How Indian MSMEs can offer a production alternative to China in the post-COVID-19 world

As China faces global repercussion for its handling of the COVID-19  crisis, several multinational companies with manufacturing plants in China are contemplating to shift their operations to other countries.

The lack of transparency by China in the initial phase of the outbreak that was linked with a supply blow has emboldened manufacturers to consider giving their manufacturing units a facelift in different markets.

India is aggressively pitching to grab a share of this immediate shift. Reports suggest that India has already reached out to more than 1,000 companies in the US to offer incentives for manufacturers seeking to move out of China.

China has been the world’s production hub for several years now with a robust manufacturing and supply chain network built over three decades. While tax incentives, land and ease of doing business are critical elements to bring foreign companies to establish manufacturing units in India, we also need to bolster our manufacturing capability to world-class standards.

According to a recent SBI Ecowrap report, India has a very small production base as compared to China and the manufacturing sector needs a major push to be able to offer competitive services to global companies. The report also says that India can target export growth anywhere between USD 20 billion to USD 193 billion over the next five years depending upon its capacity to successfully build its manufacturing capability in terms of both quality and quantity.

As we know MSMEs in our country hold a 48% share in India's exports, this sector will be central to our efforts to cash in on this drift.

While the government needs to work towards improving infrastructure, ease of doing business, logistics, regulatory frameworks and strategic relations, the MSME sector itself must also work with an aggressive mindset towards this target.

Reinvent yourself in the post-COVID-19 world

The MSME sector in India has faced huge losses over the past two months. However, entrepreneurs need to reinvent their businesses to stay viable in a post-COVID-19 world without wasting time. Businesses that instantly adapt to the changes and refigure their models are the ones that will survive and grow in this changed scenario. The MSME businesses and entrepreneurs must use the COVID-19 crisis as an opportunity to reinvent their processes, business models and outlook to stay attractive to global manufacturing.

Businesses who are operating effectively with requisite social distancing and contact-free processes will be the ones that will attract the foreign manufacturing business. Indian entrepreneurs must also adopt a global outlook, study in-depth the best business practices across the world and learn from what the Chinese did right over the past three decades. They need to develop processes that are globally competitive.

Technology upgrade

The UN Statistics Division predicts that China accounted for 28% of global manufacturing output in 2018. It is by no means an easy feat to replace China as a chosen manufacturing center. Apart from India, global manufacturers looking to shift base from China are looking at Bangladesh, Vietnam, Taiwan, and South Korea as possible alternative manufacturing centers. While Vietnam and Bangladesh offer low-cost efficient manufacturing in low-skill low-tech segments such as textiles, clothing and electronics, countries like South Korea and Taiwan figure as favorable centers for the high technology spectrum of manufacturing.

MSMEs from India need to accelerate the adoption of technology and the expertise to manufacture high-end technological products in India. This requires work on multiple fronts including studying global manufacturing models, particularly in countries at the higher end of the technology spectrum. The government must actively work to help the sector in this process by using its strategic relations to establish joint ventures with foreign companies. Innovation and skill up-gradation are other areas that need to be focused on. Technology adoption is not only critical to bringing in high-end product manufacturing to India but is also useful in improving process capabilities and a higher degree of regularity of products and services. Technology helps MSMEs to be competitive, more productive and efficient in a global environment. Centering on research and innovation is another crucial component of achieving technological up-gradation.

Move up the value chain of production

As a country that wishes to become a manufacturing core, India must work to support its capabilities in all kinds of production ends. This includes low end manufacturing such as textiles, clothing, footwear, animal and food products as well as high-end manufacturers such as electronic equipment, pharmaceuticals and chemical products.

Promoting innovation is crucial to achieve skill up-gradation and developing indigenous technological know-how. Moving up the value chain of production is very important for India if it wants to present itself as the next manufacturing hub. Given the fact that India churns out a large number of engineers and technology graduates every year, we already have a pool of skill and talent. Yet, there is a lack of a high-end manufacturing ecosystem in the country. We need to change this by developing a set up that can cater to the entire lifecycle of products from inception to development to manufacturing.

MSMEs must work towards increasing their Gross Value Added in manufacturing. A capability to produce value addition in products is crucial for creating an attractive manufacturing base.

By Dr. Vivek Bindra, Founder and CEO, Bada Business Pvt Ltd