On October 23rd, 2014, we updated our
By continuing to use LinkedIn’s SlideShare service, you agree to the revised terms, so please take a few minutes to review them.
US $ 4708 billion worth global trade in manufacturing
Accounts for 3/4 th of world merchandise trade.
Certain functions which were earlier linked to the manufacturing chain like R&D, design development, marketing and customer support are being outsourced.
Growing trade volumes have made it economical to break-up these functions and outsource.
These manufacturing activities are now being considered as services activity associated with manufacturing.
Why this Change is Happening?
Internationalisation of the production process across the countries.
Movement towards low efficient and low cost locations
Opportunity to developing countries, including India, to join in this model
Increase in inter-dependency of countries
Many firms in the NIEs used this approach
India can learn lessons from their experiences
Emergence of Global Value Chain (GVC) Model
Features of GVC Model
Geography and national boundaries are no longer considered as constraints in this model.
MNCs through FDI investment have spread this model across the globe.
To join this model, countries like India should gradually move up in the value chain.
If India is not an active player in this network, we will lose several growth opportunities.
Paths of GVC
Process Innovation – improving the efficiency of transforming inputs into outputs
Product innovation – improving quality and differentiated products and upgradation of models
Functional innovation – new ideas like contract manufacturing, outsourcing of marketing networks and production logistics
Interchain innovation – moving to new and more profitable product segments
Benefits of GVC
Begin production with existing level of capabilities
Upgrade capabilities of manufacturing
Learn process and product innovation skills
Access technological knowledge
Knowledge transfers involved were multifaceted
Access to large export markets
Exploit economies of scale
Eventually catch up with the advanced firms
Case Study: Knowledge Transfer
Mexico’s experience with the Maquiladroa initiative and the automobile industry.
Border industrialization programme designed to attract foreign manufacturing facilities along the US Mexico border.
Most Maquiladoras began as subsidiaries of US firms
USA Shifted labor-intensive assembly operations to Mexico because of low wages in Mexico.
However, the Maquiladoras now employ sophisticated production techniques, many of them transferred from the USA.
Ultimate Beneficiary – Developing countries
Resource usage in competitive activities
Can be witnessed in rapid growth in exports of parts and components
The share of parts and components in total manufactured exports also increased
Increasing intra-firm trade by multinationals
Dampen the effect of adverse shocks
Pattern of Concentration
Highly concentrated in countries with strong policy regimes, skilled workforces and adequate infrastructure.
Asia – China, Mexico, Korea. Rep, Malaysia and Thailand) accounted for 78% of developing countries’ exports of parts and components.
The next largest five countries accounted for 14%.
Pattern of Concentration
Developing countries outside the top 10 made only about 8%.
South Asia, Sub-Saharan Africa, Middle East and North Africa together account for only 2% of developing countries’ parts and components exports.
2/3 of that amount is from South Africa and India.
Huyndai small car to be outsourced from India
Ford motor company – ‘India Sourcing Programme’
Matsushita of Japan sourcing programme in India
GE, under its Global Development Center (GDC) program for outsourcing, signed up long term contracts with four strategic suppliers in India.
Other major MNCs have plans to use India as a sourcing base for their requirements
Major MNCs like Volvo, GM, GE, Chrysler, Ford, Toyota, Unilever, Clariant, Cummins and Delphi are sourcing components and hardware from India
Bharat Forge world’s largest forging facility
Essel Propack world’s largest manufacturers of laminated tubes
Hero Honda world’s largest manufacturer of motorbikes
Indica being exported to Europe as Rovercity
Why India being considered?
Outsourcing - not quality-driven.
Driven by cost effective operations – studies estimate saving potential of 70% of cost of operations, if outsourced to India
Basic infrastructure has improved
Fluency in English.
Enabling conditions – political stability, sound macro-economic management, enforceable legal and regulatory framework protecting IPR, transparency in policy making, well-functioning institutions and low-cost business environment.
Creation of Indian MNCs
Developed strong technological and industrial capabilities in several sectors;
Sustained and continuous efforts over the years have been initiated for promoting exports of technologies, services and project exports
Also liberalized policies are being evolved to encourage technology related investments abroad.
Few Imperatives – for joining this model
Infrastructure and other services must meet international quality, cost and delivery.
Efficient markets of labour, capital and information
Competitive strategies for achieving efficiency and dynamism at sectoral level
By offering Tax Incentives for foreign companies and encouraging outsourcing and related services, India can become major outsourcing destination on the global map.
Entry Strategies for GVC Model
Foreign and local buyers
Informal means (eg. training, hiring and returnees)
Own Design and Manufacture (ODM)
Strategic partnership for technology
Overseas acquisition equity
Business Practices of Select Manufacturing Sectors
Exim Bank conducted a study on 6 sectors to understand the Business Practices of Successful Indian Exporters.
The study covered the following manufacturing sectors
Apparel, Pharmaceuticals, Auto components and Agro-chemicals
Critical Success Factors in Apparel Manufacturing
Quota mastering – post 2005 it will be market penetration strategy
Effective Logistics Management
Focus on specialised areas of operation
Critical Success Factors for Pharmaceuticals Sector
Global perspective and knowledge
Moving up in the value chain
World class manufacturing
R & D investment
Establishing direct relationship with buyers
Scale in bulk drug manufacturing
Critical Success Factors for Agro-Chemicals
To have international network for marketing and distribution
Moving up in value chain with branded formulations
High level of backward integration – to reduce raw material costs
Broader product portfolio and registrations abroad – to reduce business risks
Critical Success Factors for Auto-Components Sector
Achieving international quality
Strong domestic market base
Access to best production technology
In-house expertise to developing and absorbing the technology
R & D
Capacity to meet global demand
OEM centric export strategy
Inter industry – Generic Success Factors
Global market intelligence
Strong global networking
Direct relationship with buyers
Clear product-market strategy for exports
Strong R & D skills
Competitive raw material sourcing skills
World class manufacturing and quality standards
Timely execution of orders
Moving up in the global value chain
Clear export thrust
Need for Transfer of Success
Only few firms are successful and others are unaware of the success factors and business practices adopted by them
There is a need for initiating the transfer process of success in order to tap the business opportunities in the global arena
Process of Transferring the Success
Undertake awareness programme – through industry associations, export promotion councils and cluster association
Setting up of National Export Information Repository – to provide information in enhancing the success factors
Joint programmes – with common objective of implementing the critical success factors at firm levels
Inter-industry learning – to understand the export dynamics and transferability.
Formulating Firm Level Strategies
Identify main comparators –
Neighbours with similar advantages
Immediate competitors in similar activities
Potential competitors that may emerge as challengers
Role models, those who are pioneers in technology
Benchmark at the level of industry, technology or clusters
Benchmark the drivers of industrial performance and analyse the strengths and weaknesses.
Mode of change will be the biggest force in operation.
Level of change will be dissimilar for various segments and various players within a segment
Players and segments which can assimilate this change will survive and prosper.
In some segments India can prosper and in others India could lose out to countries like China, Korea and Taiwan.
Firms should make a realistic assessment of what their strengths are, how much they can influence in the international markets and how to influence.
Partnership for Success
Government, Institutions and firms join together for success of GVC model.
Responsibilities of Government
Establish a basic legal
Restrictive trade practices
and monopoly regulations
Quick entry / exit of firms
Stable macro economic
Correction of market imper-
Pro-active FDI policies
Creation of EPZs
Promotion of industrial
Role of Pvt. sector
Conceptualise state of art technology suitable for India
Evolve indigenous technology with international standards
Earmarking a percentage of turnover for R&D
Diversify R&D efforts to focus on services, systems, products and markets
Manufacturing world class products
Develop products that are suited for Indian conditions; test before entering international markets