Don’t miss the latest developments in business and finance.

Manufacturing: PM has multiple holes to fill before pvt capital rushes in

Yet, a look at the Indian units of long-established multinationals shows how much help the industrial sector will need

manufacturing
Photo: Bloomberg
Anjani Trivedi | Bloomberg
5 min read Last Updated : Mar 03 2023 | 9:29 AM IST
By the looks of it, Prime Minister Narendra Modi’s manufacturing drive is on the up, with all the trappings of imminent success.
 
Multinational companies and long-term foreign investors like private equity giant Blackstone Inc. have their sights on India. The recently unveiled national budget boosted capital spending by more than expected, adding to the excitement. With a host of subsidies and sweeteners, electronics firms like Apple Inc. and Samsung Electronics Co. are making big commitments to the country.

Yet, a look at the Indian units of long-established multinationals shows how much help the industrial sector will need.

Consider publicly listed ABB India Ltd., the domestic unit of European industrial firm ABB Ltd., that manufactures products for automation and electrification, along with other industrial equipment. Orders grew 4% in the latest quarter. However, that was lower than the 22% order uptick from India for ABB’s global parent. Why the gap? It accounts for the supplies by ABB India in the domestic market and the imports of ABB to deal with the growing backlog, the company said in a statement. 

ABB India isn’t alone. Global companies need their parent to meet rising local demand. In a recent earnings call, executives from Cummins India Ltd., a unit of Cummins Inc., said orders for a project with the Gas Authority of India Ltd. would be taken by the parent entity and the local business would help with service support and installation. For most firms, big projects that are tendered out end up relying on overseas entities because many of the products and supplies aren’t available domestically or in some cases, don’t meet global standards.

Don’t get me wrong, these firms are still doing well — as long as the orders keep coming in and firms are able to meet them, business hums along. 

For India’s industrial sector, however, this means many companies aren’t building out operations for new products. Organic growth doesn’t really happen until demand is established, either, and any supply chains that do develop are piecemeal. These are the holes Modi needs to focus on filling before private capital rushes in.

The longer-term solution — potentially cumbersome immediately — is more localized production lines. In theory, high enough demand would mean domestic subsidiaries build factories on the ground that cater to growing needs for motors, gears and other such intermediate goods.

But what is enough? Determining the critical mass of real demand is crucial before businesses plunge into investing in India — and that’s tough. ABB India last week announced plans to invest $121 million over the next five years, including a factory for gas insulated switchgears that are used to manage power systems in substations, railways and industrial complexes. Last year, it opened a smart instrumentation factory to make a range of devices. Clearly, there is a growing need for infrastructure along with policy tailwinds. ABB, though, has been invested in India for a long time, and these moves add to its presence.

For new companies entering India now, the runway is far longer. Despite the so-called production-linked incentives, the threshold for sales and upfront capital is far too high for medium-sized businesses to actually take advantage of subsidies. Firms are still exploring opportunities and shopping around states to find the best spot.

Businesses need to be more open-minded to locations further out from urban areas and cognizant of the time it takes to set up, according to consultants at Roedl & Partner India.

The southern states of Tamil Nadu and Karnataka are front runners, with their government-led investment boards driving incentives. In central India, provinces are trying to push through the buildout of highways, hoping to spread the reach of roads and infrastructure to expand industrial areas. 

Industries like electronics (including computer software and hardware) and automobiles (largely components) have drawn the bulk of the foreign direct investment in the manufacturing sector, pointing to the concentration and fragmented nature so far. 

To avoid becoming just an assembly line, India needs to spread the love by pushing supply chains further out. Geographical clusters focused on sectors much like China’s, deeper into the hinterland, would be one place to start. Manesar — a now not-so-remote area outside Gurgaon became an industrial hub and residential area because carmaker Maruti Suzuki Ltd. set up a plant there. It boasts excellent sushi and Japanese restaurants, too. Drawing in companies that make vital yet smaller components, not just the big headline goods, would also help. 

There’s a practical lesson for the executives rushing to India: Companies need to choose locations where other firms are already present, not states where the incentives look the best, or crowded and saturated urban centers. And, tread with care because there’s opportunity, just not where you’d hope.


Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper

Topics :Narendra ModiApple IncSamsung ElectronicsMNCsBlackstoneForeign investorsmanufacturing

Next Story