A United Nations Industrial Development Organisation (UNIDO) report in 2010 listed India as one of the top 10 manufacturers in 2010 (excluding China). The report placed India in the top position among developing countries in the production of textiles, chemical products, basic metals, general machinery and equipment, and electrical machinery. However, we do not fare so well in electronics manufacturing when compared to China, which is roughly half the share that China’s electronics sector enjoys and far behind India’s targeted 25 per cent over the next decade.
By Nitasha Chawla
Even as India’s high industrial production growth rate has made a significant impact in its share of globally manufactured goods, the bitter fact remains that India still imports volumes of electronics from China. Several factors like government policies and regulations, good infrastructure and skilled manpower have contributed to China’s growth as the world’s manufacturing hub. On the other hand, manufacturing in India has been plagued by strict laws, inefficient infrastructure facilities, land acquisition controversies, regulatory hurdles and various other bottlenecks that have restricted industrial growth. Says Vinod Sharma, managing director, Deki Electronics Ltd, “It is not a secret that China has emerged as the factory of the world. Many of us in the ‘China watching’ world would like to see China displaced by India from this winner’s position on the manufacturing competitiveness podium.” Recently, Vinod Sharma presented a detailed analysis of the differing manufacturing strategies in India and China to Indian manufacturers at the launch of the Foundation for Business Competitiveness (FBC), a professional consulting organisation set up for SMEs.
In the wake of rising competition from China, the Indian government has upped the ante by unveiling the National Manufacturing Policy (NMP), which aims at developing national manufacturing and investment zones (NMIZs) spread over 2000 hectares. These NMIZs are envisaged as bigger than SEZs, covering states and even groups of states and facilitating world class infrastructure facilities. The Department of Industrial Policy and Promotion aims to create massive employment opportunities, as well as catalyse industrial growth and sustainable development in India through tax incentives, a single window clearance policy, and flexible labour laws.
Although industry has welcomed the announcements made in the National Manufacturing Policy, one major concern is shown about the timely implementation of the policy. According to Robert John, former president, ELCINA, the new manufacturing policy is very comprehensive and deals with a lot of issues like labour policies and the formation of clusters. “However, its implementation is the biggest challenge for the government, especially with respect to creating new infrastructure for industries and also providing for changes in labour laws, like providing some insurance for lean periods when employees are laid off or have to stay idle,” explains Robert Jhon.
Comparison of input costs in India and China
According to Robert John, the difference in the cost of manufacturing between India and China is due to higher input costs in India for energy, finance, and logistics and transportation. It is estimated that these three factors alone result in a 7-8 per cent disadvantage for Indian manufacturers. These costs impact manufacturers even more if their processes involve higher value addition. Another disadvantage is related to the refund of value added tax (VAT), which Chinese exporters can avail. For products with 50 per cent value addition (which means that the raw materials account for only half the sales price—which is quite high—they get a refund of the VAT paid on inputs. This works out to 8.5 per cent when calculated at 50 per cent of their VAT rate (which is 17 per cent). So, clearly those firms in the electronics component manufacturing business in India, which normally have a 50 per cent value addition, suffer a disadvantage when competing against the Chinese. Vinod Sharma says, “Interest costs for most SMEs in India are to the tune of 12-14 per cent versus 5-6 per cent in China, 3 per cent in Taiwan and 1 per cent in Japan, which is usually the source of finances for factories in China. A 5 per cent overall cost of finance for the Indian company versus a 2 per cent for the Chinese firm is hence very plausible.”
Labour laws: India does score over China when it comes to cost of labour. However, a concern that Indian manufacturers have relates to the labour policies, which are inflexible and too much in favour of labour. “What India requires are liberal labour laws, which allow
easier transfer of labour from one industry to another, depending on demand factors. Also, there should be provision for laying off of labour and giving them adequate compensation during the layoff periods when industry is going through a slump,” opines Robert John. “It has been suggested by the industry that training of such labour would be a positive step as they would learn while they are idle. There should also be a funding mechanism/insurance that the government can provide for such periods; of course, with contributions from industry as well,” he adds.
Taxes: Another major contributor to high input costs of an Indian manufacturer is the Central Sales Tax (CST). Vinod Sharma explains how CST pinches the pocket of Indian manufacturers, “CST does not apply to imports, so an Indian manufacturer pays an extra 2 per cent on all the inputs procured from within the Indian supply chain.” This means the more value Indian manufacturers add, the more will be the impact of this cascading tax. Vinod Sharma cites this as one of the main reasons why Indian manufacturers have chosen to be involved in trading rather than invest in manufacturing.
Power: Power is another high cost area for India as compared to China. Electricity for industrial use in India costs Rs 6 per unit vis-à-vis Rs 2.50 in China. To make matters worse, most factories in India have to install a backup power generating system. Also, in the case of electronics component manufacturing, the machines are sensitive, and they need good quality power. Hence, they need the assurance of a large stabiliser and a backup UPS system. All this only adds to the higher costs borne by Indian manufacturers.
According to Robert John, the best solution to deal with the high cost of power in India would be to create clusters and provide a direct supply of power to them from generation points, so that transmission losses and distribution costs are eliminated and power can be provided at a cost that is 20-30 per cent lower than regular rates currently applicable for industry. Regarding finance, he says that the industry has requested creation of a special fund to finance interest subvention costs for capital investments in new projects and also for the working capital requirements of manufacturers of zero duty electronic items.
Poor infrastructure: India’s inbound and outbound logistics costs are much higher as compared to China. Vinod Sharma gives the example of wire, which is imported from China by component manufacturers. He says that the freight cost of wire from Shangai to Mumbai is Rs 4 per kg while from Mumbai to Delhi/NCR the cost of transporting the wire is Rs 14 per kg. So, the logistics cost incurred in this case is 2 per cent vis-a-vis 1 per cent in China. Clearly, this is one of the major disadvantages India has vis-a-vis China.
Suggestions to the government
With the announcement of the draft National Policy on Electronics 2011, the government aims to achieve a turnover of US$ 400 billion for the electronics sector by 2020, which will involve an investment of about US$ 100 billion, besides creating employment for 28 million people. Although the government has painted an optimistic picture of the Indian manufacturing sector in the years to come, manufacturers feel there is still a lot to be done in order to reach where China is today.
Sanjiv Narayan, managing director, SGS Tekniks Manufacturing Pvt Ltd, says, “One issue that has been left hanging for a long time is the quick implementation of the goods and service tax (GST), which would help boost India’s manufacturing competitiveness.” The implementation of GST will lead to the abolition of other taxes such as octroi, CST, state level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, etc, thus avoiding multiple layers of taxation that currently exist in India.
Suggests Vinod Sharma, “We need to create competitive advantages in our chosen area of economic activity—whether it is production, technology, logistics or a combination of these. We need to find a methodology to select and implement the appropriate strategy—the business equation that will suit your business the best.”
When one adds all input costs, it is clear that China will continue to have comparative advantage over India and until the high cost of certain inputs is countervailed through various policy measures, the future of Indian manufacturing may not be as bright as projected by the government.
How far behind are we on manufacturing competitiveness?
The table below examines the profitability of two companies—one Indian and the other Chinese, engaged in the manufacture of an electronic component that has a value addition of 50 per cent.
Both the companies are aiming to sell to an Indian customer who is willing to pay Rs 100 per component, which is, of course, the price quoted by the Chinese supplier. The example assumes the same incidence of all costs on both the Chinese and Indian supplier, except in three cases—energy, logistics and finance, which are all beyond the control of the supplier.
Comparative ROI between an Indian and Chinese manufacturer of electronics components supplied to an Indian customer
|Sales (-CST @ 2%)||100-2 = 98||100|
|RM (+ [email protected]% on 50% local supplies)||50 +0.5||50|
|Marketing + all other expenses||15||15|
|Refund of VAT 17 per cent on value addition (Rs)||0||8.5|
|Total ROI percentage||10.62||33.12|
Source: Vinod Sharma, managing director, Deki Electronics Ltd
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine