suppliers to large
and having small as
vendors
Have been innovative
thus far, now need
to add economies of
scale to its strength
Starting to move from
being a regional
distributor to a
national/international
distributor
Large volume, standard
product producer
Strong product
Innovation & R&D
More Investment in
Technology & Equipment
More employees with
advanced skills
Strong product design &
development
Broad Channels of
Distribution
Integrated Supply Chain:
coordination across multiple
plants & vendors
Own IT network with vendors
on this platform
49
Table 24: Regional Imbalances in Manufacturing Abilities
North South East West UP
R&D in select
domains
Customs/Cargo
Clearance
Performance
the best
Well developed
supplier networks
& small suppliers
Lean aware &
Implementation
high chiefly due
to auto industry
Some regions
in North are
innovative
process
developers
(e.g., NCR,
parts of Punjab)
Requires higher
investment to
upgrade
machinery
Highest Patenting/
trademark/design
registration Activity
Highest Investment
in Training
Higher Utilization of
IT on shop floors
including more
machine operators
using IT based
applications
Best availability of
technical employees
More involvement of
3P Logistics
suppliers
Weak Road
Infrastructure
Lean awareness &
Implementation high
chiefly due to auto
industry
Pretax profits &
returns on assets
lower
commensurate to
capabilities
developed
Emergence of
large scale
manual factories
Weakest Region
for Manufacturing
on several
counts (most
development
in metallurgical
industries)
Very low
investment in
R&D as a percent
of sales
Weak on IT
infrastructure,
customs/cargo
clearance times,
availability of
technically trained
manpower
Small enterprises
have declined the
most
Requires very high
investment to
upgrade
machinery
Logistics
practices &
transport
infrastructure
requires
modernization
Some R&D in
select domains
Poor investment in
training
Wide sectoral
base and
diversified
supplier networks
Best road
infrastructure
Lean awareness
primarily in auto
production region
Some regions in
West are innovative
process developers
(e.g., Pune, Rajkot)
Most developed
supply chains
(particularly
distribution
channels) though
use of IT for
managing them
low
Pretax profits &
returns on assets
highest
Low on most
counts
Foundations of
modern industry
yet to be es-
tablished - old
strengths eroded
Low on skills
(including
availability of
technical
employees)
though in-house
training by firms is
key source of skill
building
Low on IT
infrastructure
that will enable flexibility to the management while providing for social security to the employees. Table 24
presents a summary of strengths and weaknesses of different regions.
Next, we outline specific initiatives that firms, industry associations and government can undertake to
overcome some of the key impediments towards helping create world-class firms.
50
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Recommendations for Firms
Indian manufacturing companies need to increase the productivity of their plants. The trend is in the right
direction yet significant changes are not being witnessed beyond the top ten or so firms in each sector.
From a competitiveness perspective, this is not reflective of a widening of capabilities. Manufacturing
industries need both deep capabilities in firms as well as those stretching across multiple levels of the
supply chain. Often we have found that manufacturing firms are unable to map the key requirements in
terms of managerial processes that enhance productivity for themselves as well as for their vendors or
customers thereby failing to understand the implications of their performance on others in their supply
chain. Box 1a & 1b6 show how such processes can be mapped for firms at different levels of capabilities
(and size) in order to drive innovation and capability building in one of the industrial sectors under study,
i.e., the auto-component sector. It must be recognized that capabilities are built by firms individually. First,
the firms may map the capabilities of the partners in the entire supply chain (Box 1a) and then based on
the level of the firm and its manufacturing characteristics, a sequence of managerial initiatives for improving
productivity of the manufacturing and distribution entities can be implemented (Box 1b). This can become a
useful template for improving capabilities for each sector. Now we discuss some specific recommendations
for firms.
Initiatives that firms need to undertake in order to climb the ladder of capabilities are:
(a) Firms need to understand the sequence of managerial practices that need to be implemented
on their shop floors in order to develop competitive capabilities. In Figure 14 we list a triangle of
capabilities that discrete manufacturing must undertake going from the bottom to the top. In order
words, it presents a sequence of managerial practices that may be deployed on the shop floor in order
to improve the firm’s capabilities. Similar framework must be developed for the process industry as
well. This will help in systematizing efforts of the firms.
(b) The nature and extent of “training”, particularly of the operators, must improve dramatically. Training of
Supervisors on modern tools of manufacturing will yield higher benefits. Some ideas on training are as
follows:
* Training should be both managerial and technical
* Training both in-class and on the shop floor is a must for annual increments and promotion;
for supervisors, evaluation should include hours spent coaching and training in addition to
those spent learning oneself
* IT solutions must be sought for engineering skill upgradation - ICT intervention can come in
the form of content for automated self learning
* Night schools for operator training as well as coaching for higher level of diploma and degree
examinations
6Source: Chandra, P. et. al (2008) “IT Adoption in the Indian Auto Component Industry,” NASSCOM, New Delhi.
51
* Investment in training of operators and supervisors as percent of sales must be increased
* Training in the new tool of manufacturing, i.e., Statistics, should be made mandatory for
every engineer, supervisor or operator;
(c) Indian manufacturing is facing a severe shortage of trained manpower. Firms need to make
special efforts to bring women into the workforce – especially on the shop floor. Young educated
women from semi-urban centers, with adequate relevant training, would increase the pool of
skilled manpower in the country tremendously.
(d) Control the cost of land for factory/warehouse - firms may look at moving within a cluster to
reduce costs by sharing existing resources. In addition, existing expensive land can be leveraged
to buy cheaper land in clusters.
(e) Focus on reducing costs and improving innovation is a must imperative. More exposure required
to the Innovation Infrastructure like new technology, managerial practices especially quality,
technical seminars, technical developments in industry etc.
Box 1a: The Market-Size-Capabilities Classification of Auto-component firms
Firm Markets Firm Size
Current
Manufacturing Capabilities
LEVEL I
Predominantly Domestic Tiny to Small
Low
LEVEL II
Predominantly Domestic Small
Low
LEVEL III
Predominantly Domestic Small to Medium
Low to Medium
LEVEL IV
Predominantly Domestic, some
Export
Medium
Medium
LEVEL V
Domestic and/or Export Medium to Large
Medium to High
52
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Box 1b: Map of the Manufacturing & Distribution Processes for Different Category of
Auto-Component firms
Manu-
facturer
Category
Manufacturer
Characteristics Manufacturing Management
Distribution Process
LEVEL I
(Tier 3
Supplier)
s /RDERPROCESSEDBY
the higher tier
s 0RODUCTIONPLANNING
by the customer
s "LUEPRINTPROVIDED
by the customer
s $EDICATEDSUPPLIER
s 3INGLEPLANT
s (OUSEKEEPING3
s 1UALITYINSPECTION
100% OK plant dispatch
s 4RACEABILITYOFMATERIALSORDERSTO
batches
s 0ICKUPBYTHECUSTOMER
s ,OCALDELIVERY
LEVEL II
(Tier 3
Supplier)
s /RDERPROCESSED
by the higher tier
s 0RODUCTIONPLANNING
by the customer
s "LUEPRINTPROVIDED
by the customer
s $EDICATEDSUPPLIER
s 3INGLEPLANT
s 0ROCESSANALYSISFORCAPACITY
evaluation
s %STABLISHTIMESTANDARDS
(industrial engineering)
s %STABLISHPROCESS
capabilities
s 0REVENTIVEMAINTENANCE
s 0ICKUPBYTHECUSTOMER
s ,OCALDELIVERY
LEVEL III
(Tier 2
Supplier)
s
Order processed
by the higher tier
s 0RODUCTIONPLANNING
by customers
s "LUEPRINTPROVIDED
by the customer
s $EDICATEDCAPACITY
for several customers
s 3INGLEPLANT
s )3/CERTIlCATION
s 6ALUEENGINEERING
s 1UALITYCONTROL
s 7)0CONTROL
s 3TANDARDCONTAINERSPOKEYOKE
s $ESIGNSUPPORT
s #OSTING
s 3UPERVISORTRAINING
s 0ICKUPBYTHECUSTOMER
s ,OCALDELIVERY
LEVEL IV
(Tier 2
Supplier)
s /RDERPROCESSING
production planning
by the manufacturer
s &ORECASTINGORDERS
s -ODIlCATIONTOBLUE
prints
s -ULTIPLECUSTOMERS
s -ULTIPLE0LANTS
s 'LOBALDELIVERY
s #ELLULARLAYOUT
s 3INGLEPIECEmOW
s -ULTIPLEMACHINEOPERATORS
s 3TATISTICALPROCESSCONTROL
s 4OTALPRODUCTIVEMAINTENANCE
(initiation)
s %NVIRONMENTQUALITY
s $ESIGNDEPARTMENTMULTIPLE
requirements, design
modifications & CAD drawings
s /PERATORTRAINING
s $ELIVERYTOCUSTOMER
locations
s .ATIONALVENDORS
s 2EQUIREINVENTORY
management
LEVEL V
(Tier 1
Supplier)
s /RDERPROCESSING
production planning
by the manufacturer
s &ORECASTINGORDERS
s /WNDESIGNS
blueprints
s -ULTIPLECUSTOMERS
s -ULTIPLEPLANTS
s *)4OR0ULLDELIVERY
s 0ARTOFGLOBALSUPPLY
chains
s 4OTALPRODUCTIVEMAINTENANCE
s ,EANMANUFACTURING
s *)4ORPULLPRODUCTION
s 1UICKRESPONSE
s %NVIRONMENTQUALITY13
s 3TRONGDESIGNDEPARTMENT
library or designs, proprietary
designs, IPR on designs, proto-
type laboratory, CAD/CAM
systems
s %XTENSIVEOPERATORTRAINING
s .ATIONALSUPPLYCHAIN
s *)4DELIVERY
s .EEDTOMANAGENA-
tional warehouses
s ,OGISTICSFUNCTION
s /%-REPLACEMENT
markets
s 7ARRANTYPRODUCT
recall systems
s 3TRONGSUPPLYCHAIN
coordination
53
Figure 14 : Ladder of Capabilities for Discreet Part Manufacturing
Pull Production
Value
Engineering
TPM
ISO
Preventive Maintenance Housekeeping (5S)
Process Analysis
Control WIP
Movement
Tool Room
Maintenance &
Instrumentation
SPC
(f) Strong focus required on measuring correctly and controlling lead times - manufacturing
cycle times, order delivery times, fill rates, supplier delivery times, internal order transaction
times, material movement time, on time delivery etc.
(g) Most small and medium size firms must focus on Process Innovation and a few medium and
large may invest in Product Innovation.
54
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Recommendations for Industry Associations
While there are islands of excellence in various sectors of industry that have capabilities to compete
globally, the industry associations have failed miserably. They have either been captured by the larger firms
to serve their own interests or have become lobbying platforms for the industry as a whole - their role in
building capabilities through systematic interventions in member firms has been minimal. The opportunity
for these associations to create industry benchmarks, do collectively what individual firms are unable to
do, develop common initiatives and facilities especially in industry clusters, etc. is high and the need is
overwhelming. Lack of fruitful initiatives either stem from lack of professionalism in managing the affairs of
industry associations or inability to think out of the box or due to lack of trust between its members. The
industry associations have to re-invent themselves.
Several initiatives can be undertaken by them. Some of these are:
(a) Given the downturn in the global economy as well as competition in prominent global markets, there
appears to be a need to identify intermediaries who will help Indian manufacturing firms to ‘squeeze
into’ new markets. Develop intermediaries who will take Indian goods and services especially of small
producers abroad - individual traders or agents who represent many small firms.
(b) Organize exhibitions and marketing efforts for small and medium-size firms as well as firms that are
not located in clusters. Strengthen the various industry fairs that are organized in the country.
(c) Establish IT based manufacturing programmes in ITIs that prepare students on PLC systems and
data manipulation, robotics and IT manipulation, engineering services automation and design, fly-
by-wire simulation etc. - this could be a cluster effort jointly implemented by the auto-component and
IT industry associations. This will help develop new skills that the industry requires.
(d) Develop cluster based initiatives for each sector:
i. Help develop Supplier Associations in various clusters to become agents of Cost, Quality,
Delivery, and Flexibility improvements.
ii. Cluster initiatives like joint procurement of raw material/machinery, establishment of common
testing facilities will cluster training initiatives will help address the “Cost” of operations;
iii. Focus on the “Quality” of domestic market and initiate a new domestic quality standard (i.e.,
ISO like certification domestically) that will help those that are not able to secure International
certification;
iv. Offer services to firms to map their activities that will help them identify “Delivery” related
bottlenecks. Industry Associations must create Industry Awards for firms that have never delayed
a delivery to their customers;
55
v. Announce new R&D Initiatives - core technology support especially for small firm through the
industry associations - help create strategic alignment (“Flexibility”). Create a mission oriented
competition amongst member firms with adequate mentorship. For most firms, process innovation
will build competitive capabilities - industry associations can encourage firms to undertake
process enhancements.
Industry associations recognize their firms for financial performance or aggregate innovativeness. There
is a strong need to recognize firms for specific operational performance even if it just to highlight the
need to focus on these parameters.
(e) Create Market for Innovations - innovations, in addition to generating tacit knowledge and competitive
advantage in the market for the firm, are also intellectual property that can be traded for financial
benefit to the firm. For example, small firms can continuously experiment on the process side or on
product design on behalf of their customers and once an improvement is achieved, can sell it or lease
it to the customer. Industry Associations can grant “stop-gap/short duration recognition” to these
innovative firms (till they file a patent, if they do) or facilitate formation of these linkages between
developers and users of innovation. This will considerably help change the role of small firms from
becoming ancillaries to medium or large size firms to becoming powerhouses of innovation and the
R&D arms of large and medium firms. Then the linkage between the small, medium & large will be
most productive.
(f) Support and develop a new architecture for small producers – create an architecture based on a
network of tiny and small firms especially in rural areas where one village produces one type of
product (i.e., component) - “ONE VILLAGE, ONE PART.” This will help in building of collective
capabilities and skills at the village level, will ensure that villages do not compete with one another
ruthlessly (but firms within the village will compete), will ensure that once a new process or technology
is developed or introduced in the village - all the firms will have the chance to adopt it and modernization
will be continuous, will ensure that quality intervention can be similar as well as less costly and cluster
quality can also be easily compared or certified. This will help identify the village cluster with a specific
part and related processes. This could become a strong entry strategy for a rural cluster.
(g) Develop programmes to link SMEs in India to technology driven SMEs (technology driven) outside
India (e.g., TAMA in Japan7). This will help the growth of innovative firms in India.
(h) Lean practices must take root in sectors other than those related to auto. Industry associations have
not paid enough attention to productivity enhancing practices.
(i) Promote R&D and design engineering especially in engineering colleges – need to provide advanced
computer based tools that will train young engineers on the fundamentals and principles of design
and R&D rather than on software (which they can learn in the firm they work with).
(j) Lead the Industry by helping improve training intensity through evening classes, on the job training
7See Chandra, P. (2005) “Organizing Small Producers for Technological Innovation: Some Models.”
56
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
modules, and computerized self-learning opportunities. Start Simple Manufacturing Programmes for
small and medium sector like: Identify Waste on Shop Floors, Halve your Lead Time, Reduce Delays
at To & From Vendors, How to Reduce Your Material Movement, Freeing Up Working Capital,
Making Excel Sheets Show Your Shop Floor’s Performance, How to Never be Late in Delivery,
Plotting Charts, Identifying Shop Floor Errors, Planning For Production, Organizing Flow of Material
on Shop Floor, Accounting Decisions vs Production Decisions, Using Measuring Instruments, Planning
Meetings, Resolving Problems during Standing Meetings on the shop floor etc. These programmes
are as much meant for engineers as for shop floor supervisors and workers. Many of these learning
programmes can be taught through 10-15 minute long video films or computer-based training
programmes - the films can be running in the background over large screen in dining facilities during
lunch and tea breaks - alternatively, they can be shown during morning assemblies. Industry
association can help get these films made for distribution to firms. Our feeling is that a large number
of manufacturing firms do not have the basics of manufacturing management - while the owner/
manager has attended some training programmes, there has been no or low investment in training
of workers - this is where productivity gains have to be made through training.
(k) Industry associations must be managed by professional managers who see a career in helping firms
in the industry build capabilities and not by part time managers who are owners of firms.
57
Recommendations to Policy Makers
The current economic downturn is requiring responses from government that are not only inclusive but
also based on building skills and employment in a fairly short period of time. Attention is required in three
specific areas: employment, skills, and market linkages. First, there are a large number of people migrating
from rural and semi-urban centers to larger cities and clusters in search of employment. Given that most of
these are young adults who have not worked before and not schooled appropriately or are farm workers,
they predominantly seek jobs in the low end of the manufacturing sector. Unless the manufacturing sector
grows, most of these job seekers will not be able to find any opportunity to seek a livelihood. There is, at
the same time, a growth in the number of engineering graduates who would in large numbers join the IT
services sector earlier but are now looking from job opportunities back in manufacturing and related sectors
like logistics, R&D etc. This brings us to the second issue – skills. A large percentage of these job seekers
are unskilled and do not have the requisite capabilities to either get jobs or contribute to the manufacturing
productivity. Firms are reluctant to hire such people and find it unattractive to train them on the job. The
low skills of these job seekers is going to have a very detrimental effect both in the short and the long run
on manufacturing quality, productivity and GDP. The third area of concern that requires attention is creation
of market linkages. Enterprises, particularly the small, at this juncture require support in terms of orders to
survive. Government procurement could be done in a strategic manner by involving a large number of Small
and Medium Enterprises (SMEs) there by helping augment the market linkages for these firms. Defence
procurement or those required for public infrastructure stand as good candidates for planned buying from
SMEs.
Government policies over the last several years have been progressively becoming industry oriented and
have been freeing up firms to compete. However, they have focused mostly on removing tariff barriers
both within the country and outside to ensure smooth flow of material as well as developing the necessary
infrastructure for producing and carrying goods across the country. However, they have completely ignored
the processes necessary to enable firms to build competitive organizational and managerial strengths –
leaving them completely to the firms and hoping that market forces will address them. Unfortunately, this
is where market failures have been immense in Indian manufacturing. Policy that support building of these
capabilities will go long ways in sustaining any competitive edge that Indian firms might develop. Appendix
III of this report gives a list of comments provided by sample firms in different sectors of policies that act as
hurdles to their competing globally.
Policy initiatives that would help in that direction are:
(a) Given the shortage of skilled manpower in the country, it is urgent that we pass adequate laws to
remove all obstacles for hiring of women in all shifts on shop floors. A emerging nation cannot build a
modern manufacturing industry by excluding a significant part of its skilled population.
(b) Enabling legislation/orders are required to ensure that Education & Training in Science & Engineering
is reformed at the earliest both in educational institutions as well as in companies. Some suggestions
are as follows:
58
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
i. Educational Institutions need autonomy from the government so that they are able to attract the
best of young faculty and can design their own innovative academic programmes. Engineering
education requires more practice oriented and action oriented courses;
ii. Vocational Education reforms needs to be undertaken urgently;
iii. Training programmes of Companies should be re-designed and certified as equivalent to ITI diploma
– firms may be given the authorization to grant the diploma;
iv. Establish Tax driven training escrow fund – a fraction of the tax paid by a firm can be kept in an
escrow fund which can be redeemed by a firm for every hour that it trains its own employees –
this will increase the incentives of firms to spend more time on training and the country will gain by
an increase in skill level;
(c) Government procurement processes should help create linkages with small and medium enterprises.
Orders in hand should be considered as collateral for working capital loans by banks.
(d) Every district must have a state-of-art technical training centers and prototyping centers (versions of
these have existed in the past but have become defunct) to be established in a PPP mode. This is
an essential part of the industrial infrastructure of the country and is largely missing at this juncture.
(e) In order to increase investment in plant & equipment, a Technology Upgradation Fund or TUF
(similar to the one that exists in the Textile sector) like facility should be made available to all sectors
but with specification of targets to be achieved by each beneficiary firm on Cost, Quality, Delivery ,
and Productivity.
(f) The Scale of Operations of most firms need to increase. Simultaneously, firms must learn to operate
with smaller margins in order to win bigger orders – this is also facilitated with an increase in scale.
Implementation of this suggestion would require a reduction in the cost of credit as well as loosening up
of labour laws.
(g) There is a need to develop high speed movement corridors for goods especially for export purposes
between the factory and the ports. Publish statistics on Lead Time/Turn Around Time as a key measure
of performance for this kind of infrastructure.
(h) Develop national digital network for transfer of data, funds and compliance documents seamlessly
between participating firms, between firms and banks, between firms and government etc.
(i) Establish a large number of manufacturing clusters based on distinctive eco-system capabilities
including a new architecture for small producers especially in rural areas – this would be a network
of firms that complete the eco-system with the principle of one village, one product. Develop prototype
centers, design firms, infrastructure firms, banking facility, logistics firms, machinery maintenance
centers within each cluster.
59
(j) Simplification of startup and closure rules for firms– all permissions must be given at one location and
transactions completed within 30 days of submitting an application. Small firms have to spend too
much of time in creating/maintaining paperwork for tax/excise and other purposes – templates of data
required must be developed for each sector. Also establish a target for turnaround time reduction at
customs & cargo clearance at ports & airports.
(k) Quick dispute resolution required out of the court system.
(l) Need to reform transport & transport infrastructure – this sector is very unorganized, very in-efficient
and uses low quality equipment which results in damage of both the road infrastructure as well as the
goods that they carry. Large transport companies must be encouraged to be setup facilities with newer
equipment as well as new practices.
(m) Bring back significant import substitution awards.
(n) Need to establish funds to facilitate merger of small firms in order to help create viable mid-size firms.
(o) Support for consulting services to small and micro enterprises in rural areas as an extension service
especially to groups of firms.
(p) National clearing house on manufacturing – a portal that links buyers and producers amongst SMEs,
listing projects done by engineering students and engaging engineering students to undertake projects
for these firms.
(q) Invite key firms from China, e.g., in the garments & textile sector to setup plants in India so that we can
learn on how large scale manufacturing is executed. There is a strong case for benchmarking Japanese
and Chinese manufacturing firms – it must be undertaken as a national mission. We must try to understand
what are the key enabling factors in the success of manufacturing firms in Japan, Korea, Taiwan,
Singapore, China etc.
(r) Establish an Industrial Commission to evaluate Global Competitiveness of firms in several sectors by
looking at specific technology developments in India, state of technology in Indian firms, manufacturing
& labour practices and capabilities, linkages with other sectors, specific policies that support or retard
growth, education & training levels etc. This Commission should comprise of best of academic minds
in Management, Labour Relations, Engineering, Sociology, Organizational Theory etc.
60
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
61
Appendix I
Regionwise Distribution of Internal Barriers that Act as Hurdles to Innovation in the Plant
62
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
NORTH SOUTH
INTERNAL BARRIERS
Average
Rating
INTERNAL BARRIERS
Aver-
age
Rating
Pressure for short-term results / lack
of long-term (5 years or more) think-
ing
1.71 Pressure for short-term results / lack of
long-term (5 years or more) thinking
2.25
Inadequate reward for Innovation 1.69 Insufficient company budget
allocation to innovation
2.125
Lack of an organisational focus on
innovation
1.66 Skill shortages due to lack of effective
in-house training programmes
2.02
Skill shortages due to lack of
effective in-house training
programmes
1.56 Lack of talent 1.96
Insufficient company budget
allocation to innovation
1.53 Resistance to change among other
employees
1.92
Lack of talent 1.52 Problems in measuring innovation
activity & results
1.86
Failure to keep apace with
technological changes in the
industry
1.49 Failure to keep apace with
technological changes in the industry
1.80
Lack of time 1.48 Existence of traditional organisational
hierarchies and functional silos
1.73
Problems in measuring innovation
activity & results
1.44 Lack of an organisational focus on
innovation
1.62
Resistance to change among
other employees
1.43 Lack of time 1.61
Existence of traditional
organizational hierarchies and
functional silos
1.43 Any Other 1.6
Low levels of stakeholder
involvement in the innovation
process
1.33 Failure to innovate successfully
in the past
1.57
Poor understanding of customer
needs and market dynamics
1.32 Inadequate reward for Innovation 1.55
Failure to innovate successfully in the
past
1.26 Resistance to change among top
management
1.47
Resistance to change among top
management
1.18 Low levels of stakeholder involvement in
the innovation process
1.38
Penalty for failure 1.16 Poor understanding of customer needs
and market dynamics
1.32
Any Other 0.25 Penalty for failure 1.21
63
EAST WEST
INTERNAL BARRIERS
Average
Rating
INTERNAL BARRIERS
Average
Rating
Lack of an organisational focus
on innovation
2.44 Any Other 1.53
Poor understanding of customer
needs and market dynamics
1.75 Pressure for short-term results / lack of
long-term (5 years or more) thinking
1.51
Low levels of stakeholder
involvement in the innovation
process
1.27 Problems in measuring innovation
activity & results
1.40
Resistance to change among top
management
1.18 Lack of talent 1.36
Pressure for short-term results /
lack of long-term thinking
1.17 Skill shortages due to lack of effective
in-house training programmes
1.34
Lack of talent 1.05 Insufficient company budget allocation
to innovation
1.34
Existence of traditional
organisational hierarchies and func-
tional silos
0.99 Resistance to change among other
employees
1.28
Problems in measuring innovation
activity & results
0.99 Existence of traditional organisational
hierarchies and functional silos
1.20
Lack of time 0.97 Lack of time 1.18
Resistance to change among
other employees
0.95 Lack of an organisational focus on
innovation
1.08
Insufficient company budget
allocation to innovation
0.90 Inadequate reward for Innovation 1.07
Skill shortages due to lack of
effective in-house training
programmes
0.87 Resistance to change among top
management
1.04
Failure to keep apace with
technological changes in the
industry
0.76 Low levels of stakeholder involvement
in the innovation process
0.99
Penalty for failure 0.76 Failure to keep apace with
technological changes in the industry
0.95
Inadequate reward for Innovation 0.67 Failure to innovate successfully
in the past
0.87
Failure to innovate successfully
in the past
0.59 Poor understanding of customer
needs and market dynamics
0.76
Any Other 0.33 Penalty for failure 1.21
64
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
UP
INTERNAL BARRIERS
Average
Rating
Inadequate reward for Innovation 2.47
Skill shortages due to lack of
effective in-house training
programmes
2.01
Lack of talent 1.99
Pressure for short-term results / lack
of long-term (5 years or more)
thinking
1.99
Lack of an organisational focus on
innovation
1.97
Insufficient company budget
allocation to innovation
1.92
Low levels of stakeholder
involvement in the innovation process
1.84
Existence of traditional organisational
hierarchies and functional silos
1.84
Poor understanding of customer
needs and market dynamics
1.76
Failure to keep apace with
technological changes in the industry
1.74
Lack of time 1.71
Penalty for failure 1.69
Resistance to change among other
employees
1.66
Problems in measuring innovation
activity & results
1.65
Failure to innovate successfully
in the past
1.63
Resistance to change among
top management
1.42
Any Other 0.50
65
APPENDIX II
Regionwise Distribution of External Barriers that Act as Hurdles to Innovation in the Plant
66
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
NORTH SOUTH
EXTERNAL BARRIERS
Aver-
age
Rating
INTERNAL BARRIERS
Average
Rating
Any Other 3.83 Indequate tax incentives for
investment in innovation
2.60
Excessive government regulation in
your industry
2.29 Capital intensiveness of innovation
in the industry
2.35
Inadequate tax incentives for
investment in innovation
2.04 Excessive government regulation
in your industry
2.24
Capital intensiveness of innovation
in the industry
1.80 Long time taken for innovations to
reach the market
2.18
Lack of cooperation with other
firms in the industry
1.74 Lack of effective collaboration
between your industry
2.14
Insufficient external pressure to
innovate
1.70 Insufficient external pressure to
innovate
1.87
Lack of effective collaboration
between your industry
1.64 Lack of cooperation with other
firms in the industry
1.85
Long time taken for innovations to
reach the market
1.62 Lack of information on technology 1.74
Lack of information on technology 1.53 Difficulty in finding partners 1.74
Difficulty in finding partners 1.46 No demand for innovation 1.69
No demand for innovation 1.40 Weaknesses in the current Indian
IPR regime
1.60
Weaknesses in the current Indian
IPR regime
1.30 Any Other 0.67
67
EAST WEST
EXTERNAL BARRIERS
Average
Rating
INTERNAL BARRIERS
Average
Rating
Excessive government regulation
in your industry
1.97 Any Other 3.7
Capital intensiveness of
innovation in the industry
1.96 Indequate tax incentives for
investment in innovation
2.5
Insufficient exterl pressure to
innovate
1.60 Capital intensiveness of
innovation in the industry
2.5
Long time taken for innovations
to reach the market
1.20 Excessive government regulation
in your industry
1.8
Lack of information on technology 1.14 Lack of effective collaboration
between your industry
1.5
Lack of cooperation with other
firms in the industry
1.09 Long time taken for innovations to
reach the market
1.5
Lack of effective collaboration
between your industry
0.89 Lack of cooperation with other
firms in the industry
1.4
No demand for innovation 0.88 Weaknesses in the current Indian
IPR regime
1.4
Indequate tax incentives for
investment in innovation
0.80 Insufficient exterl pressure to innovate 1.4
Weaknesses in the current
Indian IPR regime
0.71 No demand for innovation 1.3
Difficulty in finding partners 0.67 Difficulty in finding partners 1.2
Any Other 0.00 Lack of information on technology 1.1
68
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
UP
EXTERNAL BARRIERS
Average
Rating
Excessive government regulation
in your industry
2.45
Indequate tax incentives for
investment in innovation
2.36
Lack of cooperation with other
firms in the industry
2.25
Insufficient exterl pressure to
innovate
2.24
Capital intensiveness of innovation
in the industry
2.24
No demand for innovation 2.02
Lack of effective collaboration
between your industry
2.00
Difficulty in finding partners 2.00
Long time taken for innovations to
reach the market
1.95
Lack of information on technology 1.88
Weaknesses in the current Indian
IPR regime
1.70
Penalty for failure 1.69
Resistance to change among
other employees
1.66
Problems in measuring
innovation activity & results
1.65
Failure to innovate successfully in
the past
1.63
Resistance to change among top
management
1.42
Any Other 0.50
69
APPENDIX III
Government Policies in Different Sectors that Act as Hurdle to Firms’ Competing Globally
70
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
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s ,ABOURLAWS
s (IGHEXCISEDUTIES
s (IGHINTERESTRATE
s )MPORTDUTY
s &REIGHT#OST
s 3ALES4AX
s #346!4
s )NSPECTORVISITSANDCORRUPTION
s $OCUMENTATIONFOR$%0"
s !QUIRINGNEWTECHNOLOGY
s #OMPLICATED)4LAWSFORMANUFACTURINGUNITS
such as FBT etc.
s %XCESSIVEPAPERWORKSFOR%/5S
s %XCHANGERATEmUCTUATIONS
s %8)-0OLICIES
s 'OVT!GENCY#LEARANCE
s %XTREMELYHIGHTAXESANDHARRASSMENTBYALLGOVT
departments
s (IGHCOSTOFLAND
s (IGH#OST/F0OWER
s (IGHINPUTCOSTSBOTHLOCALLYANDINTERNATIONALLY
s ,ACKOFCLARITYINRULESLEADINGTOINTERPRETATION
s /CTROIISTHEMAINPROBLEM%VENAFTERSALEIFWE
get the product for repair, we have to pay octroi
s POORINFRASTRUCTURE
s 0OWER3HORTAGE
s 0ROCEDURALDELAYSINARRANGINGDUTYFREELICENCES
for infontmetl and permission from central excise
for removal of goods without payment and
excise duty
s PROCESSINGFEESSHOULDBEREDUCED
s 3TRICTCOMPLIANCETOCENTRALVIGILANCECOMMISSION
circulars and scrutiny of all decisions by internal
vigilance audit and cost of India audit
Steel Forging & Casting
s ,ABOURLAWS
s #USTOMSLAWSREDUCINGSPEEDOFIMPORT
and export
s (IGHCOSTOFBORROWINGINCLUDINGSHORT
repayment term of loans
s &REQUENTmUCTUATIONIN3TEELPRICE
s %XCISEDUTY
s .OBENElTSFORNEWENTREPRENEURS
(lack of awareness)
s 3TATESALESTAXRULESANDPROCEDURES
s (IGHINTERESTRATES
s (IGHERTRANSACTIONCOSTS
s #ONTROLONMAJORRAWMATERIALPRICELIKE
iron ore, coke etc.
71
Food & Agro Processing Forging & Casting
s ,ABOURPOLICY
s &OOD,AW
s 4AXATION6!4
s /CTROI
s !GRICULTURALPOLICYONPROCUREMENTSTORINGOF
wheat
s !YURVEDICLICENCEPOLICYAREVERYTOUGH
s "4#OTTON0OLICYISSUESRELATINGTOIT
s $ELAYINREBATE
s %XCESSIVEGOVERNMENTCONTROLONALLASPCETS
from raw material cost to sale price
s %XCHANGERATEmUCTUATION
s %XCISEDUTIES
s %XPORT0OLICY
s 'OVTISVERYSUPPORTIVEINALLASPECTS
s 'OVTRESTRICTIONSONSUGARCANEAREACANE
price
s 3ERVICETAX
s 3UGARQUANTITYRELEASEIMPORTSEXPORTPOLICIES
s 4AX%XEMPTIONONIMPROVEDPRODUCT
s 4RANSIT4RADE
s 4RANSPORTATIONTIMINGIN$ELHI
s 7HEATMOVEMENTSTOCKING
s 7HEAT0RODUCTIONPOLICY
s ,ABOUR,AWS
s #OMPLEXITYINTAXSTRUCTUREANDHIGHCUSTOMS
duty
s #OSTOFPOWERANDINTERESTISVERYHIGHASCOM-
pared to China
s #USTOMSRELATEDPROBLEM
s 3ERVICE4AX
s 4AXESONRAWMATERIAL
s 6!4
s !VAILABILITYOFCAPITALFORINVESTMENTANDBANKING
procedures
s #OMPLEX0ROCEDURESTOBEFOLLOWEDFOR
Eou
s 'OVT0OLICYONTHEWASTEMATERIAL
s ,ACKOFTECHNICALUPGRADATIONINKNOWLEDGE
s 0URCHASEPROCEDURES
s 2$ANDPROFESSIONALSKILLSOFSTAFF
s 2OAD0ERMITSYSTEM
s 3ALESTAX
s 3TEELPLASTICPRICESAREINCREASING
s 3EPARATELAWSFOR"IGCOMPANIESAND3MALL
Companies
72
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey
Chemicals Engineering
s 'OVTINTERFERENCEREGARDINGLABOURLAWS
s (IGHERRATESOFDUTYONPACKAGING
material imports
s ,OPSIDEDDUTYSTRUCTUREDUTYONRAW
materials higher than finished goods
s )MPORT%XPORT0OLICIES
s +ILLINGOFUNIQUEVALUEADDING
technological units by the financial
institutions forcing units to close
s ,ACKOFEFFORTSBYGOVTAGENCIESTO
put unproductive assets of thousand of
crores of closed units to bring into
productive stream
s ,ACKOFINFORMATIONDELIVERY
mechanism by the govt. agencies to
industry
s ,ICENSETOEXPAND
s -ULTIPLETAXESENTRYTAXHIGHERVAT
rates, current cst regime)
s /CTROION2-
s 0OLLUTIONNORMS
s 3%:POLICYOFTAXATIONONSALETO
DTA market makes us uncompetitive
s 3HOULDSUPPORTEXPORTS
s 3UBSIDYCONCESSIONPOLICYOFTHEGOVT
s 4AXREGULATIONRELATINGTOIMPORTOFMATERIAL
for the purpose of export
s ,ABOURLAWS
s #OMPLICATEDTAXSTRUCTURE
s #USTOMDUTIESONRAWMATERIALS
s (IGHERTAXESEXCISEAND6!4INSPITEOF
wood saving alternative to improve
environment
s )MPORTDUTIESHIGHERTHANMOSTOTHER
coutries)
s SSIRESERVATIONS
s 7IDEmUCTUATIONSINPRICESOFRAW
materials in aluminium and steel
s !DVANCELICENSINGPROCEDURE
s !RTIlCIALPRICINGOFDIESEL
s ,ACKOFMONITORINGOFDUMPINGBY
foreign company for price & delivery
competitiveness
s %XPORTOBLIGATIONDOCUMENTATIONTOBE
simplified to reduce indirect cost
s &INANCEVERYPOORASSISTANCETOSMALL
s )NPUTCOSTRAWMATERIALISCOSTLYTHAN
China
s INSPECTIONSPECIlCATIONS
s (IGHINTERESTRATES
s ,ACKOFUNIlED6!4MAKESOURPRODUCT
more competitive
73
Spinning Weaving
s %XCISEANDCUSTOMSDUTYSTRUCTURE
s ,ABOURLAWSNEEDTOBEREFORMED
s )NFRASTRUCTURALPOLICY
s 4OOMANYLEGALFORMALITIES
s )MPORT%XPORTDUTIES
s 2ISINGDYEPRICES
s /VERALLVERYFAVOURABLEPOLICIESASWEARE
100% export unit
s #HECKONLOWQUALITYIMPORTS
s 4AXESAREINCREASINGTHECOSTOFPRODUCTION
s $%0"
s 0OWER#OST
s #APITAL)NTENSITYANDHEAVYCAPITALREQUIREMENT
s )NTERESTRATES
s %XCISEDUTIES
s 3ALESTAX
s )NCOMETAX
s 4OOMANYFORMALITIESAPPROVALIN)NDIATHEREARE
many taxes
s 2AW-ATERIAL3TABILITYNOTINUSE
s 6!4#34DUTIESLEVIESARENOTREFUNDABLEON
time
s ,ABOUR,AWS
s $OLLAR6ALUE2EGULATION
s ,ABOUR0OLICY
s %XPORT,IMITATION#OTTONEXPORTPOLICY
s ,ABOUR,AWS
s ,ACKOFPOWERREGULATION
s %NTRYTAXINOURSTATEFORRAWMATERIAL
s (IGHERRATEOFINCOMETAXONEXPORTEARNINGS
s #ORRUPTION
s &RINGEBENElTTAXWHICHISUNNECESSARY
s )MPORT$UTIES
s %XCESSIVELABORWAGE
s *UTEPACKAGINGCOMPULSIONININDIA
s (IGHRATESOFDUTIESANDTAXES
s 0OORMARKETINGSUPPORT
s $OCUMENTATIONINBANKS
s $%0"RATE
s %NTRYTAXONPROCUREMENTOFYARNFROMOUTOF
state. It is 4% imposed by state govt.
s /CTROIIMPOSEDBYSTATEGOVTONINPUTSWHICH
are sent to out for job work as well as repair work
s -AHARASHTRACOTTONPROCUREMENTPOLICY
s LACKOFTRAININGINSTITUTESFORWORKERSINGARMENT
industry
74
Competitiveness of Indian Manufacturing: Findings of the Third National Manufacturing Survey