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The pandemic laid bare the issues around global supply chains, which has forced manufacturers to rethink their strategy and diversify their units to multiple countries for better reliability. Several Asian countries have seen growth in manufacturing, and companies are now taking notice of the Indian manufacturing sector.
India’s manufacturing sector has immense potential. In 2020, manufacturing made up 17.4% of India’s GDP, whereas a 2019 UN report found that India contributed only 3.1% to the global manufacturing output. India is now the fifth largest economy in the world, and in terms of population just behind China, the factory of the world. However, recent policy changes are aiding growth in manufacturing.
What’s driving India manufacturing higher?
Cupertino-based Apple recently diversified iPhone 14 manufacturing in India and is now asking suppliers to move AirPods and Beats headphone production to the country as well. Vietnam, Thailand and other Southeast Asian countries have been the biggest beneficiaries of the China Plus One strategy, and a similar trend is emerging for India’s manufacturing sector. For example, logistics firm DHL recently announced a $49 m investment in India to double its warehousing capacity and headcount in the next five years.
A report published by the American Chamber of Commerce of Shanghai in late 2020 says that India was among the top four options for relocation and diversification for American companies during 2019 and 2020.
Also the pharma sector is taking an advantage of India, and a meeting earlier this year between pharma companies and Indian government officials saw a discussion to develop the country as a low-cost manufacturing hub and R&D base. India’s active pharmaceutical ingredient (API) sector has seen private equity investments of $1.5 bn since the beginning of the pandemic. The city of Hyderabad has planned a ‘pharma city’ and is working on constructing 500 large facilities with a target of attracting $8.4 bn investment and employing over half a million people.
Apart from receiving a boost from Apple, India’s mobile phone manufacturing sector now ranks second in the world owing to the government’s push. Apple suppliers are setting up shops in India and are exporting items globally. Samsung is building the world’s biggest mobile manufacturing in India.
Homegrown firm Dixon Technologies manufactures smartphones for several clients, such as Panasonic, Samsung, Gionee, Karbonn, Tambo, InFocus, and Alcatel. China’s BBK Electronics, the parent of OnePlus, Realme, Vivo and Oppo, has set up several manufacturing facilities across the country.
“Mobile phone production has increased fivefold in the past five years, and India is on track to emerge as a global exporting hub of mobile phones, which creates robust demand for integrated circuits and semiconductors,” said Deepak Jain, partner at management consultancy firm Bain and Co.
A key component of India’s manufacturing push is the government’s Production Linked Incentives (PLI) scheme under which the country is expected to attract a capital expenditure of $48.65 bn and create three million jobs, as per India-based rating agency ICRA. Indian government’s PLI extends to 14 significant sectors, including solar, semiconductors, electronics, automotive, telecom gears and medical devices, among others.
Some of the notable beneficiaries for PLI are as follows —Apple suppliers Foxconn and Wistron for electronics, Hyundai Motor India, Suzuki Motor Gujarat, Ashok Leyland, Mahindra & Bajaj Auto for automobile, Sun Pharma, Cipla, Biocon, Glenmark Pharma and others for pharmaceuticals, Ericsson and Nokia for telecom, Daikin, Panasonic and Syska for white goods.
The Indian government is now planning to expand the PLI scheme to more manufacturing sectors such as furniture, textiles, toys and leather, among others.
According to Rahul Chadha, Chief Investment Officer of Mirae Asset Global Investments, the PLI can trigger a next wave of private sector capital expenditures (capex), driven by incremental investment of about Rs. 750-800 bn (~$9 bn) per annum at a direct level and more capex at a secondary level due to multiplier effect.
Opportunity in India manufacturing
India’s manufacturing exports have grown by 40% year-on-year in the fiscal year 2022 to hit a record $418 bn, and the country aims to scale this figure to $1 tn by the fiscal year 2028. Goldman Sachs in a note said that new investments and ordering activities, with the manufacturing sector showing a growth of 210% in FY22 compared to 2020-2021, while registering a growth of 460% compared to 2019-2020.
“The growth was contributed by both traditional sectors like petrochemicals, steel, cement and automobiles, and new-age sectors like electronics, e-vehicles, data centres,” said Goldman analysts.
Bain & Co says sees six trends that are shaping India’s manufacturing sector — supply chain diversification, sectoral advantages, government initiatives, Capex-led growth, M&As, and PE/VC-led investments. The management consulting firm sees six sectors driving manufacturing export growth in the country, namely chemical, pharma, industrial machinery, automotive, electrical & electronics, and textile & apparel.
“As India emerges as a hub for manufacturing exports, cutting-edge technology and best-in-class workforce are being deployed in the country’s manufacturing domain, giving further impetus to India’s strengths on cost efficiency,” said Deepak Jain, Partner at Bain & Co. “Despite possible recessionary and inflationary pressure, fundamentals for India’s manufacturing sector remain strong.”
Meanwhile, McKinsey & Co says that rising competition for creating manufacturing hubs is one of the biggest opportunities for India to spur economic growth and job creation.
