v Lack of In-house expertise
With rapid integration of global markets, there are increased options for buying (from the most cost-effective sources) as well as selling (in the best sales realizing markets) of products and services, thereby intensifying the market competition. In addition, with continuous technological innovations, shortening product life cycle and requirement for complying with increasingly more stringent environmental and safety standards, across various industries, the need for accessing low cost base sources of supply for products and technical skills has become critical for global manufacturers, This has resulted in most of the leading manufacturing firms globally resorting to Industrial Subcontracting for improving their operating performance.
Global Market Features
Owing to the key reasons mentioned above, the leading developed economies of the world are embracing industrial subcontracting and Europe and USA have emerged as major subcontracting markets. The total value of the Industrial Subcontracting Market for the European Union was estimated to be around Euro 396 bn during 2004 (Source : Midest Subcontracting Report), registering a growth of around 3% over 2003. This is largely dominated by Germany, France, Italy, UK, and Spain, together accounting for 80% of the total subcontracting market.
Industrial Subcontracting Industry in India
India leads the global market in offshore back office services. In the manufacturing sector also, it is fast emerging as a major global subcontracting hub in the world. The engineering sector constitutes the largest segment of the Indian industrial production. In the past, greater emphasis on building core sector industrial base with focus on self-reliance and indigenous technology has resulted in development of a highly diversified industrial/capital machinery manufacturing base in the country. This has also facilitated the development of other related industries in the foundry, forging, sheet metal, precision machining, metal fabrication, etc. areas in the country. With deregulation of the Indian economy and increasing integration with global markets, in the recent past, the Indian engineering industry has been very fast in upgrading its manufacturing capabilities (process technology, human resource skills, product design and re-engineering product quality) to remain globally competitive This has enabled India to emerge as a major potential global outsourcing hub in the world.
The emergent Indian Economy
India, the largest democracy with a population of over 1 Bn people, has emerged today as the fastest growing economies in the world. In terms of purchasing power parity, India ranks fourth amongst the five biggest economies of the world namely the US, China, Japan, India and Germany.
India has a roughly 25-year track record of an average annual growth of 5.8 per cent. After growing at around 9 per cent in 2007-08, India's economy is expected to face a decline due to current financial crisis. Despite this crisis it is believed that Indian economy will recover very soon and will regain the growth which is expected to be sustained over the next few years.
The GDP growth has been accompanied by the correspondingly increasing share of manufacturing and service sectors in the overall GDP composition which stands today at service sector - 53%, industry - 27% and agriculture and allied activities - 20%. The industrial and service sectors are estimated to sustain the growth momentum driven largely by cyclical factors, rise in rural income and increased public spending on physical and social infrastructure
The nominal GDP which has seen a consistent growth from around USS 390 bn in 2000 to nearly USS 650 in 2005, is expected to be around USS 5000 bn in 2010 and over USS 25000 bn in 2050
A much-cited 2003 study by Goldman Sachs, projects that over the next 50 years, India will be the fastest growing of the world's major economies (largely because its work force will not age as fast as the others). The report calculates that in 10 years, India's economy will be larger than Italy's and in 15 years will have overtaken Britain's. By 2040, it will boast the world's third largest economy. Owing to strong fundamentals of the Indian economy, it is expected that India would be the only country recording growth rates significantly above 3% over the next 30 - 50 years.
The emergence of India as a significant player in the global economy has been facilitated through the economic liberalization policies since early 1990s, stable political and macro-economic environment and continuing emphasis on forward looking and sound economic development policies of the government. With sustained fiscal reforms by both the Central and State Governments, the possibility of achieving a higher GDP growth rates again seems feasible.
Factors Providing Competitive Advantage to India
The competitive advantage of India's manufacturing sector is increasingly driving leading multinational corporations across the world to shift their manufacturing bases to India or source supplies from their subcontracting partners. The key factors that are driving India's emerging dominance in the industrial subcontracting field are outlined as below:
High Quality of Education - Vast pool of engineering and managerial talent available
Low-cost Labour coupled with Cheaper Designing, Engineering Skills
According to survey conducted by Pay Scale Inc. USA is clearly indicating that Indian salaries for technical professionals is about 1/6th lower than developed countries like USA, UK, Germany.
Table1: Countrywide Median Salary in Engineering Design
(US$ per annum)
|
Country
|
Median Salary
|
|
India
|
7,638
|
|
US
|
57,500
|
|
UK
|
41,171
|
|
Germany
|
59,417
|
Source: Pay Scale Inc. USA.
Lower Cost of Production
Leveraging engineering ability of its highly skilled technical manpower available at lower salaries, India offers a competitive advantage of lower cost of production compared to other developing and developed countries.
Demographic Factor
India has the potential to ensure adequate availability of manpower to support the manufacturing industry with India's population being predominantly young with nearly 54 per cent of the population being less than 25 years of age.
Domestic Manufacturers on the Learning Curve
Many global OEMs have set up manufacturing operations across segments in India and are increasingly sourcing components from the domestic market in order to be cost-competitive. Supplying to these global OEMs has been an excellent learning curve for domestic manufacturers as they have had first hand experience on the entire process of meeting stringent quality standards and delivery schedules laid by global OEM
Leveraging India as a R&D base
The quality and skill of India's technical manpower is reinforced by the fact that several foreign firms are leveraging India as their R&D base.
Quality of Service
Indian companies have earned the reputation of providing their international customers with good quality service along with their dedication of achieving highest quality standards. For example as of 2003, more than 2500 firms in the engineering sector in different areas such as casting and forging, automobile parts, machine tools, electrical machinery, pumps, textile machinery, etc. to name a few, have acquired ISO 9000 accreditation. A large number of Indian manufacturing firms have also adopted other prestigious quality management programmes like ISO 14001, TS 16949 and TQM
Stable Investment Climate
India offers a stable political environment and relatively risk free investment opportunity. Owing to its strong institutional systems, if has remained virtually unscathed from external shocks like South East Asian financial crisis, Latin American bankruptcy etc.
Related and Supporting Industries
The presence of matured and well-developed related industries provides a conducive environment for the engineering sector to grow and prosper.
Government Policies, Regulations and Support
Several policy initiatives are planned or are being implemented by Government to enhance India's manufacturing competitiveness.
To conclude . . .
India with its competitive advantages in availability of large pool of low-cost skilled manpower, strong engineering and design human resource competency duly supported with IT capabilities, established raw material and supply base, advanced manufacturing methods conforming to global quality norms, strong presence of related and supporting industries and growing domestic volumes has the potential to emerge as a major subcontracting hub in the engineering sector.
In the last couple of years, manufacturing outsourcing from India has been growing at around US$ 1 bn a year. The manufactured product outsourcing from India is projected to be as big as US$ 50 bn by 2015. The future outlook for India's Industrial subcontracting Industry is very promising.
Owing to the significant cost pressures faced by the global players with respect to the increasing market competitiveness coupled with increasingly stringent conformance requirements in respect of environmental standards and safety norms and shorter product life cycle due to technology upgradation, the developed economies provide huge growth opportunities for Industrial subcontracting.
More importantly, over 50% of the subcontracting in developed economies like the US is presently prevalent in skill intensive sectors and is expected to rise to 70% by 2015. India is uniquely positioned to tap these high skill sectors, which already account for almost 40 per cent of the manufacturing output.
India has the competitive edge in terms of low cost base and established capabilities in skill intensive sectors due to availability of large pool of low-cost skilled manpower, strong engineering and design human resource capabilities duly supported with IT capabilities.
India has a matured and established Industry base supplemented by well developed related and supporting industries (e.g. Forgings, Castings, Steel, Aluminium, Sheet Metal and Machined components, etc.) with strong presence of SME sector.
In view of the above, India is well poised to emerge as one of the leading Industrial subcontracting global hubs in future.