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The Benefits and Challenges of Manufacturing in India

Posted by Jessica Hoyt on Mar 8, 2017
Jessica Hoyt
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Screen Shot 2017-03-07 at 9.18.02 PM.pngAs India aims to become a top manufacturing hub, India is on the threshold of major reform. India is poised to rank among the top three manufacturing locations by 2020. If you are considering locating or moving your manufacturing operations to India, there are many good reasons to do so.

India boasts a large engineer and factory worker population, respectable intellectual property protections, and easy access to English-speaking managers and executives. The upcoming legal and tax reforms and significant manufacturing infrastructure investments will only add to this list of goods reasons to manufacture in India. This article will briefly lay out the current Indian manufacturing landscape and explain the benefits and challenges of manufacturing in India.

Indian Manufacturing Landscape

During the past decade, the Indian economy focused on services rather than manufacturing. The Indian manufacturing industry was stagnant for many years, and for the 2013-2014 financial year showed a negative growth. Because of this, in 2014, the Indian Prime Minister launched the Make in India Campaign. The aim of the Make in India Campaign is to transform India into a global design and manufacturing hub. In pursuit of this, India is focusing on the development of its infrastructure, increasing and/or tailoring its talent pool to the needs of the manufacturing industry, attracting investment through aggressive foreign direct investment initiatives, and increasing the ease of doing business through legal and tax reform.

Below is a brief description of the major manufacturing hubs in India. Although all of the areas discussed below need significant infrastructure, including roads, rail, airports, and power and water improvements, most are already attracting significant investment, which will increase their manufacturing power and capacity.

Greater Noida (Uttar Pradesh) is India’s best auto manufacturing hub. It’s location and connectivity, on the outskirts of New Delhi, and consistent supply of resources have attracted big international companies such as Yamaha, Honda Siel Cars, and LG Electronics India.

Nashik (Mumbai), located approximately three (driving) hours northeast of Mumbai, has electrical engineering and auto components industries. This location is well connected to two roads and airstrips, but no airport.

Manesar, Haryana (Chandigarh), located about an hour (driving) southwest of New Delhi, is another favored auto manufacturing hub. It is well connected to roads and railway. Infrastructure reform is underway to increase its manufacturing power and capacity.

Hospet (Bangalore), located in south central India approximately five (driving) hours north of Bangalore, is a major steel and iron manufacturing hub. Hospet has recently attracted huge investment that will continue to grow its manufacturing power and capacity. Apple recently announced its decision to set up a manufacturing plant in Bangalore.

Aurangabad (Mumbai), located approximately six hours (driving) east of Mumbai, is the manufacturing hub for major healthcare, including pharma, and brewing companies.

Benefits of Manufacturing in India

Make in India Campaign: The Make in India Campaign means the Indian government is putting a high priority and lots of attention on the manufacturing industry, including significant investment and development. This will make India an even more attractive manufacturing choice, and alleviate some of the challenges listed below.

Familiar Legal System: The Indian commercial law system is based on British common law, which is most similar to the US legal system. Although there are some regulatory hurdles, a similar system makes it easier to understand for people from other common law countries (like the US).

Cheap Labor: Manufacturing labor is very cheap in India, even compared to China. In 2014 the average cost of manufacturing labor per hour was $.92 in India and $3.52 in China. While this cost seems much lower, you have to take into account the extra costs you will incur due to India’s significantly worse and more expensive transportation, power, and water costs.

Availability of Labor: India has a huge labor force (nearly 500 million people), which includes unskilled workers as well as a rich talent pool of skilled worker, such as researchers and engineers, capable of lending cost-effective research and development support to manufacturing operations. Last year the Wall Street Journal reported that 12 million people enter the Indian labor market each year. Furthermore, India has the second largest English-speaking population in the world, behind the US of course.

High Quality Production: Most Indian factories produce high quality goods because they use high quality (Japanese) equipment and tools and they take pride in their work. Many Indian factories are family-run and well-known for the care and transparency of their work and business dealings. Unlike China, India does not carry the stigma of poor quality production.

Domestic Market: India has an attractive domestic market that will be easier to enter and compete in with in-country manufacturing operations. Even if this isn’t your primary goal, it will open up a new market for you to take advantage of.

Challenges of Manufacturing in India

Power availability: Low power availability is a major drawback to manufacturing in India. Power is not generally available 24 hours per day, which can significantly decrease productivity and efficiency, and lower output rates. Furthermore, the power that is available is expensive.

Cost and Fragmentation of Transportation and Logistics: Transportation is expensive and slow in India. It can take weeks to get products to the coasts from some places in India. Furthermore, logistics are subpar. The upside is that the Indian government recognizes this problem in infrastructure and is working to fix it. Unfortunately, India ports are not used to their capacity, being close to the coast isn’t necessarily an advantage.

Labor Productivity: Labor productivity is lower in India than many competing manufacturing countries. Labor productivity is lower because of India’s lag in production planning, supply chain management, transportation, and maintenance. You should also be aware that there are some extended Indian holidays (festivals and celebrations), which can cut into the manufacturing productivity.

Intellectual Property Protection and Enforcement: Like China, IP protection and enforcement is expensive and high risk in India. Although India ranked lower than China in the 2016 International Property Rights Index, they both ranked in the bottom of the third quintile. Another challenge with IP rights in India is that India is currently going through some significant IP reforms, which make things more complex and, at least for now, uncertain.

Choosing where to manufacture is an important business decision that requires significant research and consideration. Selecting the wrong manufacturing location or specific factory because you are busy, in a hurry, or don’t have the right resources can cost a lot of unnecessary time and money. The benefits and challenges discussed above should be considered and given the appropriate weight based on your business and manufacturing needs. Because India is going through significant reform, investment, and development, when considering India, keep in mind your long-term goals and the long-term potential of the Indian manufacturing industry.

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Topics: international expansion, India, Indian Manufacturing, Manufacturing, Asia Pacific, manufacturing in india