Make in India

Confederation of Indian Industry
CII 11th Manufacturing Summit 2012
Reigniting Indias Quest

for Manufacturing
Leadership
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The Confederation of Indian Industry (CII) works to create

and sustain an environment conducive to the growth of
industry in India, partnering industry and government
alike through advisory and consultative processes.
CII is a nongovernment, notforprofit, industry led and
industry managed organization, playing a proactive role in
Indias development process. Founded over 117 years ago,
it is Indias premier business association, with a direct
membership of over 7100 organizations from the private
as well as public sectors, including SMEs and MNCs, and
an indirect membership of over 90,000 companies from
around 250 national and regional sectoral associations.
CII catalyses change by working closely with government
on policy issues, enhancing efficiency, competitiveness and
expanding business opportunities for industry through a
range of specialised services and global linkages. It also
provides a platform for sectoral consensus building and
networking. Major emphasis is laid on projecting a positive
image of business, assisting industry to identify and
execute corporate citizenship programmes. Partnerships
with over 120 NGOs across the country carry forward our
initiatives in integrated and inclusive development, which
include health,education,livelihood,diversity management,
skill development and water, to name a few.
The CII Theme for 201213, Reviving Economic Growth:
Reforms and Governance, accords top priority to restoring
the growth trajectory of the nation, while building Global
Competitiveness, Inclusivity and Sustainability. Towards
this, CII advocacy will focus on structural reforms, both at
the Centre and in the States, and effective governance,
while taking efforts and initiatives in Affirmative Action,
Skill Development, and International Engagement to the
next level.
With 63 offices including 10 Centres of Excellence in India,
and 7 overseas offices in Australia, China, France, Singapore,
South Africa, UK, and USA, as well as institutional
partnerships with 223 counterpart organizations in 90
countries, CII serves as a reference point for Indian industry
and the international business community.
CII 11th Manufacturing Summit 2012
Reigniting Indias Quest

for Manufacturing
Leadership
Arindam Bhattacharya
Amit Ganeriwalla
Arun Bruce
December 2012 | The Boston Consulting Group
2 | Reigniting Indias Quest for Manufacturing Leadership
Contents
4
CONTEXT
RECENT MANUFACTURING SLOWDOWN: SPEED BUMP OR COURSE CORRECTION

National Manufacturing Policy (NMP): A Recap
Recent Manufacturing Performance
Examining the Building Blocks of Manufacturing
Hope on the Horizon
1 0
GLOBAL TRENDS: RESTRUCTURING OF SUPPLY CHAINS

Decreasing Cost Competitiveness of China
Increasing Importance of Innovation in Manufacturing
Increasing Competition in Low Cost Positioning
Restructuring Supply Chainsthe Opportunity
1 7
INDIAS ASPIRATION: GERMANY OF THE EAST AND NOT FACTORY TO THE WEST
Looking Beyond Low Cost
Germany of the EastIndia Incs Aspiration for the Manufacturing Sector
India well Positioned to Become Germany of the East
Realizing our Aspiration
2 3
CALL FOR ACTION: STAKES ARE HIGHER THAN BEFORE

Size of the Prize: US$ 350 Billion Incremental Sector GDP, 70 Million Incremental Jobs
Agenda for Realizing our Manufacturing Aspiration

Creation of an IndustryGovernment Institutional Framework to own the Manufacturing Agenda

Driving Long Overdue Reforms in Labour
Driving an Outofbox Solution for Land
Building Innovation and R&D Capability at Company and Sector Levels
Tapping into Newer Verticals such as Hightech
Concluding Thoughts
29
FOR FURTHER READING
30
note to the reader
The Boston Consulting Group Confederation of Indian Industry | 3
CONTEXT
he National Manufacturing policy laid out a vision for the

Indian manufacturing sector, centered around an aggressive growth of
1214 percent, creation of 100 million incremental jobs, and attainment
of 25 percent share of GDP by 2022. Since the release of the policy, due to
various factors, Indian manufacturing has actually slowed down.
This report seeks to disaggregate drivers of our recent performance,
examine relevant global trends impacting the sector, and layout the key
interventions required to chart our course towards the stated goals in the
NMP.
This report serves as the background note for CIIs Manufacturing
Summit 2012, the theme for which is Reigniting Indias Quest for
Manufacturing Leadership.
While the intent of the report is not to develop detailed policy
recommendations, we do identify an overarching framework for realizing
our manufacturing aspirations and contextualize five key imperatives
which are pivotal in achieving these aspirations.
This report is based on BCG research and inputs from senior leaders of
CII manufacturing council. Additionally, this year, we also conducted CII
BCG Manufacturing Leadership Survey 2012 and received inputs from 70
senior management executives from top Indian manufacturing
companies. These inputs have also been incorporated in this report.
RECENT MANUFACTURING
SLOWDOWN: SPEED BUMP
OR COURSE CORRECTION
ndian manufacturing has been slowing

down steadily for the last two years. After a
strong run in the 2000s, where manufacturing
grew in tandem with our strong GDP growth,
maintaining its share of GDP and creating
employment, the sector has now grown slower
than the GDP for several quarters in a row.
This underperformance ironically comes after
a period when the government announced the
National Manufacturing Policy that included a
bold vision for manufacturing to grow 24 percent faster than the GDP to reach a share of 25
percent of the economy by 2022.
This starting section to the background note assesses the recent trends in Indian manufacturing and disaggregates drivers of performance.
National Manufacturing Policy

(NMP): A Recap
In most rapidly developing economies, manufacturing contributes 2540 percent of the

countrys GDP. With Indias current share at
15 percent, the Government of India had outlined a comprehensive National Manufacturing Policy (NMP), with ambitious targets for
the manufacturing sector. Key elements of the
NMP are outlined below:
Manufacturing sectors share in GDP of 25

percent by 2022
Manufacturing sector growth of 1214

percent over the medium term
Creation of 100 million additional jobs in

the manufacturing sector by 2022
The central theme of this policy is the creation of National Investment and Manufacturing Zones (NIMZs), which would not only
have progressive and industry friendly policies, but also provide significantly better infrastructure to enable breakout manufacturing growth. The policy has been hailed as
a move in the right direction, and is perceived
as a game changer if implemented in letter
and spirit.
Recent Manufacturing
Performance
Performance of Indian manufacturing over

last two years has not been in line with the
aspiration set by NMP. From a trajectory of
89 percent, manufacturing GDP growth has
slowed down to a CAGR of 2.5 percent over
FY 201012 and has almost flattened (0.5 percent) in FY 2012131 (as shown in Exhibit
1.1). In fact, share of manufacturing sector in
GDP has slipped below 15 percent, its lowest
level since FY 199394. Further, monthon
month growth in Index of Industrial Production (IIP) has been on a consistent decline
over last two years.
Exhibit 1.1 | Manufacturing growth slowdown has intensified
Manufacturing GDP growth slowdown

has intensified...
...manufacturing IIP growth also on a continual

slowing trajectory
Manufacturing GDP (INR trillion)
IIP manufacturing growth rates (%)
10
15
2.5%
8.6%
7.2
7.7
0.5%
Growth rate2
(AprSep)
12
7.9
8.0
9
8.8%
6.6
5.5%
FY 0809 FY 0910 FY 1011 FY 1112 FY 12131

Share in
GDP (%)
0.4%
4
15.8
16.0
15.8
15.3
14.6
6
Apr
Share slipping below 15%, lowest in 18 years3
May
FY 1011
Jun
Jul
FY 1112
Aug
Sep
FY 1213
Source: RBI Database on Indian Economy; Central Statistical Office; BCG Analysis.
Note: Manufacturing GDP at factor cost, constant (20042005) prices reported as per RBI database.
1
201213 indicates data extrapolated from H1 onlyextrapolation based on 201112 trend across sectors.
2
IIP growth rate defined as growth over same period in previous year.
3
Manufacturing share in GDP has been 15% or higher consistently since FY 199495.
Examining the Building Blocks of

Manufacturing
While a bulk of the slowdown can be attributed

to a general slowdown in the European and the
U.S. economies (manufacturing sector in every
major manufacturing nation slowed down over
last few years), there is a critical need to also examine domestic drivers of performance. The
next few pages lay down the recent performance of key enablers of manufacturing.
Regulatory burden has increased
While it is a well known fact that the burden
of regulation is quite high in India, it is interesting to note that on various key parameters
of the World Banks Doing Business report,
Indias ranking has actually slipped over the
last five years. For example, India has dropped
from 111th to 173rd position on ease of starting a new business. In addition, India compares poorly against global peers on several
key parameters. Not surprisingly, in the CII
BCG Manufacturing Leadership Survey 2012,
more than 80 percent of the respondents believed that restrictive regulations were one of
the top three impediments to manufacturing
growth in India (as shown in Exhibit 1.2).
Industrial relations perceived to be a

major challenge
Productive labour and harmonious labour relations are central to realizing the demographic
dividend that India is expected to reap. While
the last ten years have seen marked improvement in industrial relations, with substantial
decrease in the number of industrial disputes,
and mandays lost (as shown in Exhibit 1.3),
the recent spate of industrial violence brings
back the question of deteriorating industrial
relations. More than half of the respondents
(55 percent, with 11 percent strongly agreeing)
expressed concerns that industrial relations
were deteriorating, in sharp contrast to only 17
percent who believed otherwise2.
Land acquisition is as difficult as ever
Acquisition of land has emerged as one of the
thorniest issues in Indian manufacturing.
While investors and manufacturers need timely acquisition of contiguous land, landowners
are wary of selling their prized assets for fear
of losing out on future price appreciation or
being inadequately compensated. As a consequence, land availability for industrial development has become tougher than before. As a
Exhibit 1.2 | Regulatory burden emerging as the biggest impediment to manufacturing growth in India
CIIBCG Manufacturing Leadership Survey 2012
What are the biggest challenges (top 3) for
manufacturing growth in India over next 5 years?
Progress made on some fronts, but lot of ground

remains to be covered
Restrictive
regulations
Starting a
business
81%
Poor
infrastructure
Trading across
borders
70%
Unstable
polity
127
177
184
Registering
property
39%
Rising labour
costs
29%
Getting credit
Currency
fluctuations
29%
Protecting
investors
Others
79
173
Enforcing
contracts
51%
High cost
of capital
111
1%
94
23
112
36
33
49
165
152
Paying taxes
Survey responses (%)
Global ranking of India1
2007
2012
Source: The World Bank reports Doing Business 2008, Doing Business 2013; CIIBCG Manufacturing Leadership Survey 2012; BCG Analysis.
Note: 2007 rank indicates rank as per Doing Business 2008 report, 2012 rank indicates rank as per Doing business 2013 report.
1
Total 178 countries ranked in Doing Business 2008 report, 185 in Doing business 2013 report.
Exhibit 1.3 | Industrial relations on an improving trajectory, but remain a key challenge
Industrial relations have improved
over the last decade
Number of disputes
Top management concerned regarding the quality

of industrial relations going forward
On average, do you see quality of industrial
relations dropping in India?
Mandays lost (million)
800
50
Disagree
579
40
552
477 456
430 389 421
400
391
429
30
20
200
24 27
30
24
30
20
27
17
14
18 211
5
2001
2003
2009
2005
2007
2011
2002
2004
2008
2010
2006
10
11%
11%
Somewhat
600
Agree
Strongly
674
17%
29%
46%
0
40
20
20
40
60
Survey responses (in %)
Source: Ministry of Labour and Employment; CIIBCG Manufacturing Leadership Survey 2012; BCG Analysis.
case in point, Orissas Industrial Infrastructure Development Corporation has only been
able to deliver 36,000 acres to industrial units
waiting for land, as against a target of 150,000
acres (a 76 percent shortfall)3.
petitiveness of the sector. World class physical

infrastructure that drives lower cost and faster
speed to market is necessary to increase the
competitiveness of the Indian manufacturing
sector, especially because other competing
countries like China and Thailand provide their
manufacturing industry with that advantage.
The land acquisition bill, being proposed to address some of these challenges, has been in the
public spotlight owing to the debate within the
cabinet on various provisions. While the original bill was refined to include several suggestions from the industry, some have subsequently been rolled back. Many in the industry feel
that the bill in its current form (November
2012) will make it both expensive and difficult
to acquire land for industrial purposes.
The CIIBCG Manufacturing Leadership Survey 2012 highlighted infrastructure, along with
restrictive regulations, as amongst the biggest
challenges to manufacturing growth in India as
shown in Exhibit 1.2. The 12th five year plan
has laid out an ambitious investment target of
approximately 1.1 trillion US$ for infrastructure. The challenge though lies not in the intent but in the timely execution of plans.
We need an approach to land acquisition that

is a winwin for all stakeholders involved,
and promotes industrial growth and job creation while sensitively addressing the concerns of landowners.
Consequently, Manufacturing
Investments have Dropped
Consequently, brand India as a manufacturing

destination has taken a hit in the global arena.
India today ranks a low 132 in ease of doing
business. Not surprisingly, manufacturing investments have steadily dropped over the last
few years (as shown in Exhibit 1.4).
Infrastructure bottlenecks continue

The importance of physical infrastructure in
the context of manufacturing cannot be over
emphasized. It has a direct bearing on the com-
Exhibit 1.4 | India ranks among most difficult places to do business, manufacturing investments have
registered a sharp fall
India ranked 132nd among 185 countries
on Ease of Doing Business
Investments in manufacturing have registered

a sharp drop in last two years
Total investments (INR trillion)
Investment / project (INR billion)
20
Thailand
Mexico
18
5%
48
6
11.0
China
Russia
72%
15
10
91
9.9
11.3 11.3
10.4
9.3
6.6
6.0
112
4.9
Brazil
130
India
132
5.4
2.9
Ease of Doing Business (Rank / 185 countries)
0
H1
H2
FY 08
H1
H2
FY 09
H1
H2
FY 10
H1
H2
FY 11
Average investment per project
Source: The World Bank Doing Business Report 2013; Centre for Monitoring Indian Economy; BCG Analysis.
H1
H2
FY 12
H1
FY 13
Investments
Exhibit 1.5 | While current outlook for manufacturing is weak, India Inc. is confident about the
potential going forward
How does India Inc. see manufacturing sector
grow in India over the next 5 years?
What should be the target, aspirational growth

rate for manufacturing from now till 2020?
50
30
47%
29%
40
30
21%
20
29%
20
19%
9%
10
11%
10
17%
6%
7%
3%
3%
0
0
<5%
57%
79%
910% 1015%
>15%
<5%
57%
79%
910% 1015%
13% respondents
for 9% + growth
>15%
69% respondents
for 9% + growth
Source: CIIBCG Manufacturing Leadership Survey 2012; BCG Analysis.
Hope on the Horizon
While the performance of Indian manufacturing sector over the last three years is certainly
a cause for concern, the longterm vision for
Indian manufacturing, as highlighted in the
CIIBCG Manufacturing Leadership Survey
2012, remains intact (as shown in Exhibit 1.5).
Most CEOs believed that while the recent
slowdown would tend to drive growth rates
downward, the long term aspiration for manufacturing growth in India should be intact.
Over 69 percent of respondents believe that a
growth of over 9 percent is possible with a
change in ecosystem and policies.
This clearly points to the fact that while Indian manufacturing sector has slowed down,
it definitely has the potential to reembark
upon the path to accelerated growth and
global manufacturing leadership. Addressing
the basic enablers with a renewed sense of
urgency is an important step in this journey.
Note:
1. Based on H1 FY 2013 only
2. CIIBCG Manufacturing Leadership Survey 2012
3. Press search
GLOBAL TRENDS:
RESTRUCTURING OF SUPPLY
CHAINS
he period from 1990s to 2000s saw a

massive shift of manufacturing to the
emerging economies, especially China. The
key driver was labour cost arbitrage that
existed even after adjusting for lower
productivity. For China, this was augmented
by favorable government policies including
high public investments, and an artificially

depreciated currency.
However, this simplistic view of the world is
fast undergoing a change (as shown in Exhibit 2.1). Specifically, three key trends are
driving a restructuring of supply chains
Exhibit 2.1 | Manufacturing supply chains confronting unprecedented pace of change
2007
2012
2017?
Going to
China
More
countries
Low
valueadd
High
valueadd
Customer
driven
Export
driven
Chinese labour rates double?

Input prices double? Oil
reaches US$ 147 / barrel
...again?
Logistics congestion doubles
supply lead times? ...and
increases lead time variability?
Massive Foreign Exchange
shifts or currency revaluations?
Africa, South America, South
East Asia next big growth area?
1. Decreasing cost competitiveness of China
Key emerging
trends for global
manufacturing
2.
Increasing importance of innovation in manufacturing
3.
Increasing competition in low cost positioning
world over and could have a significant impact on Indian manufacturing:
Decreasing cost competitiveness of China
Increasing importance of innovation in

manufacturing globally
Increasing competition in low cost

positioning
Decreasing Cost Competitiveness

of China
Since it entered the World Trade Organization in 2001, China has essentially become
the default option for manufacturing companies around the globe wishing to outsource
production at lower cost. In the ten years
starting 2001, Chinese exports have increased sevenfold at an impressive CAGR
of 22 percent as compared to 7 percent for
the U.S. and Japan and 10 percent for Germany. During the same period, its share of
global exports rose from approximately 4
percent in 2001 to approximately 10 percent
in 2011.
Chinese manufacturing, however, has now

started exhibiting signs of weakening. GDP
growth is expected to cool down and stay at
78 percent levels against 1011 percent earlier. Two factors are primarily responsible for
this decline in Chinese manufacturing competitiveness: rising labour rates and appreciation of Yuan.
Labour rate arbitrage was the main driver for
off shoring of production to China and provided substantial costs savings of 2040 percent,
in spite of lower productivity levels. However,
since 2009, production worker wages have inflated at almost four times the rate of Indian
wages (as shown in Exhibit 2.2). Add to this the
relatively low productivity as compared to the
U.S. standards, and Chinas competitiveness in
low cost labour is clearly eroding. In Chinas
industrial heartlandthe Yangtze River Delta
region, which includes the provinces of Shanghai, Jiangsu, and Zhejiangproductivityadjusted costs are rapidly converging with the
costs in Americas lowoverhead states1 .
Simultaneously, the Chinese Yuan has appreciated by nearly 20 percent against the dol-
Exhibit 2.2 | China has taken corrective measures to compensate for its falling competitiveness on
account of rising wages and currency appreciation
Chinese wage rates have
increased sharply
3 year CAGR
(0912)
Labour costs (USD / hr)
40
35
Yuan only BRIC currency that

appreciated against USD
US
1.8%
EU
0.7%
Brazil
11.6%
5 year return 1 (0712)
Russia 12.1%
China
India
0
2009 2011 2013
2010 2012 2014
15.1%
4.0%
Export rebate rate (%)
25
INR/CNY 2
57%
USD/CNY
USD/BRL 3
10
China has increased its exports

incentives
USD/RUB 4
USD/INR
18%
9%
Already high rebate rates increased

further to incentivize exports
20
Auto
components
15
ACs,
microwaves
Dies 5
Locks
19%
25%
50
50
100
0
2009 2010 2011 2012
Source: Economic Intelligence Unit (EIU) for labour rates. EIU estimates accessed on 28th November 2012. IMF and respective central banks for the
currencies; Customs Import and Export Tariff of the Peoples Republic of China for export rebate rates; BCG Analysis.
1
For five years ending September 30, 2012.
2
CNY stands for Chinese Yuan
3
BRL stands for Brazilian Real.
4
RUB stands for Russian Ruble.
5
Dies for plastic injection moulding.
lar since 2007. This is when most of the

emerging world currencies, including the Indian Rupee have been on a fall, thus eroding
Chinese cost competitiveness in manufacturing exports. Only taking exchange rates into
account, an equipriced export to the U.S.
from India and China in 2007 would now be
approximately 60 percent more expensive
from China as compared to India.
In summary, the rising labour cost and an appreciating Yuan have significantly weakened
Chinese cost competitiveness compared to
other emerging economies and this trend is
expected to continue. This shift is being manifested in several ways, from developed market
purchasers increasingly seeking to develop alternate bases (for example, Vietnam, India,
Thailand) to Indian and other Asian importers of erstwhile Chinese goods seeking to re
shore their imports.
port incentives over the last few years, making its products more competitive in the
international market. For example, in door
locks, the export VAT rate has been decreased by half this year. Secondly, China is
aggressively implementing countermeasures
to compensate for its wage inflation in the
east. Its GoWest policy has been successful
in parts in convincing corporates to relocate
to its interior. Thirdly, it has embarked on a
clear policy of globalization to safeguard its
markets. In fact, Chinas GoGlobal strategy
is part of the official 12th five year plan. Lastly, the Chinese government is actively encouraging a move into higher value added segments and has set an ambitious target for
significantly higher R&D investment.
Increasing Importance of
Innovation in Manufacturing
Innovation is reemerging as a key focus area

of competitive advantage across companies.
BCG Global Annual Innovators Survey exhibits increasing focus on R&D and innovation by
manufacturing companies, over the past few
years (as shown in Exhibit 2.3).
However, the Chinese government has already initiated action on multiple fronts to
compensate for its loss of competitiveness
and retain leadership of world manufacturing. Firstly, it has continually increased its ex-
Exhibit 2.3 | Manufacturing companies across sectors have increased focus on R&D and innovation in
last 3 years
Innovation is moving up on the strategic priority...
Where does innovation / product development rank
among your companys top strategic priorities?
...with companies looking to increase R&D spends

Do you expect your companys investment in R&D /
innovation to increase this year, compared to last year?
% of respondents selecting top or top 3 priorities
% of respondents selecting strongly agree or agree
100
80
75
91
79
77
68
65
59
60
50
40
25
20
74
63
60
62
65
52
0
Industrial
Auto
2009
Consumer
products
Industrial
2012
Source: 2009 BCG Global Innovators Survey; 2012 BCG Global Innovators Survey; BCG Analysis.
Auto
2009
Consumer
products
2012
77 percent, 91 percent, and 79 percent of

top management executives from Industrial goods, auto and consumer products
respectively included innovation as one
their top three strategic priorities in the
BCG Global Annual Innovators Survey
2012, up from 68 percent, 59 percent and
65 percent respectively, three years ago
Over 74 percent of the respondents in
Industrial goods expected an increase in
R&D investments over previous year, a
sharp increase over 2009, when the
comparable figure was 60 percent, a
trend also repeated in automotive and
consumer products
Besides companies, emerging market countries are also promoting innovation in a big
manner. A few examples below:
China aggressively moving from made in

China to created in China:
Governments Indigenous Innovation

program is aimed at narrowing the
gap between China and the West
Russia has launched initiatives designed

to promote hightech innovation, for
example:
Rusnano: Nanotechnology hub
Skolkovo: Russias Silicon Valley
Malaysias 10th Malaysia Plan, and New

Economic Policy highlights the shift
towards knowledge and innovation
driven growth as it pursues a next phase
of economic development
Increasing Competition in Low

Cost Positioning
Over last few years, several Emerging Market Economies (EMEs) have seen a rapid increase in their manufacturing exports. The
top 10 economies by merchandise export in
2012, amongst EMEs with labour rates less
than US$ 3 per hour, contributed to approximately 18 percent of worlds net merchandise trade in 2012 as compared to approximately 11 percent in 2001 (as shown in
Exhibit 2.4). The exports from these econo-
Exhibit 2.4 | Emerging economies with low cost advantage continue to gain share in world exports
Exports from top 10 low cost EMEs1 grew at 2.5X the

world export growth2 from 200811
Merchandise exports, USD trillion
CAGR
(200811)
4
3.3
10%
3
2
1
Others3
2.7
2.5
2.0
20%
Vietnam
16%
Thailand
9%
Mexico
6%
Indonesia 13%
0.7
India
16%
China
10%
2001 2008 2009 2010 2011

10.8
15.3
16.3
17.6
17.9
% of worlds
exports
EMEs continue to have significant cost advantage

relative to developed economies
Labour rates, USD / hour, 2011
Europe
Japan
USA
China
Ukraine
Mexico
Peru
Thailand
Philippines
Pakistan
India
Indonesia
Vietnam
38.0
35.4
35.4
2.8
2.5
2.2
2.2
2.1
1.2
0.9
0.9
0.8
0.8
0
Labour wages for

top 10 low cost
export EMEs are
<10% of wages in
key developed
economies
10
20
30
40
Source: WTO trade statistics for merchandise export data; EIU for hourly labour wages; BCG Analysis.
1
EME refers to Emerging Market Economies as described by IMF. Top 10 economies by Merchandise export was considered after removal of economies with
labour rates > US$ 3 per hour.
2
World merchandise exports grew at a CAGR of 4% from 20082011
3
Others include Ukraine, Peru, Pakistan and Philippines.
mies grew at over 10 percent CAGR from

2008 to 2011 in dollar value terms, while the
worlds total export grew at less than half
this rate.
Owing to this steady growth, we have multiple significant players now operating in the
low cost manufacturing space as compared
to only India and China a few years back. As
of today, we have as many as nine emerging
market economies that each individually
contribute to over one percent of worlds
merchandise exports as compared to only
five in 2001.
sion of Indonesias Economic Development developed in May 2011. Alongside,

the government has also setup an inter
departmental debottlenecking team to
identify and plan necessary reforms. While
logistics development in Indonesia has a
long way to go, active government interventions have started yielding immediate
results with Indonesias LPI rank improving to 59 in 2012.
Thailand: In order to boost the countrys

competitiveness, Thailand government has
approved a five year plan (201217) to
invest US$ 72 billion in infrastructure
projects. Another US$ 11.4 billion is also
planned for investment in countrys water
management system. In addition, it has
also cut the corporate income tax rate
from 30 percent in 2011 to 23 percent in
2012 and plans to further reduce it to 20
percent in 2013. By 2013, once the 20
percent tax rate is adopted, Thailand will
rank as the second most tax competitive
nation in the region, behind Singapore.
Malaysia: The Malaysian government has

set a target to double its exports by 2015.
It is aggressively negotiating FTAs with
Australia, Turkey, the EU and the members of the TransPacific Partnership.
Malaysia and India concluded negotiations on a free trade agreement which
came into effect in 2011. Negotiators
expect the annual value of bilateral trade
to reach US$ 15 billion by 2015. To
encourage investment, the government
has granted a tenyear exemption on
venture capital and introduced investment incentives in certain regions. The
Malaysian government has also launched
an ambitious Economic Transition Plan
(ETP), which calls for an increase in real
GDP growth by 200250 basis points over
next ten years. Altogether, the ETP is
expected to create at least 3.3 million
jobs. Further, the ETP also includes plans
to increase private sector involvement in
the economy by divesting stakes in 33
companies.
Mexico: Mexico approved a widereaching labour reform bill in November 2012.

The biggest shakeup of the countrys job
The labour wages in these economies also

continue to be significantly lower than developed economies. In fact, it is less than 10
percent of the developed country wages. In
spite of relatively high projected growth rate
in labour wages, the EMEs will continue to
enjoy significant cost advantage relative to
developed countries in the near to medium
term.
Each of these countries has its own relative
advantage and disadvantage against others
(as shown in Exhibit 2.5). While Mexico and
Thailand have relatively higher labour cost
than most of the other low cost countries,
they also have a more conducive business
environment. In contrast, the likes of Indonesia and Vietnam offer a very low labour
cost but a relatively more challenging business environment. India stands somewhere
in the middle.
Several of these countries have already initiated action on multiple fronts to further enhance their competitiveness and build sustainable advantage:
Indonesia: Infrastructural and regulatory

challenges saw Indonesias rank on the
Logistics Performance Index (LPI) published by World Bank deteriorate from sub
50 level in 2007 to 75 in 2010. To reverse
this, Indonesian government actively
launched initiatives to drive logistics
reform. Improving connectivity along all
three aspects (intraisland, interisland,
and international) was identified as a
strategic focus area in the governments
Master Plan for Acceleration and Expan-
Exhibit 2.5 | Intensifying competition in low cost manufacturing space, each country with its own
strengths and weaknesses
Criteria
Labour
cost1
Description
% of U.S.
labour rates,
2011
China
7.9
Mexico
Thailand
6.2
5.9
India
Indonesia
Vietnam
2.5
2.3
2.2
Ease of
workforce
supply2
Scale of 1 10,
10 being best
6.1
6.6
5.7
5.3
5.6
Land leasing
cost3
Cost in
USD / m2 / year
71.8
47
62.8
43.1
52.6
50.3
Country
infrastructure4
Scale of 1 5,
5 being best
3.49
3.05
3.18
3.12
2.76
2.96
Country risk5
Scale of 1 100,
1 being best
47
44
49
51
55
56
Business
environment6
Country rank
in world
79
35
18
134
121
78
Innovation
index7
Country rank
in world
34
79
57
64
100
76
Moderate labour cost with

relatively conducive business
environment
Low labour cost, yet

infrastructural issues exist;
being worked on
Source: EIU, World Bank, Cushman & Wakefield, Global innovation Index, BCG Analysis.
1
Labor wages per hour, EIU.
2
EIU labor market rating (red < 6 < yellow < 7 < green; max = 10).
3
Cushman & Wakefield, Industrial Space across the World 2011 (green < 60 < yellow < 100 < red).
4
Logistics Performance Index (red < 3 < yellow < 3.5 < green; max = 5).
5
EIU Overall business operation risk (green < 25 < yellow < 50 < red; max = 100).
6
Global rank on doingbusiness.org (green < 25 < yellow < 100 < red).
7
Ranking on Global Innovation Index (green < 50 < yellow < 75 < red).
market in more than four decades, the

bill contains a raft of measures, including
changes that make it easier for companies to hire and fire workers and shorten
labour disputes. Earlier this year, Mexico
made starting a business easier by
eliminating the minimum capital requirement for limited liability companies. Also
in 2011, Mexico approved structural
reforms in tax structure, labour laws, and
foreign ownership. The results are for
everyone to see, with analysts now
predicting that Mexicos economy,
currently half the size of Brazils, could
end up being bigger of the two within the
next decade2.
Restructuring Supply Chains

the Opportunity
Given the nature of the trends laid out, global manufacturing flows could see a radical
transformation over the next decade. A few
potential areas of impact could be as follows:
From being a unipolar one country led

exercise, manufacturing in emerging markets will turn multipolar with several
credible contenders in the fray. Top 10
emerging market players could potentially contribute anywhere between 2 to
4 percent each of worlds manufacturing
export in the next ten years
With time, we will see an enhancement

in the role of R&D and innovation in
manufacturing; battlegrounds for manufacturing companies will widen from cost
and productivity to also include innovation in a major way
Taking into account the above factors, India

Inc. needs to consider that:
There is a clear opportunity to become a

strong global manufacturing powerhouse,
thanks to a depreciating currency and
wages inflating at a relatively lower pace
However, lowcost or costfocus alone is

unlikely to drive differentiation in the
world of global trade, and increasingly

within India as well, as R&D and innovation grow in importance as market
differentiators
Both of these points will have to be borne in
mind as India seeks to achieve its manufacturing aspirationlaid out in detail in the
next section.
Note:
1. BCG report, Made in America, Again, August 2011

2. Economist, August 2012
INDIAS ASPIRATION:
GERMANY OF THE EAST AND
NOT FACTORY TO THE WEST
iven Indias current position, and

the many changes taking place in the
global manufacturing landscape, what
aspiration should Indian companies have for
themselves? Which direction, and what
endposition is the most value creating?
Looking Beyond Low Cost

As the trends in the previous section pointed
out, merely competing on low cost is fast becoming a thing of the past. Many countries or
industry sectors that have done so, have had
to pay the price. Take garment manufacturing
for example. Several decades ago, Hong Kong
was a key hub for garment making. China
then grew rapidly, as labour rates in Hong
Kong sky rocketed, with the front offices still
largely operating out of Hong Kong. As Chinese labour costs have continually grown over
the last decade and a half, many other countriessuch as Vietnam, Thailand, Sri Lanka
have all made rapid gains in the garment export manufacturing space.
Globally, supply chains are reorganizing in a
way that will dramatically alter the manufacturing landscape. The decreasing cost
competitiveness of China coupled with increasing focus on lead times and transportation costs has triggered interest in reshoring capacities to the U.S. In addition, as
discussed earlier, the low cost space is getting increasingly crowded, with several EMEs
competing for a higher share of the global

manufacturing opportunity.
Germany of the EastIndia

Incs Aspiration for the
Manufacturing Sector
In summary, low cost labour alone is not a
tenable position to build Indias manufacturing vision on, and the manufacturing leadership has taken cognizance of this. In the CII
BCG Manufacturing Leadership Survey 2012,
while low cost labour is recognized as one of
the top three competitive advantages for Indian manufacturing currently, an overwhelming 89 percent of respondents believe
this advantage is unlikely to be sustainable
up to 2020 (as shown in Exhibit 3.1).
India needs to focus on developing other
sustainable competitive advantages in order
to win in the race of global manufacturing.
The survey reveals that over 75 percent of
the respondents seek a positioning beyond
just low cost for Indian manufacturing. 29
percent of the respondents believe in qualityoriented manufacturing as a source of
competitive advantage. Another 26 percent
believe that selective process and technology leadership is the way to go. Very few believe that cost alone could be a differentiator. The most popular catchphrase that India
Inc. chose was Germany of the East as
against Factory to the West.
Exhibit 3.1 | India Inc believes low cost advantage not sustainable, need to look beyond low cost
Current competitive
advantage for manufacturing1
Quality engineering
talent
Low cost
labour one of
key
competitive
advantages
currently, but
not sustainable
in the long
term
40%
70%
Entrepreneurship
(large number of SMEs)
21%
66%
Low cost labour
50%
Frugal Engineering
(Jugaad)
89%
41%
Natural resources
30%
Process capability
30%
Technology
Competitive advantage
unsustainable up to 20202
34%
50%
26%
13%
37%
Vision for
Indian
manufacturing:
Germany of
the East and
not Factory to
the West
India Inc's aspiration for Indian Manufacturing
Germany of the
East?
77%
Topquality
manufacturing
29%
Technology and
process leader in
select sectors
26%
Low cost innovation
23%
Most preferred
lowcost
16%
Beyond low cost
7%
Low cost
Others
Source: CIIBCG Manufacturing Leadership Survey 2012; BCG Analysis.

1
Survey response to question on biggest competitive advantage of Indian manufacturing (top 3).
2
Survey response to what competitive advantage will not be sustainable up to 2020 (top 3).
3
Survey response to what would you like Indian manufacturing to be known by 2020.
India well Positioned to Become

Germany of the East
For achieving the vision of becoming a top
quality and high technology manufacturing
destination, we believe that the following
will be key focus areas, and while we are
well positioned in some of these aspects, our
position needs to be further bolstered.
Manufacturing qualityneed to build on

our solid foundation and accelerate
R&D and Innovationto be targeted as a

source of sustainable competitive advantage
18 | Reigniting
Indias Quest for Manufacturing Leadership
Manufacturing qualityNeed to
build on our solid foundation and
accelerate
BCG experience shows that companies with
superior quality can outperform companies
with poor quality by two to three times
based on return of sales, and by up to five
times on sales growth. Quality leaders can
achieve a scrap rate that is only 30 percent
of the rate suffered by companies with lower
quality. In addition, companies with higher
focus on predevelopment and using preventive quality management tools are able to reduce R&D expense by 20 to 30 percent.
Multiple Indian companies have invested in

improving their quality standards over the
last few years, partly in recognition of increasing consumer awareness and partly to
distinguish themselves from low quality Chinese exports. Many are deploying best in
class practices such as Total Quality Management (TQM), Total Productive Maintenance
(TPM), Six Sigma, etc. Japanese consultants
specialized in TPM, TQM are quite popular
with several Indian manufacturing companies. And, the efforts are bearing fruit:
India stands second globally on the

number of TPM awards given by Japan
Institute of Plant Maintenance ( JIPM),
having received 23 out of a total of 201
awarded over last four years
India ranks 8th in the world on the

number of ISO 9001 quality management
system certifications, above the U.S. and
South Korea
The number of ISI licenses awarded by

Bureau of Indian Standards have grown at
a CAGR of approximately 10 percent over
last three years (as shown in Exhibit 3.2)
Over 50 percent of all Deming Awards

(known as the Oscars for quality systems)
awarded since 2003, have gone to Indian
companies
Three Indian companies have been

awarded the Japan Quality Medal; the
medal is reserved for companies demonstrating continuous improvement efforts
toward quality and dependability of
products. Only 20 of these medals have
been given since its inception in 1970
The Indian auto component industry is a

perfect example of an industry sector that
has steadily improved its quality standing in
the domestic and international circles. India
has seen one of the highest adoption rates
for ISO / TS 16949 certification which deals
with the automotive industry. The number
of such certifications by Indian companies
grew at approximately 14 percent from 2007
to 2010 when the worlds total such certifications grew at approximately 7 percent. In
fact, the Indian automotive sector has won
16 out of total 37 Deming awards given since
2003. The industry has also won 15 TPM
awards and 3 JIPM awards. This high focus
Exhibit 3.2 | Indian companies have moved up the quality ladder over last few years
Rapid increase in adoption of quality standards

over last three years
BIS licenses
granted (000)
Cumulative operative
licenses (000)
25
Indian companies have won majority of Deming

awards in the last decade
Deming awards, cumulative starting 2003
40
30
20
+10%
4
+3%
3
2.3
2.5
2.5
2.4
2.6
2.9
20
3.2
10
2
10
1
FY05 FY06 FY07 FY08 FY09 FY10 FY11
BIS licenses granted
15
10
10
10
12
12
13
13
6
3
4
10
10
15
14
17
ROW
20
India
17
15
03 04 05 06 07 08 09 10 11 12
Cumulative BIS
operative licenses
Source: Bureau of Indian Standards, Annual Report 201011, 200910, 200809, 200708; The W. Edwards Deming Institute; Union of Japanese Scientists &
Engineers (UJSE)
on quality has helped automotive component exports grow at a CAGR of approximately 16 percent from 200712 and as per
Automotive Components Manufacturers Association of India (ACMA), the growth rate is
expected to further accelerate over the next
five years.
dex1. Average TSR for the identified Innovators averaged 9.5 percent over 200711, in
stark contrast to the negative 2.3 percent
TSR for the industry benchmarks.
While India finds itself on a strong footing
with respect to quality, R&D is one area
where we need to bolster our capabilities. In
this critical area, India lags peer countries
and there is room for improvement. Some
key facts:
While Indian companies have made great

progress in the area of quality over the last
few decades, the need of the hour is to accelerate our journey towards quality excellence and match the best globally. The aspiration is for every other exportoriented
industry to learn from the autocomponent
example and develop excellent quality systems in order to propel their performance
forward.
Target R&D and Innovation as a
source of sustainable competitive
advantage
Innovation is a critical driver of manufacturing growth, and one that is shown to drive
higher returns. A recent global BCG study
compared Total Shareholder Return (TSR) of
companies identified as Innovators with
the TSR of the MSCI All Countries World In-
India spends less than one percent of its

GDP on R&D. This is quite low in comparison with 3.47 percent for Japan, 3.4
percent for South Korea, 2.81 percent for
the U.S., and 1.55 percent for China2
In terms of research manpower, India has

190 R&D professionals per million
population, compared to approximately
1,100 for China and more than 5,000 for
Germany (as shown in Exhibit 3.3)
Number of patents granted to Indians in

FY 2011 were approximately 2,000;
compared to approximately 85,000 for
China and 190,000 for the U.S.
Exhibit 3.3 | India lags peer countries in R&D and innovation

Indias research standing significantly
lower than global peers
Share of industry in R&D spend lower for

India than global benchmarks
Patents granted in FY11 (# 000)
R&D expenditure by sector in FY11 (%)
200
100
190
85
4
36
70
28
50
50
62
18
67
Higher
education
64
Industry
33
Government
71
60
17
0
R&D
professionals
per million
population
2
India
190
10
0
UK Germany China
4,269
5,305
1,071
USA
4,663
R&D spend
in FY11 (PPP
US$ billion)
India
38
15
20
UK Germany China
41
88
175
USA
427
Source: World International Patents Organizations statistics on patents granted by countries of origin; UNESCO Institute for Statistics, UIS online database;
World Bank World Development Indicators database (200210); Battelle report on Global R&D Expenditure 2012; Eurostat by European CommissionReport
on R&D expenditure, Statistical Bureau of Japan Website, National Science Foundation website, Department of StatisticsSingapore website; China Science
& Technology Statistics Data book; BCG Analysis.
Note: R&D professionals are full time equivalent researchers in industry, academia and labs.
20 | Reigniting
Nonetheless, India has the potential to

quickly address this gap on the back of a
strong and growing pool of talent in science,
technology, and engineering.
Another focus area is industry participation
in R&D. Most R&D spending in India happens
by government (approximately 60 percent of
total R&D spend as shown in Exhibit 3.3) unlike global peers, where industry leads R&D
spending. Even within government spend,
share of industrial R&D is very low (approximately 8 percent) for India, as most government R&D spend is directed towards nonindustrial sectors like space, defense etc.
Further, there is need for greater collaboration between industry and academia, which
is currently confined (largely) to publishing
papers, and hence resulting in inadequate
generation of Intellectual Property (IP). In
addition, speeding up the process of patent
granting can help bolster IP filing. Currently,
insufficient capacity and capabilities in the
patent office is creating a backlog of patent
applications. For instance, 64 percent posts
for officers (above level of examiners) in the
patent office are currently vacant3.
While India is currently deficient in R&D,

the research infrastructure is expanding at a
rapid pace. The number of R&D professionals (full time researchers) has doubled from
around 100,000 in 2005 to more than
200,000 in 20104. Similarly, the number of research centers has also doubled over the
same period. In addition, there is a clear recognition of the importance of R&D from the
industry, as evidenced by the CIIBCG Manufacturing Leadership Survey 2012 (as
shown in Exhibit 3.4).
The highest number of respondents (73 percent) believed technological innovation is one
of the three most important success factors for
an Indian manufacturing company in order to
gain manufacturing leadership. In addition,
approximately 80 percent respondents indicated that they would be investing more in R&D
and innovation going forward.
Clearly, there is an explicit recognition of the
need to increase investment in R&D. The
critical next step for companies now is to
move from intent to implementation and
convert their plans into robust innovation /
R&D activities on the ground.
Exhibit 3.4 | R&D and innovation seen as a key success factor for future manufacturing growth
What are the most important (top 3) KSFs for an
Indian company towards manufacturing leadership?
Technological innovation
73%
Lean operations
Significantly more
33%
67%
Talent management
64%
Global aspirations
44%
Low cost procurement
31%
Somewhat more
46%
Similar
Somewhat lesser
20%
1%
19%
Backward integration
Others
Will your company invest more in R&D and

innovation in next 5 years compared to last 5?
Significantly lesser
1%
India Inc. looks at technological innovation as

the most important KSF
0%
~80% respondents expect R&D and

innovation spends to increase going forward
Source: CIIBCG Manufacturing Leadership Survey 2012.
Realizing our Aspiration

India Inc has set for itself a bold agenda of
becoming the Germany of the East. We also
have the right ingredients to attain this aspiration over the next ten yearsabundant
engineering talent, strengthening quality systemsas evidenced by a string of Deming
awards, and a strong intent to invest in technology, R&D and innovation.
However, this starting point alone will not
be sufficient for us to achieve this aspiration.
Our enablers, as highlighted in the early part
of this report have to be fixed on an urgent
basis, through a mix of government and in-
dustry initiatives. The next section focusses

precisely on these issues and delves into the
interventions required to make our aspirations a reality.
Note:
1. MSCI All Countries World Index is a stock market
index of over 6,000 global stocks
2. CIIBCG Capital Goods Report, November 2012
3. DIPP discussion paper on Controller General of
Patents Designs and Trademarks (CGPDTM) structure
4. Wharton Business School, Knowledge@Wharton,
October 2012
CALL FOR ACTION: STAKES

ARE HIGHER THAN BEFORE
he Indian manufacturing sector is

at an important crossroad today. While
the sector was poised for a strong upward
growth trajectory towards the end of the
previous decade, the last two years have seen
a dramatic slowdown in growth. The manufacturing sector has shrunk by about 0.8
percent (share of GDP) over the last two
years and is now less than 15 percent of GDP,
a scenario not witnessed since the mid 1990s.
Size of the Prize: US$ 350 Billion

Incremental Sector GDP, 70
Million Incremental Jobs
Going by the current growth expectations,
based on the CIIBCG Manufacturing Leadership Survey 2012 (manufacturing growth
rate of 6 percent as per survey consensus),
the Indian manufacturing sector could significantly underperform NMP targets (as shown
in Exhibit 4.1). Incremental growth in manufacturing GDP could lag NMP target for 2022
by as much as 70 percent, with manufacturing sectors share in GDP falling to 13 percent as against the envisaged target of 25
percent. While manufacturing GDP could
have been INR 32 trillion in 2022 as per
NMP vision, it might only achieve an output
closer to INR 14 trillion (a difference of INR
18 trillion or US$ 350 billion). Indias manufacturing sector could end up at number 6
position in the global league tables by 2022
as against the envisaged number 4 position.
Employment generation would be another

key area to be hit by slow manufacturing
growth rates. At the current trajectory the
manufacturing sector would fall significantly
short of the 100 million jobs it is expected to
generate over the next decade and would generate only about 30 million jobs. At a time
when around 30 million people1 are unemployed, significantly more being underemployed, and more than 200 million people are
expected to enter the workforce over the next
fifteen years, the importance of manufacturing sector for employment generation and
economic development cannot be over emphasized.
Agenda for Realizing our Manufacturing Aspiration
Many recommendations have been made in

the past about reviving manufacturing
growth. Our aim is not to repeat these recommendations in detail, but rather to summarize them, and to focus on the key areas
of intervention that are most pivotal to re
igniting our quest for manufacturing leadership.
Exhibit 4.2 lays out the areas of interventions required by the government and the industry:
Developing vision and capabilities

beyond low cost leadership
Exhibit 4.1 | At current growth trajectory, Indian manufacturing sector will significantly underperform
NMP targets for 2022
Incremental manufacturing GDP
could lag NMP target by ~70%...
Manufacturing GDP
(INR trillion)
Jobs created
(millions)
40
100
NMP target
Likley achievement
30
Manufacturing
GDP (2009)
...and impacting Indias manufacturing leadership aspirations
...creating ~70 million less jobs...
100
Rank
30
2009
2022E
USA
China
China
USA
Japan
Japan
Germany
Italy
Germany
S. Korea
S. Korea
UK
Italy
France
UK
India
Brazil
10
Mexico
Mexico
11
Brazil
France
12
Spain
Russia
32
70
~70%
20
50
14
10
0
2009 20121
2022
17.5%
15.7%
14.7%
25.0%
13.0%
NMP
Likely
Gap
target achievement
India ?
Source: CII BCG Manufacturing Leadership Survey 2012; EIU; Euromonitor; Oxford Economics; BCG Analysis.
Note: All GDP data at constant (200405) prices; Likely achievement assumes Manufacturing GDP growth of 6% based on survey consensus; Manufacturing
GDP calculated based on Real GDP data from EIU and applying manufacturing % (of GDP) from Euromonitor International; Indian GDP and Manufacturing
GDP forecasts are from Oxford Economics database. US$ / INR exchange rate assumed to be 50. NMP target assumes achievement of 25% share in GDP at
constant CAGR of 12.5% starting 2010.
1
All years are calendar years; 2012 data extrapolated using 9 months data ( JanuarySeptember).
Exhibit 4.2 | Agenda for realizing Indian manufacturing vision
Capabilities
Vision look beyond low cost leadership
Competitiveness
Develop R&D and innovation

as a source of sustainable
competitive advantage
9
Create a stronger footprint in

highvalue added sectors
Build infrastructure
Ease regulatory burden

Establish promanufacturing
business environment
Faster and simplified
clearances and approvals
Building
blocks
Land
9
Simplify land
acquisition
LARR bill needs
to take
balanced view
Labour
9
Establish Common Market
Establish world class supporting

infrastructure
Improve ports, rail, roads, etc.
Faster development of clusters
9
Balance worker
rights with
flexibility
Skill
development
Harmonize IR
Fortify and further enhance

quality foundation already built
Address absence of common

market across country and
current cascading taxation
Implementation of GST
Power
Capital
Ensure regular
power supply to
industries
Secure fuel
availability for
power plants
Ease credit
availability to
industry
Fiscal prudence
Raw materials
Ease availability
Implement
Chawla
committee
recommendations
Drive accountable policy implementation

Create an IndustryGovernment institutional framework to own the manufacturing agenda
9
Key interventions detailed
9
Enhancing competitiveness (easing

regulatory burden, aggressively building
infrastructure, establish common market)
Fixing the building blocks (ensuring availability of land, labour, power, capital, raw
material)
Ensuring speedy and accountable

implementation of all manufacturing
policies (creating an industrygovernment institutional framework for owning
the industrial agenda)
While the above list is expansive, we detail

out five most critical interventions below:
Ensuring success of the NMP would require a

similar effort, of a much higher magnitude:
An industrygovernment institutional
framework may have to be setup, to own
the industrial agenda and be accountable
for industrial policy implementation
This agency would be responsible for

coordination across relevant diverse
departments and be sufficiently empowered to ensure speedy execution and
swift resolution of conflicts, if any. It
should be directly attached to the Prime
Ministers office
It is also critical to adequately represent

and actively involve the private sector in
the daytoday working of this agency
1. Creation of an industrygovernment
institutional framework to own the
manufacturing agenda
2. Driving long overdue reforms in labour
3. Driving an outofbox solution for land
4. Building innovation and R&D capability
at company and sector levels
5. Tapping into newer verticals such as
hightech
Creation of an IndustryGovernment Institutional Framework to

own the Manufacturing Agenda
Adequate focus and visibility on the key

metrics of progress (for example, kilometer of rail built as the single most important parameter of success of the Delhi
Metro)
Driving Long Overdue Reforms

in Labour
Labour is one issue that has remained untouched by reforms for long. This is the right
time to unlock the true potential of this all important factor determining manufacturing
growth.
Well thought out policies, often do not end up

serving their purpose due to delayed or inadequate implementation. The National Manufacturing Policy itself, while having the potential to be a gamechanger needs to be
implemented well to have the desired impact.
Four key issues related to labour continue to

plague Indian manufacturing growth: lack of
flexibility in the present 19th century labour
laws, low labour productivity, increasing demand supply gap for skilled labour, and deplorable living conditions for workers.
Examples of successful implementation of

policy, such as the rapid infrastructure build
out seen in Delhi and Gujarat in the recent
years, have three key aspects in common:
The first of these issues has led to a scenario

where more than 90 percent workers belong
to the contract category, hurting all stakeholders. The government needs to implement
a multipronged solution aimed at growing
organized sector employment and balancing
the need for flexibility. An outofbox solution would be to eliminate contract as a category rather than regularize them through
the back door by bringing their compensation
on par with permanent workers. This will
eliminate the biggest cause of dissatisfaction.
Strong political will with visibility and

ownership at the highest level
Single point ownership of the agenda at

an implementation level cutting across
ministry / department lines (as in the
case of the Delhi metro)
This increased supply of permanent workers should also lead to a downward pressure
on their wages, as long as we can create a
more efficient labour market, and thereby
sustain labour cost competitiveness of Indian industry.
ue) and the consent clauses (80 percent

consent of land owners and livelihood losers), which are likely to make land acquisition both difficult and expensive, thereby
hampering manufacturing investment and
growth.
This, alone, however does not give necessary

flexibility to the industry. The labour policy
should allow companies to downsize more
easily up to a certain percentage of total
workforce in a transparent manner, under
pinned by a jobloss scheme, unemployment
insurance and retraining fees. The final,
and perhaps the most important, part of this
solution is to implement a policy incentivizing creation of permanent jobs.
The government needs to explore outof

box solutions to the land problem. A potential winwin approach can be to separate
land ownership and land usage for industry.
While the details will have to be worked out,
the guiding principles could be as follows:
The government should carry out land

zoning and identify land for different
usage. Further, instead of outright
acquisition, it should facilitate setting of
a land owning company with ownership
interest held by landowners. The owners
could contribute their land in return for
stock in the ratio of land they contribute
and thus become fractional owners of the
land holding entity
The land can be valued at the NPV of

current average net annual returns, thus
ensuring that there is no loss to the
current earnings of the land owners
Driving an Outofbox Solution

for Land
This land can then be given on renewable long lease (say 30+30 years) to the
industry for setting up operations, with
the lease contract having a built in
escalation. Thus the current and future
annual income of the land owners is
preserved and they still own the land
The stocks of these land owning companies can be allowed to be traded like a
REIT2 giving land owners the flexibility
to monetize the long term upside
The industry has expressed concerns on various aspects of the bill, including the compensation provisions (four times market val-
Another opportunity lies in the land held by

various firms in defunct industrial estates
and also the land lying waste in prime areas
due to closure of factories / mills. This is all
dead investment, hugely valuable, and largely wasted. The state governments need to
undertake surveys for correct estimation of
the land lying locked which would enable
and help the government make better informed decisions while allocating land to
companies. However, this will also in turn re-
Finally, as a corollary to facilitating creation of

large scale jobs, it is critical to address the issue of workers living conditions. Many of
these workers migrate from rural areas in
search of manufacturing jobs. Today, they stay
in very deplorable conditions in the outskirts
of industrial hubs and as the scale of migration increases, more and more urban slums
are created in the absence of any planning for
their housing. The contrast of clean, air
cooled factories with hot, dirty, shared rooms
in the night (often with many hours without
power) could not be greater. The government
needs to create an appropriate policy framework with incentives to promote development
of large scale worker colonies with suitable
amenities near every industrial cluster.
Land acquisition is increasingly becoming a

hindrance to Indian manufacturing growth.
The Land Acquisition and Rehabilitation and
Resettlement Bill (LARR) currently being debated within the cabinet and likely to be introduced in the winter session of parliament
is an important step in the journey. However,
even after multiple refinements, the LARR
Bill has failed to strike the right balance between industrial agenda and sensitively addressing the needs of landowners.
26 | Reigniting
quire radical reform in bankruptcy laws so

that much of the sick industry gets closed,
restructured, or revived under new ownership.
Building Innovation and R&D

Capability at Company and
Sector Levels
In addition to focussing on the aspects detailed above, achieving our aspiration necessitates building a manufacturing ecosystem
that has sustainable advantages beyond low
costsuch as innovation.
One of the key routes for the industry to
build innovation as a source of advantage, is
to step up innovation process and focus at
the company level. Some specific ideas include:
Increased investment in R&D and

innovation, with a long term focus
Indian companiesas highlighted in the
earlier chapters, spend lesser on R&D as
compared to their global peers. This in a
situation when many global companies are
looking to create their R&D hubs in India.
There needs to be a radical rethink to
move away from focussing on cost or
borrowed technology as a competitive
advantage, but move to technology, design,
and innovation to compete both locally
and globally. Government incentives for
R&D will also have to be tweaked to move
away from only incentivizing explicit R&D
spends, to encouraging innovationspend
at a company level (innovation covers a
much broader canvas than specific research and development).
Creation of a culture of innovation that
percolates right from the top management
to the shop floor. This can help create a
robust pipeline of ideas for optimizing
costs, improving quality, or catering to new
opportunities. While there are many
different routes to creating this culture,
companies can institutionalize this culture by setting aside say 1015 percent of
employee time on pursuit of individual
projects. This coupled with strong financial
incentives can help create a robust pipeline of innovation.
Tapping into Newer Verticals

such as Hightech
The government along with the industry
needs to aggressively expand the footprint of
Indian manufacturing in sectors of strategic
importance such as hightech and capital
goods. As seen from the rise of automotive
sector, India has all the right ingredients for
growing such industriesavailability of abundant science and engineering talent, cheap labour for manufacturing and rising domestic
demand. Expansion in such sectors would also
ensure development and deployment of capabilities beyond low cost. The government, aided by the private sector needs to build a conducive ecosystem for such industries to grow.
Some of the key levers that can be employed
are provided below:
Leverage Indian demand to nurture and

develop scale for local industry
Domestic demand should be used as a
lever to trigger localization and enable
technology transfer. We need to learn from
examples of other countries such as China
and Korea, where this approach has been
the basis for creating global giants. Further,
for categories like capital goods, where
feasible, public procurement should have
preference for local manufacturers. Also,
the government needs to create a level
playing field between imports and domestically manufactured goods in such sectors
(for example, the increased duties recently
announced on Chinese made BTG equipment will help the domestic industry over
the long run).
Develop clusters for cost competitiveness, shared facilities and local supply
chains
Industry cluster formation has been one
of the levers successfully applied by
several countries to increase competitiveness in high value industries. As NIMZs
and other clusters develop, they need to
be set in a way so as to deliver structural
advantages on a long term basis to high
value sectors. Core infrastructure for
supporting operations, common facility
centres, common product development
centres as well as means to enable easier
market access should be established as
part of this effort.
Concluding Thoughts
The global and local manufacturing landscape are being transformed. Globally, the
Chinese manufacturing sector is losing cost
competitiveness, creating opportunities for
other challengers to participate in the global
supply chain. Both globally and locally, companies are moving away from low cost as the
sole driver of advantage.
India, with its abundant engineering talent,
depreciated currency and strengthening
quality systems is in a unique position to leverage these trends favorably. However,
some key enablers to set the Indian manufacturing sector back on its growth track
have been found wanting. With a renewed
thrust, our manufacturing sector can rapidly
regain its earlier trajectory.
On the other hand, if the core building

blocks are not addressed, and the government and industry do not jointly take responsibility for driving this agenda, this next
phase of global manufacturing restructuring
will once again see India being outdone by
other countries and more importantly be undone by its own fixable weaknesses. The
price we have to pay for such slippage could
be enormousupto US$ 350 billion of incremental output, and 70 million incremental
jobs.
Note:
1. NSSO Employment and Unemployment Situation
in India 200910
2. Real Estate Investment trust
FOR further reading
The Boston Consulting Group

publishes other reports and articles
on related topics that may be of
interest to senior executives. Recent
examples include:
Capital Goods in IndiaA Call for

Action
A report by The Boston Consulting Group

in association with The Confederation of
Indian Industry (CII), November 2012
U.S. Manufacturing Nears the

Tipping PointWhich Industries,
Why, and How Much?
A focus by The Boston Consulting Group,

March 2012
Creating a Vibrant Domestic

Defence Manufacturing Sector
Lean in Industrial GoodsDriving

to Breakthrough Performance
Green ManufacturingEnergy,
Products and Processes
Made in America, AgainWhy

Manufacturing Will Return to the
U.S.
Competing with China: Lessons

from South Koreas Manufacturers
Companies on the MoveRising

Stars from Rapidly Developing
Economies Are Reshaping Global
Industries
A whitepaper by The Boston Consulting

Group in association with Confederation
of Indian Industry (CII), March 2012
A whitepaper by The Boston Consulting

Group in association with The
Confederation of Indian Industry (CII),
March 2011
An article by The Boston Consulting

Group, October 2012
What Sets Quality Leaders in

Manufacturing ApartThe Human
Factor
A focus by The Boston Consulting Group
in collaboration with RWTH Aachen
University, August 2012
The DemandDriven Supply

ChainMaking It Work and
Delivering Results

May 2012

September 2011

August 2011
A report by The Boston Consulting Group,

January 2011
Flexibility and Innovation

Todays Imperatives for Steel
A report by The Boston Consulting Group,

December 2010
The African ChallengersGlobal

Competitors Emerge from the
Overlooked Continent

June 2010
NOTE to the reader
About the Authors
Dr. Arindam Bhattacharya is Managing Director of BCG India. Amit Ganeriwalla is a Partner and Director at
BCGs Mumbai office. Arun Bruce is a
Principal in the firms Mumbai office.
For Further Contact
If you would like to discuss the themes

and content of this report, please contact:
Arindam Bhattacharya
BCG New Delhi
+91 124 459 7093
bhattacharya.arindam@bcg.com
Amit Ganeriwalla
BCG Mumbai
+91 22 6749 7232
ganeriwalla.amit@bcg.com
Arun Bruce
BCG Mumbai
+91 22 6749 7101
bruce.arun@bcg.com
Prateek Gupta
BCG Mumbai
+91 22 6749 7324
gupta.prateek@bcg.com
Charu Mathur
Regional Director, CII Western Region
+91 22 24931790 Ext 401
charu.mathur@cii.in
Sangita Das
Deputy Director, CII Western Region
+91 22 24931790 Ext 409
sangita.das@cii.in
Acknowledgments
This study was undertaken by The

Boston Consulting Group (BCG) with
support from the Confederation of Indian Industry (CII).
We would like to thank the CII CEOs
Council on Manufacturing for their
valuable inputs and insights. Special
thanks to Mr. Jamshyd N Godrej, Chairman, 11th Manufacturing Summit and
Chairman and MD, Godrej & Boyce
Manufacturing Company Limited; Mr.
Pradeep Bhargava, Chairman, CII
Western Region and Director, Cummins Generator Technologies India
Limited; Dr. Naushad Forbes, Director,
Forbes Marshall Private Limited; Ms.
Charu Mathur, Regional Director, CII
Western Region, for their valuable contribution.
We would also like to thank the respondents to the CIIBCG Manufacturing Leadership Survey 2012 for
their valuable inputs.
We gratefully acknowledge the contribution of Nikhil Nerurkar and Rahul
Sanghvi in the firms Mumbai office,
and Ritesh Ritolia in the firms New
Delhi office for their contribution in
writing this report, and also Ankita
Wahi in the firms New Delhi office for
supporting analysis.
Special thanks to Jasmin Pithawala for
managing the marketing process, and
Jamshed Daruwalla, Kim Friedman,
Saroj Singh and Nevin Varghese for
their contributions to the editing, design and production of this report.
32 | Reigniting
The Boston Consulting Group, Inc. 2012. All rights reserved.

For information or permission to reprint:
Please contact BCG at:
Email: bcginfo@bcg.com
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Please contact CII at:
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Confederation of Indian Industry

CII 11th Manufacturing Summit 2012

Reigniting Indias Quest

The Boston Consulting Group (BCG) is a global

The Confederation of Indian Industry (CII) works to create

Confederation of Indian Industry

CII 11th Manufacturing Summit 2012

Reigniting Indias Quest

December 2012 | The Boston Consulting Group

2 | Reigniting Indias Quest for Manufacturing Leadership

RECENT MANUFACTURING SLOWDOWN: SPEED BUMP OR COURSE CORRECTION

GLOBAL TRENDS: RESTRUCTURING OF SUPPLY CHAINS

CALL FOR ACTION: STAKES ARE HIGHER THAN BEFORE

Creation of an IndustryGovernment Institutional Framework to own the Manufacturing Agenda

FOR FURTHER READING

note to the reader

The Boston Consulting Group Confederation of Indian Industry | 3

he National Manufacturing policy laid out a vision for the

4 | Reigniting Indias Quest for Manufacturing Leadership

ndian manufacturing has been slowing

National Manufacturing Policy

In most rapidly developing economies, manufacturing contributes 2540 percent of the

Manufacturing sectors share in GDP of 25

Manufacturing sector growth of 1214

Creation of 100 million additional jobs in

Performance of Indian manufacturing over

The Boston Consulting Group Confederation of Indian Industry | 5

Exhibit 1.1 | Manufacturing growth slowdown has intensified

Manufacturing GDP growth slowdown

...manufacturing IIP growth also on a continual

Manufacturing GDP (INR trillion)

IIP manufacturing growth rates (%)

FY 0809 FY 0910 FY 1011 FY 1112 FY 12131

Share slipping below 15%, lowest in 18 years3

Examining the Building Blocks of

While a bulk of the slowdown can be attributed

Industrial relations perceived to be a

Progress made on some fronts, but lot of ground

Global ranking of India1

Top management concerned regarding the quality

Mandays lost (million)

430 389 421

Survey responses (in %)

The Boston Consulting Group Confederation of Indian Industry | 7

petitiveness of the sector. World class physical

We need an approach to land acquisition that

Consequently, brand India as a manufacturing

Infrastructure bottlenecks continue

Investments in manufacturing have registered

Investment / project (INR billion)

Ease of Doing Business (Rank / 185 countries)

Average investment per project

8 | Reigniting Indias Quest for Manufacturing Leadership

What should be the target, aspirational growth

Survey responses (%)

Survey responses (%)

Source: CIIBCG Manufacturing Leadership Survey 2012; BCG Analysis.

Hope on the Horizon

The Boston Consulting Group Confederation of Indian Industry | 9

he period from 1990s to 2000s saw a

high public investments, and an artificially

Exhibit 2.1 | Manufacturing supply chains confronting unprecedented pace of change

Chinese labour rates double?

1. Decreasing cost competitiveness of China