How economies develop in the global marketplace has a fairly predictable pattern. You start with low-end products for which cheap labor is key to success (think apparel) and then move on to higher and higher value products until you are producing robots, cars, and high-tech gizmos. That stereotypically is the story of post-war Japan as well as Taiwan, Korea, and (most recently) China. However, the New York Times asserts that India is following a different pattern (Manufactured Goods Lead Surge in Indian Exports, July 26).
India has largely skipped the first step and gone straight to producing capital-intensive items that require skilled workers but not necessarily many of them. Rather than pursue the traditional developing-country model of exports, India aspires to eventually achieve something more like Germany’s mix of industrial goods for the global market — even if India has a long way to go before approaching Germany’s $1.3 trillion in annual exports.
Over the last decade, industrial export hubs have sprouted around India, some with the help of government planning. Here in Pune, about 100 miles east of Mumbai, a vibrant domestic automotive and engineering hub supplies the United States and other Western markets.
Chennai in the south has become India’s Detroit, as car factories ship small Fords, Nissans and Hyundais to Europe, Africa and Latin America.
In the west, Gujarat State is home to several large petroleum refineries that take imported crude oil and process it into products like jet and diesel fuel that are sold in other Asian countries. (The need to import crude oil for domestic use, though, is the main reason India continues to run a trade deficit — $104.8 billion in the last fiscal year.)
Meanwhile, traditional exports like textiles and agricultural products together account for less than 20 percent of the goods India sells to the world. India now exports fewer garments than its neighbor Bangladesh, which has one-eighth India’s population and an economy only about one-fifteenth as large.
(Aside: We’ve posted about Chennai before.) The article has an interesting graphic (not available on-line for some reason) showing that engineered products have gone from being 21% of India’s exports in 2006 to being 27.3% this year.
So what’s behind this? The article points to India’s less than robust infrastructure and its restrictive labor laws. These, the argument goes, favor smaller firms that do not require too many bodies. Higher value products give the biggest bang for the labor buck (or rupee) but the local market may have a limited ability to absorb what is produced and thus you turn to exports.
Another potential factor (not mentioned in the article) is that India has long had access to Western education. Indians have been coming to the US and other countries to pursue advance engineering and management eduction for years. That means there is a ready pool of people with the human capital needed to develop new businesses. Further, they have a familiarity with the West when it comes to sell here. Indeed, the article focuses on a firm that was founded by a pair of RPI grads.
What’s interesting in all this is that this pretty much the textbook Western strategy for having a vibrant, domestic manufacturing industry. In the past few months, essentially every business publication has done some variation on the “US manufacturing is making a comeback story” (and we have posted on several of them). The theme of finding a niche where engineering skill or capital investment can trump cheap hands always recurs. If many Indian firms are also following such a strategy, is it really viable in the West?
It seems that there are at least two angles on this. One is that a given niche for a highly engineered product can only support so many firms regardless of what country they are based in. That is, an Indian competitor is a challenge but so is any other competitor since these markets are inherently limited. That suggests that focusing on a high-end niche can work as long as one is there early or has some particular capability.
The second angle is that infrastructure matters. The Times says that one of the growth challenges facing these firms in India is the unreliability of local utilities which makes having back up generators a necessity. Fortune, in its turn on the return of American manufacturing, actually had an article titled “The secret role of energy in bringing U.S. jobs back” (Jun 29). Of course, that advantage may not last forever as developing countries invest and improve their infrastructure.