HOW BRIGHT IS
by Tim Foster, Managing Director Asia Pacific, Chainalytics
It is no wonder India’s optimism is at an all-time high: Strong domestic growth and consumption have insulated it from and largely helped to avoid the other BRIC countries’ (Brazil, Russia, India, China) globalised economic woes. With its stock market roaring through much of 2014 and into 2015, and its young, skilled workforce comprised of a quickly growing pool of taxpayers and spenders, India has just jumped to first place in Nielsen’s global consumer confidence index.
Meanwhile, IHS economists project that India’s economy will grow more rapidly than China’s over two to three decades and account for a rising share of global GDP, making India a much more important global growth engine for trade and investment flows than in the past.
However, from a supply chain perspective, we think there is a quantum leap between India’s present and its future potential outlook in five to 10 years, when current reforms—designed to increase intra-country cross-border trade and transportation and manufacturing efficiency—are actually successfully implemented. Right now, uncertainty and changing global logistics dynamics complicate India’s long-term viability as a dominant manufacturing base or global export hub.
Putting the “I” in India
India’s current manufacturing activity (about 17 per cent of its GDP) is focused primarily on serving domestic needs— easy to do when you have one-sixth of the world’s population within your borders. India does not export as much manufactured goods to the global market in comparison to other BRICs, resulting in a more diversified export base with its service sector accounting for nearly 50 per cent of its total exports.
India is ripe for attracting logistics and supply chain investments with companies, like Harley-Davidson and Vodafone, for high-value-added manufacturing and e-tailers like Amazon and Flipkart, capitalising on increasing consumption and a rapidly emerging middle class. These companies are investing in and building robust, efficient logistics networks and infrastructure to capitalise on India’s massive long-term potential which is much needed considering India’s e-commerce startups currently spend as much as 30 per cent of their net income on logistic costs alone.
If you are already doing business in India or thinking about it, you will want to consider these factors, which affect India’s long-term promise as a global and regional supply chain player and ultimately your long-term success:
• Policy and incentives around taxes, land and infrastructure. Without some permutations of the proposed (but currently stalled) Goods and Service Tax (GST ) and land reform, India will continue to struggle with large-scale supply chain inefficiency and global competitiveness. With its nine major ports and 187 minor and intermediate ports—administered by a mix of central and state governments and public–private partnerships—it will take several years to get all hubs up to speed and at a level of efficiency seen elsewhere. As written, transporting freight across state borders in India is often just as complex, or more so, than crossing international borders, adding a staggering 30 per cent to the costs of goods sold in the country.
Some of India’s proactive state governments are taking matters into their own hands, attracting multinational businesses with infrastructure and economic incentives and competing with one another to make their own hubs the most efficient. Companies have to carefully evaluate states that offer better land deals for siting plants and warehouses holistically (a single warehouse can take up to six months, with uncertainty around availability, negotiations and legal processing) before making the leap. It is also important to be aware of the availability of water, electricity, labour law reforms, and connectivity to major highways, railways, and waterways and how these elements can impact your modal options and optimal supply chain network design over the longer term.
In Chainalytics’ preliminary modelling of the effect a post-GST environment will have on distribution centre networks (complete report to be released in 2016), it is found that the financial benefit for supply chains will not be completely realised until the maturity of india’s infrastructure improves dramatically.
• The importance of meeting domestic demand. For the foreseeable future, doing business in India is all about finding the best supply chain solutions to meet shorter-term domestic demand—whether that means reviewing or automating your supply chain operations, addressing transportation infrastructure and network inefficiencies, implementing effective processes and information systems to enable fact-based strategic decisions, or partnering with third parties to augment or complement current capabilities. If you are already doing business in India, it is time to address any and all supply chain inefficiencies, because global competition is coming, thanks to the attractive growth of India’s domestic consumption.
• The pluses and minuses of local supply. Due to dampened global competitiveness, India has largely protected and insulated its local manufacturing industries rather successfully. New entrants into this emerging market often find it difficult to import products into India, obliging them to look towards local sourcing as an alternative supply solution. But entering short-term partnerships or setting up small manufacturing plants to take advantage of growth and demand is only the beginning. Many forced into setting up flexible (and potentially sub-optimal) local supply arrangements, should eventually build scalable capacity themselves or utilise a third parties. A proper strategy is one equipped with a long-term goal to build manufacturing and distribution capacity domestically, over time.
• India’s evolving regional and international role. Unlike India, China’s centrally controlled economy can drive relatively rapid manufacturing and logistics change. India will succeed when it gets itself sorted out internally and increases its ease of doing business domestically and internationally. As India’s prosperity and labour costs continue to grow, rather than competing with low-cost manufacturing providers, it will likely do well to target industries and manufacturing sectors that will provide it with a competitive advantage, utilising its educated workforce for more advanced higher value-added manufacturing. This will put it on a collision course with China.
It is one thing to be optimistic; it is another to be realistic. India is not an easy place for multinationals to do business. India needs to get strategic and realistic—about building out its inland infrastructure, rail, grid and ports and evolving into a global factory for more-advanced industries. Companies already doing business in India have global competition nipping at their heels. But once India gets itself sorted out internally, the rest of the world will share its optimism.