Wednesday, May 17, 2006

 

A new manufacturing mantra

A new manufacturing mantra
By Peter Marsh
Published: May 15 2006 18:56 | Last updated: May 15 2006 18:56

imageThe world’s carmakers are to be given a novel way of keeping ahead of rivals: sending their competitors’ vehicles to a $125m (£66.1m) engineering centre in India where they will be dismantled to reveal their technical secrets.
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Mahindra & Mahindra, an Indian industrial conglomerate, is building the “tear-down” in Chennai as part of a larger complex that, when finished early next year, will employ 1,000 engineers.

The initiative underlines the mix of ideas – a “service” approach to production, backed by a willingness to think globally – that sets India-based manufacturers apart from their rivals across Asia, and particularly China.

India’s manufacturing prowess – and its impact on relations with customers and competitors around the world – will be explored in the next three days in a Financial Times series.

Part 2 - Feast of a moveable workforce
Click here

Philippe Joubert, head of the power equipment division of Alstom, a French engineering company that has operations in both India and China, says the two countries’ models for manufacturing are clearly distinct. “China is geared to mass production. India focuses on manufacturing backed up by software and high-level engineering.”

Both countries have the advantage of low labour costs – which is invaluable in reducing the price of making standard goods – plus the potential of huge domestic markets over the next 20 years provided by their countries’ 1bn-plus populations. But China is a long way ahead in the world’s league table of manufacturing output, lying in third place behind the US and Japan, while India is 14th.

Yet India has an edge in the service aspects of manufacturing, say some observers. Once regarded as peripheral to the “core” task of production, these areas include design, development, links with suppliers and the ability to customise output to meet changes in demand patterns.

Now, though, the services elements are becoming more important as manufacturers seek more sophisticated links with suppliers and customers demand greater customisation in the finished product.

In many manufacturing companies, no more than one-fifth of employees are defined as manufacturing workers. The majority are doing jobs more properly categorised as service occupations. Sometimes – as in the case of pure “product originators” such as Nike, the clothing company, which outsources virtually all of its production – the proportion falls close to zero.

One reason for this is that manufacturers often turn to service as a defensive strategy to protect themselves from rivals muscling in on their territory.

Anita Woülfl of the Centre d’Etudes Prospectives et d’Informations Internationales, a Paris-based economics institute, says: “Manufacturers all over the world are increasingly interested in services as a way to make themselves more competitive and also to find new sources of growth.”

The service activities in manufacturing span a range of tasks, from maintenance contracts to design work. Some of the costs of these are bundled inside the price of goods, while others are paid for separately.

India’s recent history puts it in a good position to exploit this shift, says Anand Sharma, president of TBM Consulting, a US-based manufacturing advisory group. The seeds of the country’s prowess in manufacturing services were sown back in the 1990s, he says, when it became a world centre in software development and business process outsourcing (BPO), in which providers take over jobs such as payroll administration on behalf of customers in other countries.

Together, software development and BPO provide fast-expanding revenues for India-based companies of about $23bn a year, and account for 1.3m jobs. India’s growth in this field – as in the service side of manufacturing generally – is boosted by its proficiency in English, the world’s business language. Another attraction is the fact that the cost of employing engineers – essential to manufacturing services – is one-third to one-fifth lower in India than in industrialised nations such as the UK and the US.

“The BPO boom in India provided a core of expertise in software and a service-based approach to customers based around the world,” says Mr Sharma. “It has led to an interest by manufacturers [in India] to add value to basic manufacturing through offering services.”

Arvind Subramanian, an economist at the Washington-based International Monetary Fund, says India’s ability to compete in this field is based on its focus on fairly small-scale manufacturing operations, aimed at turning out goods in small batches and with close consultation with customers – a prerequisite for a service-based approach. He adds that there is “no doubt” that India has a global competitive advantage when it comes to service-based manufacturing.

Some of the India-based companies pioneering the service model for manufacturing are foreign businesses whose products require complex software and vary greatly depending on customers’ needs. Pradipta Sen, president of the India arm of Emerson, the US engineering company, says a “customer-facing” capability is a hallmark of Emerson’s India-based operations.

Ravi Uppal, managing director for India at ABB, the Swiss-Swedish engineering group, says India has an advantage in products such as automation equipment for factories and electricity transmission systems – in other words, products that are defined by software variations.

“India is good at the softer skills involved with manufacturing. We can use these to integrate production with [software] engineering and move in the direction of tailored products,” says Mr Uppal.

This move up the value chain is reflected in the make-up of the workforce. Only about 1,200 of ABB’s 4,000 India-based employees work in factories. The rest hold positions in design, engineering, marketing and sales – roles that address the design and production of customer-specific products.

In making new kinds of control systems for electricity transmission, for instance, ABB’s India arm is geared around answering the individual needs of its power company customers. Sigma Electric, a US company that has based most of its production in India, has also adopted a manufacturing approach based on swift changes in design, allowing it to respond more quickly to fluctuations in demand. The company – set up by India-born engineer Sajjan Agarwal – makes all its products in five low-cost India plants. It sells its goods predominantly to large US industrial groups such as General Electric and Delphi.

Mr Agarwal says: “We have 8,000 products in our catalogue and are flexible enough to make them in batches of as few as 100 at a time.” Out of 1,200 employees, 200 are engineers – including a corps of 30 development staff who work on new products and whose numbers Mr Agarwal wants to double in the next five years.

If Indian manufacturers are to capitalise on the services model, links with international companies are vital. The Indian market for engineering goods remains relatively small, though it could expand considerably in the next decade if economic growth projections are met. While China’s manufacturers have made their mark on the global economy mainly through exporting, Indians are doing far more to set up production centres outside their home country, and linking these to a “service” approach.

Mahindra & Mahindra, for instance, is setting up a global network of vehicle parts factories – linked to its production operations in India – that will make specialised components to order on behalf of large western carmakers. And Bharat Forge, a large India-based components manufacturer, is establishing plants in the UK, Germany and the US to supply customers in these markets.

Elsewhere, Essel, an Indian packager, has set up plants outside India to connect with large cosmetics manufacturers such as L’Oréal. In this way, its customers have more say in the products, even specifying what they look like. Other India-based packaging rivals are following Essel’s lead: Mahika Packaging, for instance, has recently set up a plant in Cleveland.

Baba Kalyarni, chairman of Bharat Forge, says the outward-looking approach – coupled with a way of looking at manufacturing as a combination of production and services – is critical for India’s manufacturers. “What will give companies [in India] an edge is a combination of technology and service,” he says.

India is acting as a laboratory for these ideas and is now starting to show how they operate in practice. The lessons that emerge will not be confined to its borders, however. The experience of manufacturers in formulating the right blend of production and service, and linking these to their far-flung customers’ requirements, will be studied by manufacturers the world over.

GOOD SERVICES HELP MAKE GOOD PRODUCTS

How big is the service side of manufacturing? The combined global sales of all manufacturing companies involved in making goods such as cars, computers and clothing are put at about $15,000bn (£7,975bn) a year.

Of this, 10 to 20 per cent comes from some kind of service function, whether it is charged for separately by the company or included in the price customers pay.

An example of the former is the service contracts agreed by customers with producers of, for instance, jet engines to ensure the latter are maintained while in service.

An included service might be a consultancy fee, which a customer is effectively paying for when it specifies a complex piece of manufacturing or medical equipment from a goods producer, even if the arrangement is not made explicit. The customer expects the item to be more or less made to order. The consultancy part of

the interaction is included in the price agreed by the two parties for the equipment.

A study by McKinsey, the strategy consultancy, says that more than one-fifth of all revenues of the durable goods industry in the US – encompassing manufacturing fields that include machinery, appliances and vehicles – comes from services associated with the products.

Byron Auguste, a McKinsey director, says no one has estimated an equivalent figure for the whole of global industry, but it could easily be a similar proportion.

A service approach, he says, links in with the increased interest from many manufacturers in product customisation – in which items are made in small volumes and geared to the needs of users. It can be regarded as part of the general move for manufacturers to get to know their customers better.

“If companies have a good service relationship with their customers, they are more likely to be in a position to know enough about them to configure products to suit their needs,” says Mr Auguste.

Manufacturers’ service activities vary considerably. They can range from the customisation or configuration of products in order to meet requirements of users, to jobs such as testing, development, market research, equipment installation and maintenance, for which an explicit charge may be made.

Estimates of how much of the vast manufacturing service market may be outsourceable to countries such as India – to take advantage of lower labour costs and new skills – vary from 5 per cent to 30 per cent. If India establishes a foothold in this area it will be well placed to play a substantial role in world industry, whatever the figure is.

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