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20 September 2013, Gateway House

An unseen revolution in Indian manufacturing?

Indian manufacturing’s share of GDP has been stagnating. Some of the industry’s problems stem from a business culture of hierarchy and bureaucracy. But competitive pressure is forcing a transformation, and the new management models now being adopted can change how investors and customers perceive Indian companies

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As China turned itself into the manufacturing centre of the world over the past decade, many expected India to follow – but it never happened. The Indian economy did take off, but largely in services such as software development.  For years, manufacturing’s share of GDP has been flat at 15-16%, and has actually declined slightly in recent years. [1] Now, with the economy in trouble, manufacturing output is stagnating.

Many of the factors usually blamed for this are beyond the manufacturers’ control.  Infrastructure is still weak.  Financing is difficult to get, with high inflation driving up interest rates and bankers becoming risk averse.  Labour laws make it extremely difficult to lay off employees; this discourages investment by global businesses, which are able to locate elsewhere.  Energy is expensive and unreliable.

However, some of the industry’s problems are of its own making, stemming from an old-time business culture that emphasises hierarchy, bureaucracy, and family control at the expense of responsiveness to customers and the ability to innovate.  There have always been some well-run companies like Tata, but the classic Indian business model has been based on low-wage labour producing low-quality products – not a formula for success in a global marketplace.

A major study published in 2010 comparing management quality internationally ranked India near the bottom (along with China and Brazil); some companies did well, but there was a long tail of underperformers. [2]

Competitive pressure, however, is now forcing a wave of transformation in the Indian manufacturing world. India’s businesses are increasingly run by well-educated, professional managers who are adopting the management strategies that companies in Japan, the U.S., and Europe have used over the past several decades to maximise productivity and quality. The changes are more than operational – they require changing an entire way of thinking, fundamentally affecting the relationship between businesses and their customers, and between managers and their employees.   Management improvement amounts, in effect, to social reform.

The new management models are partly technical: they involve deeply analysing production processes to streamline them, minimise defects, ensure quality and avoid tying up capital in inventory.  However, they are also cultural: they introduce a mindset of “continuous improvement” that is unwilling to accept the status quo as “good enough,” and rely on bottom-up problem-solving that uses teams, including workers from the shop floor, to come up with solutions.

What this means in practice can be seen at a factory in Shirwal, a few hours southeast of Mumbai, where Godrej and Boyce makes refrigerators, washing machines and air conditioners.  Hussain Shariyarr, head of manufacturing operations for Godrej’s appliance division, says that persuading managers to think proactively and seek  suggestions from employees, and persuading employees that the invitation was sincere, did not happen overnight.

However, a majority of the employees at Shirwal are now involved in improvement efforts in one way or another.  The company conducts hundreds of improvement projects called “kaizens” each year, rating them on a complex scoring system to recognise and reward those that have the best results. (Kaizen is a Japanese word meaning “change for the better.”)

Line managers seem genuinely enthusiastic about the new approach – eager to show a visitor how employees are helping to improve quality and efficiency.  For example, one team of assembly operators found a simple way to prevent refrigerant leaks, which had been a major customer complaint.  Line workers in a another part of the factory came up with an alternative to the metal back-plate on washing machines, which would rust, made from scrap plastic using a mould that they designed themselves.

As a result, the plant has been able to keep its prices down despite major increases in input costs.  Simplifying the production line layout freed up so much space that additional lines could be added without increasing the size of the factory.  Product quality is now on a par with the foreign competition, according to the company’s customer surveys.

The same techniques are being adopted by many other Indian companies. According to a recent report by the India Brand Equity Foundation, 21 Indian companies have won the Deming Excellence Award for quality, second only to Japan.  [3] The report highlights Bajaj Auto and Bharat Forge for their “lean” initiatives and for investing in new technology.  The Chennai plant of motorbike maker TVS Motors was once described by business guru James Womack as second only to Toyota in quality of management.

Even small and medium-sized businesses, which make up a large share of India’s manufacturing sector, are beginning to pick up at least the basics of these techniques from training offered by the Confederation of Indian Industry and other organisations.  For example, Matrix Tools and Components in Faridabad received training through an International Labour Organisation programme called Sustaining Competitive and Responsible Enterprises.  Its owner, S. P. Jain, said that moving to a more inclusive approach “changed the whole game” for his company. [4] He cited the example of a shop floor worker who pointed out a way to cut production time for one manufacturing component from five days to three.

All of this may be for naught, however, if the fundamental barriers that shackle Indian industry are not dealt with.  The government has budgeted for major infrastructure improvements, but in the past such projects have been plagued by delays. India still remains far behind China.  The government’s ability to bring corruption under control and reform a dysfunctional court system is seriously in doubt.

Nevertheless, the changes that are occurring will, at a minimum, change how investors and customers perceive Indian companies, which cannot help but improve their ability to sell more widely in foreign markets, and their chances of being selected as suppliers to other global producers. The changes will also improve the companies’ ability to attract talent – in the same way that IT firms began attracting engineering graduates who would in the past have gone to Silicon Valley.  Indian industry has much farther to go but seems to finally be on the right path.

George Wyeth is a visiting public policy scholar at the Woodrow Wilson Center for International Scholars, Washington, D.C.  From February to May 2013 he was a Fulbright-Nehru Environmental Leadership Fellow based at the Symbiosis Centre for Management and Human Resource Development in Pune.

This feature was written exclusively for Gateway House: Indian Council on Global Relations. You can read more exclusive features here.

For interview requests with the author, or for permission to republish, please contact Rajeshwari Krishnamurthy at krishnamurthy.rajeshwari@gatewayhouse.in or 022 22023371.

References

1. Operational excellence in Indian manufacturing. (2013). India Brand Equity Foundation

2. Nicholas, B. & John, V. R. (2010). Why do management practices differ across firms and countries?. Journal of Economic   Perspectives24(1), 203-224. Retrieved from http://www.stanford.edu/~nbloom/JEP.pdf

3. Operational excellence in Indian manufacturing. (2013). India Brand Equity Foundation

4. From the author’s notes of an interview done on 19 April 2013.