Expanding Indian manufacturing in EU, US

Exponential growth in the manufacturing sector that had been promised for more than a decade may soon be achieved. Post-1991 reforms that liberalized the economy led to substantial but gradual growth. The current government in power since 2014 and its predecessor in control from 2005 made attempts to open up manufacturing, and the prospects of growing employment and the creation of a manufacturing hub, were held out many times.

It took the dual threats of the covid-19 storm and Chinese aggression to get this thought process over the finish line. It is the first time in many years that the Make in India programme looks serious enough to bring about the changes that had been expected since 2014. A series of reforms has been implemented in the labour sector and the liberalization of land acquisition has been introduced very aggressively by the government. Land acquisition is the area identified as the most challenging one when setting up foreign direct investment (FDI) dependent plants and manufacturing. In addition, the government is opening up new corporate matching programmes and channels to introduce domestic and foreign companies in order to bring manufacturing to India.

Such measures operate at the macro level, but to attract substantial FDI change has to come mainly from the entrepreneur and the industrialist if the country is to become a dominant manufacturing and exporting hub. There are five areas, involving major strategy and mindset changes, that industries must immediately introduce if the goal is to be achieved.

Improvement of quality

Industry has lagged in technology. The volume of production does not meet the minimum requirements to achieve economies of scale. To reach such a scale and to receive global orders businesses have to obtain manufacturing approvals from such international and domestic agencies as the Food and Drug Administration (FDA), the Bureau of Indian Standards and the International Organization for Standards. Specialized inspection agencies and companies such as the Technischer Überwachungsverein (TÜV) and SGS provide internationally recognized inspection and certification services that help to secure export orders and outsourcing contracts from developed economies. Such certification encourages foreign companies to set up outsourced manufacturing in India.

Certifications of foreign markets

The US maintains quality standards through agencies such as the US FDA, while the EU depends on the Conformité Européenne (CE) quality certification. Certification involves factory visits. The value of such certificates is high in the context of standardized products that are to be sold globally. As an example, FDA and CE certified factories in China and Vietnam secured contracts to produce a high volume of clinical masks in the pandemic, while India with a large textiles sector had no such business. Investments in approvals helped China to build huge manufacturing facilities. Indian manufacturers have to emulate this to build up a global hub.

Distribution networks overseas

Manufacturers have to open overseas subsidiaries to build their business internationally. Buyers in developed countries are used to buying China, Thailand and Vietnam products easily without the hindrance of customs formalities and so on. The control of distribution channels overseas is essential for companies to build up their markets.

Foreign technology and finance

Good technology and easy access to finance are the biggest benefits of working in developed economies. For this reason, the US, EU and Canadian systems are very attractive to foreign companies trying to build their businesses. The establishment of overseas subsidiaries and business development teams in such territories is the only way to penetrate markets deeply.

Joint ventures and acquisitions

These methods are more relevant than ever before. Joint ventures bring qualified overseas partners to India with the dual benefit of introducing new products and technologies that are suited for Indian manufacturing capabilities, and providing access to developed markets for finance. An acquisition is a more immediate and less organic method to achieve the same result of channelling products and technology perfected in foreign markets as well as accessing the financial depth of resources from capital rich markets.

At the same time government support by way of the establishment of better infrastructure connecting manufacturing sites with efficient port facilities, and the creation of viable tax-free and export-oriented manufacturing zones, would give the much-needed support to Indian industry that has been missing for the past several decades.

Gautam Khurana is the managing partner at India Law Offices.