CII 10th Manufacturing Summit

2011: "Indian Manufacturing at a

Point of Inflection"
Background Note to the Conference















Arindam Bhattacharya, Arun Bruce


December 2011


The Boston Consulting Group (BCG) is a
global management consulting firm and the
worlds leading advisor on business strategy.
We partner with clients from the private,
public, and notforprofit sectors in all
regions to identify their highestvalue
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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 non-government, not-for-profit,
industry led and industry managed
organization, playing a proactive role in
India's development process. Founded over
116 years ago, it is India's premier business
association, with a direct membership of over
8100 organizations from the private as well as
public sectors, including SMEs and MNCs, and
an indirect membership of over 90,000
companies from around 400 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 specialized 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.
CII has taken up the agenda of Business for
Livelihood for the year 2011-12. This
converges the fundamental themes of
spreading growth to disadvantaged sections of
society, building skills for meeting emerging
economic compulsions, and fostering a
climate of good governance. In line with this,
CII is placing increased focus on Affirmative
Action, Skills Development and Governance
during the year.
With 64 offices and 7 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 organisations in 90
countries, CII serves as a reference point for
Indian industry and the international business
community.


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THE BOSTON CONSULTING GROUP DECEMBER 2011

Contents
1. Context 4
2. Achieving the Aspirations for Indian Manufacturing: 25 % of GDP by 2025 5
3. Recent Challenges: Volatility, Cost Pressure, Falling Investment 10
4. Four Trends that will Shape our Journey to 25% of GDP 15
5. The NMP: A Step in the Right Direction 23
6. Conclusions 25


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1. Context
The CIIBCG report on the Indian manufacturing sector published in January 2010 had set a bold
aspiration for the industry to grow from 16 percent to 25 percent of the Indian GDP by 2025,
creating 100 million additional jobs for the economy. The report had identified key issues and
proposed an action agenda for the Indian manufacturing sector to achieve this aspiration.
Over the last two years since the publication of that report, our manufacturing output has
continued to grow below its true potential and remains at 1516 percent of GDP. Demand has
slowed down. Existing issues of skills, infrastructure, and depth of manufacturing continue to be
germane. Older issues such as strained labour relations have reemerged again. On the other
hand, there are also several positives. For example, India's competitive position for export
oriented goods visvis China is now stronger thanks to a weak rupee and a stronger Yuan,
coupled with increase in China's labour rates. Most importantly, the Indian Government has for
the first time articulated a bold target of achieving 25 percent contribution to GDP for the sector
in its recently released National Manufacturing Policy, which also lays down a reform agenda to
achieve this target.
Given this context, it would be fair to say that the Indian manufacturing sector is at a point of
inflection. We could continue with the moderate growth and competitiveness of recent years and
perform below our potential, held back by the constraints we face today, or we could see the
industry embarking on an aggressive growth path, driven by proactive structural and policy
changes and its improved competitiveness. The CII manufacturing summit is set against this
backdrop, and will feature several sessions linked to this theme of growth and competitiveness.
This document is intended to serve as a background note to the conference, and gives a
perspective on the aspirations for the Indian manufacturing sector and the latest trends that
could shape our journey to achieve these aspirations.

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2. Achieving the Aspirations for Indian Manufacturing: 25 % of GDP by 2025
A. Performance of the Manufacturing Sector so far
The manufacturing sector was a growth engine for India's economy till about 1980, growing
faster than national GDP by ~2 percent. Since 1980, the growth of the sector has been closely
tracking GDP (as shown in Exhibit 2.1). The share of the sector to GDP has remained steady
around 1516 percent in recent years compared to a high of 40 percent for Thailand and 34
percent for China and 2530 percent for most emerging economies. A share of 1520 percent is
far more representative of a developed economy with an established industrial base, than that of
an emerging economy. Clearly India's manufacturing sector's share cannot be justified given the
stage of its economic development.

There are some serious implications of this performance of the manufacturing sector. The most
important implication is the low share of employment for the sector (12 percent) as compared to
agriculture (54 percent) and services (34 percent). This compares unfavourably to other emerging
economies where the share of employment in manufacturing range from 15 percent to 30
percent. Clearly the Indian manufacturing sector has a lower contribution in creating
employment than that of its peer countries, and unless India can reverse this trend it will face
serious social pressures given the fact that the nation needs to create over 220 million jobs over
the next 15 years.
B. Changing Gears to Achieve 25 percent Share of GDP
India's manufacturing growth rate has typically tracked GDP growth, averaging 7 percent per
annum over the past 15 years. If we assume that India's GDP will grow at around 78 percent on


Exhibit 2.1: Manufacturing was India's growth engine till 1980,
but has since been tracking GDP
Manufacturing GDP (Rs. '000 Cr)
600
400
200
0
% share
30%
20%
10%
0%
2009
2007
15%
15%
2003 1951 1980
9%
~ 9.0% ~ 5.8% ~ 5.3% Mfg. GDP CAGR
Overall GDP CAGR ~ 8.8% ~ 5.5% ~ 3.4%
Growth in share of manufacturing
seen in postindependence period due
to aboveGDP growth
Despite increased growth, stagnant
share of manufacturing post 1980 with
growth close to GDP growth levels
Source: BCGCIIDIPP Report, CSO, MOSPI, BCG analysis.
Note: Manufacturing GDP at constant (19992000)prices, excludes mining.
19501980 19802002 200307
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an average over the next decade, the manufacturing growth has to be 34 percent higher to reach
25 percent share of GDP by 2025. This means that the manufacturing sector has to grow at 1112
percent per annum for the next 15 years, a stretch target but by no means an impossible one
given that the sector has witnessed 11 percent growth in some years during the last decade. This
steady growth at the rate of 11 percent will also propel India into a league of select nations and
place it as the third largest manufacturing sector in the world, behind China and United States (as
shown in Exhibit 2.2).

C. Three Critical Growth Drivers
A 25 percent GDP scenario by 2025 will need three critical growth drivers:
a) Aggressive investments to the tune of Rs. 5479 trillion between now and 2025
Our estimates suggest that between four to five times the levels of incremental investment will be
required over the next fifteen years to achieve the target level of growth. A conservative estimate
of 35 percent improvement in asset productivity improvement would mean that gross fixed
assets need to increase by Rs. 5479 trillion by 2025 to meet the 11 percent growth target (as
shown in Exhibit 2.3).
Appropriate policy measures will be required to ensure that such a massive funding requirement
is met through a combination of public expenditure, private and foreign investments. Specific
efforts will need to be made to attract higher FDI into the manufacturing sector.


Exhibit 2.2: India's manufacturing sector can become the 3rd largest
globally, if it grows at 11% per annum
Source: EIU, Euromonitor, BCG Analysis
Note: GDP data for FY2010 refers to India's GDP for 2009-10, but for some countries, such as China, Brazil and Russia, US, it refers to calendar year 2010.
Manufacturing GDP calculated based on Real GDP (based on expenditure) data from EIU and applying 'manufacturing % (of GDP)' from Euromonitor International
1. GDP at constant prices (in 2005 US$Bn)
2. 2025 estimates based on EIU projections for all countries (except India)
Comparison of manufacturing GDP
1
(2010 2025E
2
)
Country US$ Bn
United States
China
Japan
Germany
Italy
South Korea
United Kingdom
France
India
Brazil
Mexico
Spain
Canada
Russia
Turkey
1,414
1,165
751
523
262
262
222
201
199
163
162
149
135
128
87
China
United States
India
Japan
Germany
South Korea
Italy
Brazil
United Kingdom
Mexico
France
Russia
Canada
Spain
Turkey
2,927
1,924
969
844
662
442
298
296
284
258
257
217
196
182
163
Country US$ Bn
2010 2025E
~11%
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b) ~3968 million incremental manufacturing workforce
In 2010, the manufacturing sector is estimated to have employed about 50 million people, or 11
percent of total workforce
1
. We expect that Indian manufacturing sector will embrace a higher
level of automation and other technologies and, combined with improved operational processes,
will improve its productivity faster.
Even if we assume that the manufacturing labour productivity will improve at 57 percent per
year between 2011 and 2025, the manufacturing workforce would need an additional 3968
million trained people by 2025. This number would increase to over 107 million if the
productivity improvement is lower at 3 percent (as shown in Exhibit 2.4).
This represents a substantial growth from current levels and represents a much higher share of
the total workforce in India. Given the current state of the skill training infrastructure, this
represents a significant challenge. We anticipate a substantial part of the incremental workforce
to come by way of migration from ruralagriculture to urbanmanufacturing. Hence, it becomes
imperative that appropriate polices are adopted to make this workforce employable with the
right set of skills and qualifications.

1
NSSO Report: Key Indicators of Employment and Unemployment in India 200910
Exhibit 2.3: Large investments required to achieve aspirations
Additions in gross fixed assets (Rs. trillion)
10
40
20
0
202025 20152020 201015
40.9
200410
26.1
17.5
24.7
30
10.1
13.3
50
5.6
Projected addition @5% asset productivity gain
Projected addition @3% asset productivity gain
Actual addition in 200410
Total additional of Rs. 5479 trillion in manufacturing gross fixed assets by 2025
1
~ Rs. 5479 trillion from 2011 2025
Source: CSO, ASI, Capitaline, EIU, BCG analysis.
Note: At 19992000 constant prices, FY2008 base of gross fixed assets is nearly Rs. 13 trillion, and additions required will be Rs. 610 trillion.
Asset productivity is defined as revenues generated per gross fixed asset.
1. At current market prices; nominal value projections.
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c) 1418 percent growth in exports
It is also important to recognize that an 11 percent manufacturing growth rate cannot be
achieved without rapid growth in exports. If the domestic manufacturing sector can grow at
around 8 percent, in line with or slightly higher than the overall GDP growth rate over the period
of 20102025, exports will need to grow at 1418 percent annually. This target is not impossible
given the global trends and recent export growth of high double digits. The last two decades have
seen large scale migration of industrial capacity from developed countries to RDEs. This trend is
expected to continue we estimate that by 2025, RDE production will account for over 55
percent of global production compared to 36 percent today.
Hence over the next 15 years, there will be a massive shift of manufacturing capacity from the
developed to the developing countries. India has to exploit the opportunity to capture a
disproportionate share of this shift, thereby accelerating its exports growth rate. At the same time,
Indias traditional goods exports (textiles, rubber, petroleum, metal products) will need to fire on
all cylinders.
D. Key Enablers
No discussion about growth of the manufacturing sector will be complete without a mention of (a)
enabling infrastructure like roads, railways, power, airports, etc., to support the sector and, (b)
simplified government procedures and policies to reduce the transaction costs of doing business
in India. The challenges on both these fronts are well known and it is not the purpose of this note
to do more than highlight their importance. The National Manufacturing Policy announced
recently seeks to address some of these challenges and is discussed later in this note.

Additions to manufacturing workforce (Mn)
200 150 100 50 0
50 23 34 50
50 17 22 29
50 11 13 15
Exhibit 2.4: Significant workforce requirements to achieve aspirations
Current Workforce Projected additions (201115) Projected additions (201620) Projected additions (202125)
Projected additions
(20112025)
Actual workforce
(2010)
@ 3% labour
productivity
growth
@ 5% labour
productivity
growth
@ 7% labour
productivity
growth
Additional people required in manufacturing workforce (20112025)
Source: NSSO Report: Key Indicators of Employment and Unemployment in India 200910, BCG analysis.
Labour productivity is defined as real manufacturing GDP / worker employed in manufacturing sector.
~39
~107
~68
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E. Conclusion
Currently, there are over 25 Indian manufacturing companies with annual revenue in excess of
US$ 1 billion. To achieve our growth aspirations for 2025, this number will have to grow by
nearly 34 times. By 2025, India would need 7080 manufacturing companies achieving annual
revenue in excess of US$ 1 billion, and 45 firms with annual revenue in excess of US$ 100 billion
(assuming company growth rate at par with overall manufacturing growth rate).
Achieving this will be no mean task and will call for visionary leadership and management talent
of a different order.
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3. Recent Challenges: Volatility, Cost Pressure, Falling Investment
While there are several structural issues that continue to ail the Indian manufacturing sector
(skills deficit, poor infrastructure, rigid labour policies etc), three recent challenges have emerged,
that are creating considerable headwinds to Indian manufacturing's growth story demand
volatility, cost pressures, and falling investments.
A. Demand Volatility:
Volatility in performance of the manufacturing sector has become more pronounced over the last
five years. As depicted in Exhibit 3.1, over the last five years, YoY growth (measured every
quarter) has varied from a high of 16 percent in '07 to a low of 1.3 percent in '09, and back to a
high of 15 percent in '09. In no other period of growth (either 20002005 or even earlier) has the
volatility been as high as 15 percentage points.

Implications: In the face of increasing volatility, manufacturing companies will have to make
their operations more flexible. Flexibility in manufacturing systems can be introduced in all
aspects of the production process: product flexibility that allows rapid change and upgradation in
models and simultaneous production of a broader variety; volume flexibility; lead time flexibility;
process flexibility as well as financial flexibility in the investment strategy. Several levers can be
used to increase flexibility. A few models that companies utilize to enhance flexibility include:
Flexible Automation: Companies can use automation to increase the flexibility of their
manufacturing operations. These can vary from low cost 'smart' automation to advanced
robotics. For example, automotive plants have used advanced robotic tools to produce
several models on the same assembly line, allowing them to respond quickly to changing
demand patterns.
Exhibit 3.1: Volatility in manufacturing sector has tangibly increased over
last 2 years
% growth
20
10
0
5.5
6.0
10.0
12.7
15.2
11.4
6.1
2.0
1.3
2.6
6.6
7.0
8.4
9.9
10.5
12.7
16.4
14.0
14.0
12.6
10.0
9.0
9.1
12.5
8.7
9.7
8.9
7.2
7.3
6.7
6.6 5.8
7.9
7.4 7.3
4.6
3.2
2.6
2.2
2.1
5.7
8.2
8.1
9.1
4.0 3.5
3.0
2.3
3.5
2.0
3.5 3.5
-0.5
1.5
0.2
-0.9
-5
5
15
'97'98 '98'99 '99'00 '00'01 '01'02 '02'03 '03'04 '04'05 '05'06 '06'07 '07'08 '08'09 '09'10 '10'11
7%
7%
YoY growth (on quarterly basis)
Source: MOSPI, BCG analysis
14-15%
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Flexible Labour: For handling short term volatility (within the year), companies can use
annualized labour contracts and / or mix of permanent and temporary labour. An Indian
appliance company, in its refrigerator plant (whose demand rises significantly during summer
months), handles inyear volatility by deploying temporary labour to address demand peaks.
The proportion of temporary labour can vary from a low of 10 percent in troughs to as high
as 50 percent in peaks. A continuous 'skillproofing' approach has been implemented in the
production system to create lowskilled positions in which the temporary labour can be
deployed thus managing demand peaks without affecting productivity.
Modular systems with a broad network of suppliers: Companies often create highly modular
products that can be quickly customized or tweaked, by changing a few parts or modules to
meet changing consumer preferences at low incremental costs. This modularity can be
extended to the supplier network.
Multilocation production: Manufacturing locations spread across geographies allow
companies to address volatility in freight and factor costs as well as respond efficiently to
changing demand across markets. A global automotive OEM leverages network scale with
11 plants manufacturing similar models of utility vehicles across Asian, South American and
European RDEs. This serves as backup for other plants and also caters to regional markets.
To maintain the right balance of local sourcing and global scale, the company has dedicated
Centres of Excellence (CoEs) to ensure quality of critical components.
Deferred customization: It is often hard to predict the exact specifications that your end user
will demand. Carrying unwanted inventories can become extremely costly, while waiting to
produce on demand will make you unresponsive. A global power equipment company uses
'deferred customization' to address this challenge. Almost 85 percent of their global
production originates from 3 low-cost large-scale plants in RDEs which manufacture ready
toconfigure kits for high-end products. Final configuration is performed at highcost plants
located close to customers, thus offering quick response times, and highly customized
products.
Disposable factories: These plants are the opposite of large scale plants with expensive
flexible automation. They use simple, inexpensive single product assembly lines that can be
setup and dismantled at very low costs. This dramatically reduces the cost of entry and
production, and enables the manufacturer to move in and out of changing markets with low
risk. For instance, a major specialty chemical producer expanding in Asia had traditionally
relied on few massive multipurpose plants catering to the entire region leading to high
investment in storage facilities, EHS protections and transport infrastructure. For its new
expansion, it shifted its strategy to building many small, closetocustomer plants. This led to
dramatic reductions on environmental impact and investment costs.
Each of these models offer different levels of flexibility and different tradeoffs between risk
management, cost and speed to market. There is no one right answer. Players will need to make
choices based on their own starting positions in terms of financial priorities and engineering
capabilities as well as the extent of volatility in their product markets.
B. Factor Cost Inflation
The last 3 years have seen dramatic inflation in multiple commodities and labour. Besides, the
impending policy changes are likely to make land considerably more expensive than before as
well.
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Land: We expect the proposed Land Acquisition, Rehabilitation & Resettlement (LARR) Bill to
adversely impact the development of the Indian manufacturing industry. The new bill can make
it difficult to acquire large tracts of land for manufacturing purposes, owing to its features of
having the buyer pay annual payments to original owners for the next 20 years, identifying and
paying all those who are affected by the acquisition, paying 10 per cent of capital gains to the
original owners for the next 10 years, and ensuring the development of basic facilities in the
acquired areas.
Preliminary analysis indicates costs of land acquisition could also go up to about 3.24.6 times its
current costs (increase in market value by a factor of 12, solatium increase from 30 percent to
100 percent, increased rehabilitation costs and tenure of rehabilitation).
Commodity inflation: A quick look at the price trends of key commodities (as shown in Exhibit
3.2) indicates that prices of most commodities (Exhibit 3.2 shows trend for Steel, Aluminium,
Coal and Oil) have increased rapidly over the last 3 years.

Power cost inflation: The power sector is currently reeling under several structural issues. SEBs
have a large and growing pool of accumulated losses (currently around Rs. 1 trillion). With over
28 percent T&D losses and subsidized electricity supply to agricultural sector (another 25 percent
of output), they are left to rely on tariff increases on the remaining 50 percent of their output to
tide over this situation. Add to this the recent challenge posed by higher input costs (driven by
increase in coal prices of the IPPs) that will put further pressure on electricity tariffs. The cost of
merchant power, reflective of the marginal price that the market is willing to pay, has zoomed
significantly over the last few quarters (an increase of 80 percent from Rs. 2,344 / MWH on 2 Dec
2010 to Rs. 4,285 / MWH as on 2 Dec 2011). It could only be a matter of time before another
round of tariff increases hit the industry.
Exhibit 3.2: Steep rise in key commodity prices over last three years
100
Price index
200
0
+20%
2011
143
2010
123
2009
100
Price index
200
100
0
+25%
2011
157
2010
116
2009
100
100
0
+33%
177
Price index
200
2011 2010
121
2009
100
2010
107
2009
100
164
100
Price index
200
+28%
0
2011
Aluminium Steel (Global HRC)
Oil (Brent) Premium Hard Coking Coal
Source: Analyst reports, BCG analysis.
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Implications: Need to improve manufacturing competitiveness: In the face of increasing factor
costs, companies have to ramp up the efforts to improve competitiveness and productivity of
their assets and labour. China is a clear benchmark on this parameter and its growth in
productivity is far steeper than India's. This has helped China to retain its competitiveness,
despite increasing wage costs. EIU data suggests that for the last 15 years, Chinese productivity
increase has been on average about 1213 percent per year, about double the rate of productivity
increase in India.
Indian manufacturing companies will have to use several levers to improve their labour
productivity and overall competitiveness (a) Increased capital: To move up the value chain /
access higher skilled workforce and / or increase the level of automation to drive higher
productivity. (b) Clusters: Strong clusters which provide a variety of productivity benefits and
overcome impact of wage increase. A strong cluster can improve margins from 5 to 15 percent
compared to a standalone plant. (c) Scale: Higher scale of operations to achieve scale benefits in
manufacturing operations. (d) Resource intensity Companies will have to closely monitor and
reduce the resource intensity of their manufacturing operations by implementing sustainable
practices across the value chain (discussed in more detail in the next section).
C. Falling Investments
Manufacturing investments have fallen continuously over the last year. Exhibit 3.3 shows that the
fall has been considerable, both on 'number of new projects announced' and in the value of these
projects.



Exhibit 3.3: Falling investments in the manufacturing sector
Number of new projects
300
0
Rs. '000 crores
150
450
300
0
Quarter ending
Sep11
45
152
Jun11
133
205
Mar11
90
371
Dec10
71
260
Sep10
64
279
Jun10
174
303
Mar10
259
406
Dec09
140
277
150
450
New investments announced across quarters
Source: CMIE, BCG Analysis.
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Reasons for this slowdown seem to be both policyrelated and economic:
A slowdown in policymaking / clearances has clearly made Indian entrepreneurs cautious
about new investments and to seek opportunities outside India. This is unfortunate, given
that India's long term growth story is still very much intact and therefore, rightfully
investments should chase this opportunity.
New investments have witnessed a drop due to the high cost of capital caused by monetary
tightening measures of RBI, and a fall in foreign investments due to the global liquidity
crunch. Most businesses relying on credit to fund the next round of investment (as against
internal accruals), have found the cost of capital too high at the current levels, to warrant an
immediate deployment.
The slowdown in near term demand has also forced entrepreneurs to push back capex plans
in many sectors, e.g. the cement industry, which saw a lot of activity last year, now has more
capacity than demand.
Implications: Falling investments could result in a supplyside crunch over the next 35 years
when internal demand picks up again, and this in turn could further fuel inflation that could
constrain the next wave of growth. Companies need to be cognizant of this and ensure that
appropriate investments are made, or alternate supply sources are thought through. Government
/ policy makers should also look to resolve the overall policy impasse and the tightening
monetary situation, which are evidently having an adverse impact on industry investment levels.
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Exhibit 4.1: A twospeed world emerging
Brazil
2%
1%
2%
France
2%
India
2%
1%
US
1%
Germany
2%
Indonesia
3%
Eurozone
1%
2%
Japan
3%
5%
UK
3%
China
6%
5%
8%
6%
9%
11% Faster growth Slower growth
Precrisis trend GDP growth
1
20092015 GDP growth
2
Comparison of future growth projections with past
Source: Economist Intelligence Unit; BCG analysis.
Note: Trend for Indonesia computed from 19992007 due to Asian crisis.
1. 19902007 trend growth.
2. Latest projections by EIU (downloaded 2 December 2011).
4. Four Trends that will Shape our Journey to 25% of GDP
The world has changed dramatically since the economic crisis of 2008. Several trends have
emerged which have the potential to fundamentally impact the destinies of manufacturing
companies around the world. In this section, we profile four of these defining trends.
A. New World Order: A TwoSpeed World
The World Economic Outlook report published in April 2009 by the International Monetary Fund
(IMF) found that two types of recessions are particularly long and severe: those preceded by
financial crises and those that are globally synergized. The current recession meets both these
criteria. In addition, in its World Economic Outlook: Crisis and Recovery report published in
October 2009, the IMF shared mediumterm implications of the last 88 financial crises in
developed, emerging and developing countries. According to the report, even after seven years
after a crisis, economies tend to have a significant output gap that is, a deviation of actual
output from the extrapolated precrisis trend growth. On average, this gap is 10 percent.
In line with the IMF report and findings, we expect the overall growth scenario to remain
depressed over the coming years, but with significant regional differences. We term this emerging
scenario as the "TwoSpeed World".
A TwoSpeed World is characterized by slow growth in developed economies and relatively high
growth in many of the socalled rapidly developing economies (RDEs) (as depicted in Exhibit 4.1).
Most of the RDEs that were previously seen as sources of cheap labour are emerging as big
markets with plenty of consumers and population with the demographic advantage of age and
education. These economies are now host to a new generation of competitors the socalled
global challengers who are emerging stronger from the crisis. These companies have the
advantage of being based in comparatively fastgrowing markets with relatively undamaged
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economies. Building on their cost advantage and growing technological competence, they will
increase the competitive pressure on established companies.
The growth in the developed world, on the other hand, is expected to remain subdued owing to a
host of problems ailing these economies such as economic uncertainty, high government deficit,
high debt levels, banking system under pressure, aging population and growing levels on
unemployment. And since the developed world still accounts for such a large slice of the pie (the
United States, the European Union and Japan account for around twothirds of global GDP), the
overall global growth numbers will remain depressed for some time to come.
Further, if the world is entering a period of prolonged slower growth, it is matter of concern to
business leaders. In order to grow, companies will have to gain market share. The management
and strategies of all companies especially poorly run ones will come under enormous stress.
This will accelerate industry restructuring. Tough economic times will expose structural
weaknesses. Poorly grounded business models and excess capacity, among other problems, will
force companies especially those in mature industries to adjust to or exit the market.
Over much of the last 20 years, it was possible to be successful simply by riding market growth.
For many companies, future prosperity will require gaining share in the face of significantly
increased competition, triggered by slow growth a challenge that many executives will not
have faced till now. For other companies, success will come because their business models allow
them to share in the prosperity of the growth haves in the TwoSpeed World.
Implications: We expect that TwoSpeed World will impact the Indian manufacturing sector in
the following manner:
A subdued growth in most of the developed world will adversely affect the demand emerging
from these economies and will put pressure on the manufacturing exports of the RDEs. Thus
India's exports will come under immense stress. To be successful, the Indian manufacturing
sector will need to clearly differentiate itself from other RDEs through more competitive costs,
quality or lead times.
While developed world is expected to grow at a subdued pace, RDEs such as India and China
are expected to grow at a rapid pace fuelled by burgeoning domestic demand. On the one
hand, this will provide the manufacturing sector with an opportunity to break out of
historical patterns and position itself for the next decade of growth. On the other, competition
for domestic market share will increase hugely as multinational companies will look at
growing markets in Asia to meet their growth aspirations. Indian manufacturing will
therefore need to prepare itself, to better address this competition.
B. Resurgence of American Manufacturing
U.S. economy and its consumers have been the fuel that has driven the global growth in the last
decade. In turn, this has fuelled the growth of China (mainly) along with India, Mexico, Eastern
Europe and countries of South East Asia. These economies have become the hub for
manufacturing companies around the world wanting to reduce their cost of production and feed
the U.S. market. In fact, in the decade since it entered the World Trade Organization (WTO) in
2001, China has essentially become the default option for companies wishing to outsource
production in order to lower costs. From 2000 to 2009, China's exports leapt nearly fivefold, to
US$ 1.2 trillion, and its share of global exports rose from 2.9 percent to 9.7 percent, according to
United Nations Conference on Trade and Development data. In the U.S. meanwhile, the loss of
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THE BOSTON CONSULTING GROUP DECEMBER 2011

Cost advantage
of 15%
assuming
China
productivity
rises to US
levels by 2015
Exhibit 4.2: RDEs' cost advantage diminishing because of rising labour costs
0
2015
100
15
75
2015E
42
13
39
2010
27
16
Cost savings (%) before supply chain costs
100
80
60
40
20
44
2005
19
21
61
2000
13
25
66
Chinas productivity relative to U.S. productivity (%) Total cost savings in China (%) Labour cost savings in China (%)
Cost saving comparison for a product with 20 percent labour content
Source: BCG analysis.
Note: Labour cost savings in China (%) = Total labour cost in China divided by total labour cost in the U.S.
some 6 million manufacturing jobs and the closure of tens of thousands of factories over the past
decade has fanned frequent warnings of a manufacturing crisis.
However, we observe that a combination of economic forces is turning the direction of this tide.
These forces are fast eroding China's cost advantage as an export platform for the North
American market and making manufacturing of many goods in America cheaper than ever
before. Rising wages, shipping costs, and land prices combined with a strengthening Renminbi
are rapidly eroding China's cost advantages. The U.S., meanwhile, is becoming a lowercost
country with declining or moderately rising wages, weakening dollar (against Yuan), increasing
workforce flexibility, and continuously improving labour productivity.
Our analysis concludes that, within five years, the total cost of production for many products will
be only about 10 to 15 percent less in Chinese coastal cities than in some part of the U.S., where
factories are likely to be built (as shown in Exhibit 4.2). In fact, when shipping, inventory costs,
and other considerations are taken into account, certain U.S. states, such as South Carolina,
Alabama, and Tennessee, will turn out to be more competitive production sites as compared to
some of the RDEs such as China. As a result, we expect companies to begin building more
capacity in the U.S. to supply to North America. The early evidence of such a shift is mounting:
NCR moved production of its ATMs to a plant in Columbus, Georgia, that will employ 870
people in 2014.
Ford Motors Company is bringing up to 2,000 jobs back to the U.S. in the wake of a favorable
agreement with the United Auto Workers that allows the company to hire new workers at
US$ 14 per hour.
Peerless Industries will consolidate by moving back all manufacturing of audiovisual
mounting systems to Illinois, in order to achieve cost efficiencies, shorter lead times, and local
control over manufacturing processes.
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Amongst the various reasons behind such a shift is the factor of labour wages and productivity.
Labour wages in RDEs have grown at a much faster rate than the labour wages in U.S., while the
labour productivity in RDEs has not risen commensurately to offset the wage increases. This has
reduced the cost arbitrage long enjoyed by the RDEs by a significant extent.
To exacerbate the scenario, the costs of power and industrial land have also been going up in the
RDEs. We also expect that rising oil prices, falloff in new shipbuilding, and projected shortage in
container port capacity in 2015 will result in further rise in the ocean freight rates. In addition,
there are the many costs and complexities associated with extended supply chains such as
inventory expenses, quality control problems, unanticipated travel needs, and the threat of
supply disruptions due to port closures or natural disasters. Other major concerns with some of
the RDEs are threat of intellectualproperty theft and trade disputes.
As a result, reducing cost differential and rising overhead costs and concerns are slowly turning
the direction of the tide and encouraging more and more companies to explore the option of
shifting manufacturing back to America. In fact, federal government and many U.S. states are
also encouraging such a move. Governments in Asia and Europe have long used generous
financial incentives to persuade multinational companies to build hightech plants in targeted
industries. Frequently, they offered terms that the U.S. could not match, such as tenyear
holidays from corporate taxes, cash grants, and cheap loans. However, in recent years, the
federal government and many U.S. states have closed the gap with aggressive incentive packages,
making the U.S. more competitive in the chase for manufacturing facilities. Examples of such
government interventions include:
Global Foundries The Company is receiving US$ 1.3 billion in cash reimbursements and
tax breaks over the next 15 years from the State of New York to build a US$ 4.2 billion state
oftheart siliconwafer plant in Malta, New York.
Nissan The company received a US$ 1.45 billion loan under the Advanced Technology
Vehicles Manufacturing Program managed by the U.S. Department of Energy that covered
most of the company's US$ 1.8 billion investment in a new plant in Tennessee.
We believe that even though the reallocation of production is still in its early stages, it will
accelerate in the years ahead. The impact of the changing cost equations will vary from industry
to industry. Companies will reevaluate their options for supplying to the North American
market in case of products in which labour accounts for a small portion of total costs and in
which volumes are modest. Examples of such products include construction equipment,
appliances, and select auto parts. But the manufacture of goods with relatively higher labour
content that are produced in high volumes will likely remain in RDEs. Finally, companies that
make massproduced, labourintensive products, like apparel and shoes, may move production
from China to other lowcost nations. This means that when it comes to building new production
capacity, companies will likely choose to explore alternatives instead of automatically opting for
China. Over the next five years, we believe that the U.S. will be the optimal choice for many
manufacturing investments aimed at serving the North American market.
Implications: This shift provides both opportunities and challenges for the Indian manufacturing
sector in its journey to become 25 percent of GDP by 2025. On the one hand, more and more
manufacturing activities are expected to move back to America, on the other hand, there is
opportunity to attract business away from the Chinese market by offering either cheaper or
differentiated alternatives. There is also the ever present opportunity of learning from China's
approach / mistakes in addressing this shift.
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C. Rise of Sustainable Manufacturing
Another important trend that we have observed is the move towards sustainable manufacturing
or what we call "Green Manufacturing". Green initiatives aim to minimize the impact of human
activities on the environment. It is estimated that even if every factory, power plant, car and
aeroplane is shut down, the average global temperature would still increase by 0.6C in this
century. Green Manufacturing or sustainable industrial activity is therefore a critical need and
no more an empty slogan.
Manufacturing companies across sectors are deploying green strategies along the following three
dimensions:
a) Green energy Green energy strategies primarily involve deploying renewable energy
sources such as CNG, wind, solar and biomass. Successful examples of Indian companies that
are using green energy include the stateowned Delhi Transport Corporation (DTC), which
has become the world's largest operator of environmentfriendly CNG buses. A similar focus
across the country has resulted in a 30 percent increase (over 2009) in the number of CNG
powered vehicles to reach 1 million in 2010. Another example is the power generation
companies who are using supercritical technology in most of the new power plants under
construction. The technology is expected to help power generation companies in improving
efficiency, and reducing fuel consumption and emission by about 4 percent.

b) Green products Many companies have started creating greener products that have a
positive impact on the environment. Successful examples of Indian companies that produce
green products include Mahindra Reva Electric Vehicles Private Limited which is involved in
designing and manufacturing of compact electric vehicles, and appliance companies who are
promoting greener ACs / refrigerators with lower energy consumption (higher 'starrating' on
the BEE energy consumption scale).

c) Green processes in business operations Implementing green processes in operations
entails efficiently utilizing key resources, reducing waste generation through lean operations,
bringing down the carbon footprint and conserving water. These levers improve operational
efficiency and lower costs. Successful examples of Indian companies that have implemented
green processes include Essar Group with its Clean Development Mechanism (CDM) projects
to reduce CO2 emissions in its upcoming blast furnace project in Hazira, ITC with redesign of
its paper plant at Bhadrachalam to consume less water, and Shree cement with its usage of
aircooled condensers to reduce overall water usage.
Governmental policies are a major driving force behind this green drive (besides companylevel
activism). The Government has taken a series of measures such as creating the National Solar
Mission; setting aggressive targets for hydro and nuclear power generation; providing various
sops such as tax holidays, soft loans, subsidies and other incentives for renewable energy projects;
and setting up organizations to support the cause Indian Renewable Energy Development
Agency (IREDA), The Bureau of Energy Efficiency (BEE), and National Clean Energy Fund
(NCEF). These efforts were also recognized by a report by the UN Environment Program (UNEP)
Global Trends in Sustainable Energy Investment 2010 released in July 2010 where India
was ranked seventh in the world in terms of investment in sustainable energy.
Implications: The first and allimportant step for manufacturing companies is to define the
overall sustainability agenda for the company i.e. identifying what process, products, and energy
options need to be availed of. Very often, company's efforts are either very fragmented (e.g.

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kaizens / initiatives at shop floor level) or they end up remaining as a broad agenda without
specific action items. Many companies have started defining a comprehensive agenda and setting
aside appropriate management resources for pursuing the agenda. For e.g., the Godrej Group has
set up a 'Mission on Sustainable Growth (MSG)' task force led by a very senior leader of the firm
and constituting of senior executives representing each operating division. The mandate of the
task force is to make processes and products more sustainable. Besides agenda and execution,
ensuring that the right communication happens is critical to realizing the full benefits of the
green drive. External publicity, customer education programs, and internal awareness programs
are some of the key communication levers that are used by companies in this area.
D. New Models of Workforce Engagement
The recent instances of labour unrest especially the highly publicized labour strike at Maruti's
plant at Manesar takes us to another shift being faced by the India manufacturing sector
the need for a new engagement model with the workforce. While the latest data for 2011 is still
provisional, a comparison of data pre2011 indicates that the mandays lost due to disputes and
lockouts have started rising again after having dropped over a twoyear period (as shown in
Exhibit 4.3).

Several issues are seen as contributing to the deterioration of labour relations.
a) Increasing disparity between worker pay and management pay: As inflation continues to rise,
the need for payhikes is felt stronger by the shopfloor employees and labourers, who have
lesser accumulated savings to rely on to serve as a buffer. While the government has
continued to increase national floor rates at the rate of industrial worker inflation, the
disparity between senior management salaries and shopfloor wages seems to be as high as
ever. A study by the Hay Group, states that India ranks #14 in a list of 50 countries in terms of

Exhibit 4.3: Industrial disputes on the rise again?
0
2010 (P)
17,902
430
2009 (P)
13,365
392
2008 (P)
17,434
421
2007
27,167
389
150
450
Number of disputes
0
300
Mandays lost ('000)
30,000
20,000
10,000
Source: Ministry of Labour and Employment, Government of India; BCG analysis.
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pay gap between senior management and the clerical / bluecollar workers. A worker's
aspirations has increased manyfold over last two decades with easier access to information
and visible signs of consumption by the rich, creating grounds for industrial action.

b) Growth of contract labour: In the last decade, the share of contract workers has grown rapidly
as companies grapple with the rigid labour laws on the one hand and increasing output
volatility, which we saw earlier, on the other. Estimates suggest that even in organized sector,
this share can be as high as 6070 percent on some plants. These workers feel discriminated
against, compared to the permanenent workers, once again creating opportunities of
industrial unrest.

c) Alternative employment options: The low skilled jobs in Indian manufacturing plants have
always been filled from workers migrating from rural areas in search of better paying jobs.
With the implementation of MGNREGS, and the assurance of pay higher than the national
minimum floor (e.g. national minimum floorrate is now Rs. 115 / day, while MGNREGS
minimum guaranteed pay is between Rs. 120 / day to Rs. 130 / day in most states), labourers
have little incentive to continue at an underpaid job far away from their home town. This is
not only creating an acute labour shortage in many sectors and regions, but also putting
pressure on the manufacturing wage rates.
Implications: There are two sets of implications. First, there is a need for making structural
changes in the policies for labour. Second, companies have to find more effective ways to engage
with today's workers.
The Government has to implement four interrelated policy measures. The first set of measures
should focus on driving manufacturing employment. These should include creating mega
manufacturing zones, making policies which make it easier to set up new factories, and directly
or indirectly incentivizing new job creation (implementing the National Manufacturing Policy will
be a good beginning). The second set of measures has to focus on improving employability
through better training and skill development programmes. While the government has launched
multiple initiatives on this front, the key is to ramp them up and align their activities with the
other labour policies and not run them independently. The third set of policy changes have to
bring in greater flexibility for the businesses to deal with changing market conditions while
protecting worker rights. These could include institutional arrangements to provide direct cash
support to laidoff workers, jobloss insurance, retraining and redeployment. Finally, the
government has to completely revamp the employment exchanges to create a more efficient way
to match demand and supply.
Companies need to start thinking of competitiveness improvement as not just a oneoff
implementation of a TQM / Leanmanufacturing program but integrate into it a new approach
that takes the shopfloor employee along in the transformation journey. Indian industry saw the
launch of Total Quality Management (TQM) movement in 1980s and 1990s which developed into
the 'Lean' programe of the 2000s. The challenge with many of these Lean efforts is their short
term focus which at best have created well functioning plants, but missed on integrating the
people dimension into the initiative. Two approaches that companies are adopting to address this
issue are laid out below:
a) Adopting a peoplecentric approach to competitiveness improvement: A 'peoplecentric'
approach starts with shared aspiration and vision of the plant around quality and cost
leadership, and builds a strong engagement model with capability building across levels,
integrated with the usual tools and techniques of a typical 'lean' methodology. It becomes a

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'way of operation', a part of everyday life through appropriate changes in the organisational
structure and role definitions, rather than a oneoff initiative. Companies need to build
specific capabilities for problem solving and analysis through training and coaching, and
ensure an increasing level of leadership and workforce engagement. BCG experience shows
that such an approach can increase labour productivity by as much as 20 percent, build
sustainable transformation and drive substantial value along multiple dimensions of cost,
quality, safety and cycle time while engaging the workforce. A leading cement company's
transformation program achieved 10 percent cost savings within the factory, mainly because
of bottomup initiatives suggested and led by shopfloor workers. Several of CII's cluster
programs typically involve spending the first 6 of the 24 month journey in employee
engagement and morale improvement (e.g. through 5s initiatives of shopfloor organization,
and TEI (Total employee involvement approaches)).

b) Including worker welfare / involvement within sustainability agenda: Several companies that
have embarked on the sustainability drive have also included worker welfare / engagement
as a key pillar of their sustainability, to ensure that there is visibility, rigour and management
attention in ensuring worker engagement.
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5. The NMP: A Step in the Right Direction
After several rounds of iteration, the Government of India (GoI) has released a new National
Manufacturing Policy. The policy is a mix of several new bold moves, few restated rules. A
central policy initiative of the NMP is about creating NIMZs (National Investment and
Manufacturing zones) which will drive breakout manufacturing growth through a mix of
favourable policies and quality infrastructure.
NIMZs are envisaged to be huge clusters, of significant size (the minimum size of an NIMZS is
5000 hectares), with progressive and industryfriendly policies such as reducing transaction costs
by moving towards self certification, easier exits of companies, ability to reduce workforce more
easily, and significantly better infrastructure (NIMZ level planning, sufficient quantity of power,
roads, ITIs catering to local skills etc).
There are clearly multiple positive facets to the NMP:
a) Boldness of and specificity in vision: The vision that the NMP has set for the country is bold.
Ramping up from 16 percent to 25 percent of GDP in the face of a fast growing services sector
necessitates a more rapid growth rate in manufacturing than ever achieved in the recent past.
The mission to create 100 million jobs through this growth is even bolder. While there are
questions about India's ability to accelerate at the implied rate, the boldness and specificity of
vision provides a benchmark to measure all subsequent subpolicies / circulars of the NMP.

b) Clusters (rightly) as the core to growth: In various reports, we had indicated that clusters
could drive cost advantage of upto 1015 percent of sales through a mixture of various levers
such as local scale, shorter supply chains, access to talent and allied services (e.g. tool repair
vendors in case of engineering clusters). The GoI has explicitly recognized the benefits of
clusters and used the clusterconcept as the central piece of its policy.

c) Farreaching policies in critical areas: The boldness in policy change is also tangible. The
move to rationalize regulatory procedures, provide an exit mechanism including the setting
up of a jobloss policy, asset redeployment policy is commendable.

d) Emphasis on local special purpose vehicle (SPV) governance: The NIMZ will be managed by a
local SPV with a governing board. This SPV is for all practical purposes, the nodal body for
the NIMZ, and is empowered to take several decisions from planning of the NIMZ, to
infrastructure development (and contractor appointment), decision on type of skill
development and partner, to magnitude of usage charges from 'renters' etc. The NMP has
also mandated that the CEO of the SPV board will be a senior government official, and that
the board will also have representation from the local pollution control / environmental
authorities. In providing this clarity, the government has effectively empowered the board in
several areas responsible for local development at the cluster level.

e) Sops: Multiple sops to encourage investment in NIMZ, such as the TADF (Technology
Acquisition and Development fund) and incentives for green investments (several capital and
interest subsidies), are part of the NMP. Though sops are never the primary driver of
investment, they do play a role in sweetening specific investment cases.
There are also several risks and challenges in the implementation of the NMP:
a) Intent to implementation: The NMP is, at the end of the day, a policy of intent and it is
expected that individual ministries take the cue and develop more specific rules and
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regulations to be followed at the local level. Any slippage in time or dilution in quality of the
direction set by the NMP, would therefore be a significant dampener. For e.g. the policy lays
out a biannual state industry ministers' conference as a forum for continuous dialogue and
also states than an MIPB (Manufacturing Industry promotion board) be setup to drive this
further. Tracking how these immediate term implementation monitoring mechanisms are
setup could give us a good leadindicator of how rigorous the implementation will be.

b) Over dependence on state, especially for Land: The NMP mandates the state to be the
primary authority in key decisions such as land acquisition, power / water supply etc. While
this is in a way good, and practical, it also limits the potential impact that NIMZ could have,
to a few states with large parcels of land and local political will.

c) Funding Largely unaddressed: Funding of the internal infrastructure within SPV is an issue
largely left unaddressed, with the NMP only referring to the existing modes typically
available. Viability gap funding and soft loans are talked about in a highlevel manner, while
ECB route was anyway available to erstwhile SEZ developers and hence was expected
anyway to be made available to NIMZ developers.
In the balance, the NMP has the potential of becoming a 'game changer' for the industry if
implemented in its entirety.
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6. Conclusions
India's manufacturing sector is now the second fastest growing in the world after China's. The
government has set an ambitious target of achieving 1112 percent growth per annum and
increase the share of the manufacturing sector to 25 percent of GDP from 16 percent. The new
National Manufacturing Policy, if implemented properly can be a game changer. The twospeed
world and declining competitivenss of Chinese manufacturing visvis U.S. manufacturing
provide a window of opportunity for India's manufacturing companies to increase their share of
the global manufacturing trade. The growth of Green Manufacturing provides an opportunity to
retool products and processes. At the same time, the sector faces several challenges in terms of
increasing volatility of demand; growth in factor costs like land, labour and power; decreasing
attractiveness for new investments; and growing alienation of labour.
The steps that the government and the industry will take over the next decade will determine
whether we continue to grow at 78 percent and closely track GDP growth as in the past decades,
or breakout from our past and chart a a new 'normal' of double digit growth. Indian
manufacturing is clearly at a point of inflection and the next few years will determine its future
for years to come.
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About the Authors
Arindam Bhattacharya is the Managing Director of BCG India, and is based out of the New Delhi
office of The Boston Consulting Group. You may contact him by email at
bhattacharya.arindam@bcg.com.
Arun Bruce is a Principal in the Mumbai office of The Boston Consulting Group. You may contact
him by email at bruce.arun@bcg.com.
Acknowledgements
The authors would like to thank Ankur Aggarwal in the firms New Delhi office for his
contribution to the writing of this paper. A special thanks to Payal Sheth for managing the
marketing process. The authors would also like to acknowledge the efforts of Jamshed Daruwalla
and Pradeep Hire in the firms Mumbai office for their contribution to design and production of
this paper.
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Contact
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The Boston Consulting Group, Inc. 2011. All rights reserved.

12/11

Arindam Bhattacharya
BCG Gurgaon
+91 (12) 459 7144
bhattacharya.arindam@bcg.com

Arun Bruce
BCG Mumbai
+91 (22) 6749 7359
bruce.arun@bcg.com

Charu Mathur
Regional Director Western Region
T : 91 22 24931790
F : 91 22 24945831/ 2493 9463
charu.mathur@cii.in

Sangita Das
Deputy Director Western Region
T : 91 22 24931790 Ext 409
F : 91 22 24945831/ 2493 9463
sangita.das@cii.in