COVID-19: Turning the crisis into an opportunity!

COVID-19 has turned the world upside down. What started off as an outbreak in Wuhan, Hubei province of China is now a pandemic that has spread in more than 130 countries worldwide as we speak. In India too, the number of people who have detected positive has been multiplying by the day. Most of the state governments are waking up to the reality and state after state have been shut down.

In this sombre time, it may not sound so appropriate to talk about tapping opportunities that may arise. But then, one of the key jobs of strategic experts in counties is to always look beyond the obvious, see ahead of today and tomorrow and peep into the future.  In India, if such experts do that, they will see a window to turn this crisis into a long term, game changing opportunity.

Few weeks ago, when Corona virus had not spread like it is today, other than the human calamity, discussions were about how global supply chains have been disrupted due to the outbreak in China. Today, with China controlling the spread quickly using strong arm action and with the virus spreading all over, discussions around supply chain disruption have receded.  The focus today is around containing the spread as country after country have found people inflicted by the virus. However, when the dust and storm around the pandemic settles down in a few months, policy makers and industry experts will start pondering over putting all manufacturing eggs in the Chinese basket. De-risking from China for future would be top in the agenda.  Already, we are beginning to see some noise in that direction.

For countries and manufacturing companies, de-risking from China is nothing new. Many of them started doing it ten years ago when China, in the back of around 10% GDP growth for few years in a row from 2003 to 2011, was on fire as an economy. High economic growth also means increase in wages which shot up from CNY 750 in 2007 to CNY 2420 in 2018! Coupled with raising wages was the non-availability of skilled labour. A factory manager in Shanghai way back in 2012 told me that after the Chinese New year holidays, half the workforce would not return as they would end up joining companies which are located in provinces with higher minimum wages and with more overtime potential. Invariably mobile phones and other high demand product manufacturing units would suck up a lot of skilled manpower leaving other production units to scramble for trained manpower.

The logical option was to expand facilities out of China, if not to shift the entire production. Many Japanese companies who had put up factories in Thailand, Malaysia and later in China went and invested in Vietnam. It was a golden opportunity for India to have tapped that wave in that period. But we missed. Vietnam in spite of not boasting of very high skilled manpower but with relatively low labour cost managed to take advantage of the Japanese expansion plans. I was told that companies used to travel to interior Vietnam provinces and literally call out in the streets with microphones like in the feudal days as part of recruitment drive for factories!

India with its low labour cost and abundance of skilled manpower, still couldn’t feature in the agenda of companies looking at de-risking from China. And there are many reasons for the same.

It’s a myth that foreign companies just go by low labour cost when they try to invest in manufacturing facilities outside of their existing country bases. What they look for is whether the entire manufacturing eco-system is in place. China showed the world as to how to put that kind of eco-system in place that includes availability of low cost land in plenty, abundant skilled and low cost labour, low interest rate regime, tax benefits/holidays, access to ports, high quality infrastructure in the form of roads, highways, airports and sea ports, access to vendor base (this is particularly critical for Electronics and Automotive production) and more importantly what I call as the “hygiene factor”.  And this is the comfort factor which expatriates develop for the country where they want to set up production.

In India, we do not attach much importance to this while planning but, in my experience this becomes the key, tilting factor when choosing between options. If the team of expats who spend time in the country looking at options, do not feel comfortable about being able to lead a decent quality of life, they would never recommend that country. We should not forget that when a large production facility is set up, there will be hordes of expats who will be spending time during the project set-up phase and also later at supervisory/managerial roles when the unit is up and running.

That’s why I would not squabble if our governments spend money and resources to put their best face forward when foreign leaders visit here. For, many a times, there is a delegation of corporate chiefs who accompany these leaders and it is important that they carry a good impression of India as a country when they visit. In a Japanese company I worked earlier, the decision to invest in India which was lingering around for a while was finally taken when the group Chairman visited India and got impressed seeing the campus and Golf course of Infosys in Bengaluru!. I am talking of 2005 and fortunately the traffic situation then wasn’t as bad as it is today!

Coming back to the hygiene factor, this includes availability of good international schools, safety for women, availability of their country cuisines and even stuff like “Not a dry state” or “No Beef Ban”…!

In the wake of COVID-19, it is my belief that India must put its best foot forward in pitching itself as a robust manufacturing destination to the world which is looking at options.  And for this the government must move on a “Mission” mode quickly and activate “Make in India 2.0”!  We may not be able to scale up the economies of scale of China but then we are not looking at China completely. Our pitch must be to position India as an augmenting base.

Compared to the 1st decade of this century when India missed the opportunity when companies were de-risking, I believe that we now stand a better chance overall and hence it’s worth taking a shot now. Our roads and highways infrastructure is getting better though it’s a work in progress. We can now boast of world class airports in all the metro cities. The ports infrastructure have improved leaps and bounds and our customs clearance processes have smoothened.  We could still do much better on the “Ease of Doing business” front, though!

Ergo, I do believe that with a focussed approach towards getting companies to invest in setting up production facilities in India, India can be a good option for companies contemplating to de-risk from China. For India, which is in desperate need of a boost to the economy, nothing works like expansion in manufacturing as it increases direct and indirect jobs.

Author and Economist Shankkar Aiyyar in his book, The Accidental India has documented how in India every landmark game changing event since independence happened as a response to a crisis. Going by that track record, we are in the throes of another crisis with COVID-19 and hopefully we will come up with a response that is game changing!

The last booster shot for the Indian economy came in the beginning of this millennium and that was due to a global threat of a bug! The Y2K phenomenon opened the flood gates for the Indian Software industry and helped erect a pillar for our economy called the “Services”! Twenty years hence, now, a virus could provide the booster shot for the economy if India gets its act together. That of getting the manufacturing ecosystem in place and tap the opportunity which could present itself in the coming months. It’s not easy. But then its not impossible either.

Waking up “Make In India”!!!

In a week from now, Mumbai will host the “Make in India Week” – an event planned to give fillip to one of Modi Sarkar’s flagship program – Make In India. This was aimed at reviving the interest of domestic and MNCs in setting up/expanding manufacturing footprint in India – a sure shot elixir to tackle the unemployment malady and create millions of jobs. When this Govt. kicked off this initiative, one would have expected more cheers than jeers. However the reality was different. Leaving aside the noises from the opposition which anyway criticizes what the ruling Govt. does in India (this is irrespective of who is in power and who is in opposition), the naysayers included reputed economists and thinkers. They were of the view that it was too late for India to board the “Manufacturing” bus. China is already in the driver’s seat being the “factory for the world” and global companies are already heavily invested in China. Also the general view that with increasing automation in the shop floor, you don’t need much of low cost labour for manufacturing. So betting on manufacturing to generate millions of jobs may not be a cool idea any more. The session during the recently concluded World Economic Forum in Davos about “The Fourth Industrial Revolution” powered by Connected devices, 3D printers, Super Smart Robots and the like,… probably put paid to this idea of the critics. So instead of playing the catch up, the cynics’ view was that India should play to its strengths namely “Services” and invest further in developing soft skills to scale up further.

There is probably merit in this argument. However if one analyses the different states of India in terms of the economic condition it is clear that no state can hope to survive and grow by just focusing on services. For a diverse country like India with a huge disparity in income and social strata an even economic growth can be achieved only with a mix of manufacturing, services and agricultural activities. The top states in terms of GDP in India like Maharashtra, Tamil Nadu,.. have a very healthy mix as I noted in one of my earlier posts on “Car manufacturing” in Chennai (Read here). A fourth Industrial Revolution may augur well for developed countries with shrinking population, ever rising wages and diminishing demographic dividend but in India we still need to reap the benefits of the 2nd and 3rd.

So I think that this Govt. is right in pursuing the Make In India initiative particularly at a time when China is facing economic headwinds. The labour in China can no longer be termed cheap with wages ever-increasing to keep pace with the aspirations of the people. Many of the global corporations do not want to put all eggs in one basket that too Made in China😁😁. I know for sure that the Japanese are expanding into Vietnam in a big way for production. So could be other countries like the US, Germany,…,.. soon. So the moot question is are we positioned well to make them Make In India??

logo 2

As the logo of India’s Make In India program demonstrates, there are many cogs in the wheel for a country to be successful in manufacturing that too for the world. Cheap and Skilled labour, Vendor base, Access to cheap raw material, Quality awareness, Access to ports and logistic hubs (particularly for exports), flexible labour laws, Ease of doing business (which applies not just for mfg.) and above all a very efficient infrastructure (Roads, airports, ports, broadband connectivity,..,…) in short a “pro manufacturing eco system”. And for India while all the other cogs could fall in place over time, the biggest challenge is in infrastructure. One would argue that the eco system will be in place when growth picks up and factories are set up. Necessity is the mother of everything you know. For example wasn’t Gurgaon just a “Gaon” before Maruti?? Today it is a recognized Auto mfg. hub. Similarly there are many examples of PSU Units which were set up first which then turned out to be manufacturing hubs in course of time. Goes the argument. No argument can be more specious than this. Maruti was set up at a time when India was a protectionist state where the promoters (in this case the Govt. of India) can patiently wait for more than 10 years for the 1st car to roll out! Same is the case with many PSU units where the overarching mission was upliftment of the society rather than shareholder value or profits! Not in these “QSQT” (Quarter Se Quarter Tak) days!!!😁😁 And in these days of strict WTO regime the Government cannot slap high duties on imported goods to protect the local manufacturers.

So for Make In India to succeed India needs to get the Eco system right first up. While India has a natural advantage in some aspects like availability of not just cheap labour but also skilled, large Engineering pool,.. the road is long for areas like “Ease of doing business” and Infrastructure as I mentioned before. And fortunately the Govt. has rightly recognized these challenges. Its’ for the 1st time that a Govt. website has spotlight on “Ease of Doing Business” like in the Make In India home page, I reckon. See here. It was a pleasant surprise to see the list of initiatives already taken and ones on the way when I clicked on “Ease of Business” tab. And it is also great to see every day in Newspaper one state or the other hosting Investor summits to lure potential investors with Make In India being an important aspect. So while pitching for investments is all right, I think the state Govts. must also focus on getting the infrastructure in place in their respective states which helps not just manufacturing but in general fosters economic activity. Today inspite of higher labour costs if many companies are still outsourcing mfg. to China it is because of their fantastic infrastructure overall which helps to keep indirect costs lower. India’s labour costs is lower but the indirect costs due to poor infrastructure weighs us down.

I think now the world is quite convinced on the intent of the Modi Sarkar to promote Make In India. Now the time has come to morph the intent to reality by focusing on Infrastructure for which the states have to work in tandem with the Centre. That’s what will wake up Make In India and not the raking up of intolerance debate every other morning😩

Make in IndiaToon courtesy: Satish Acharya