Manufacturing: The India Value Proposition

Contents
Market Overview

Government regulations & policy

Business Opportunities and Advantage India

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Manufacturing has contributed to Indias economic growth

Indias GDP of $1.43 trillion makes it the 11th largest economy in the world and 4th largest in terms of purchasing power parity

One of the fastest growing economies in the world - growing at over 8 % p.a average for the last 3years

Manufacturing contributes to  79% of FDI investment  16% of India GDP  53% of Indian exports

World's second largest small car market One of only three countries that makes its own supercomputers y World's largest producer of milk, tea and pulses and the worlds largest livestock population y Second largest producer of food including fruits and vegetables y Worlds largest diamond cutting and polishing centre and the second largest jewellery market
y y

Source: GoI website, IMaCS analysis

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Indian Manufacturing : A macro perspective

Indian manufacturing sector is expected to grow at 12% to 14 % over the next decade India is a stable democracy with strong macroeconomic fundamentals

India is ranked 43 in the latest GCI index (1) ahead of other BRIC (2) economies

Indian manufacturing competitively positioned for a high growth rate era

Indian economy expected to grow at 8% to 10% over the next decade

The BPO migration to India is getting replicated in the manufacturing sector

The quality of Indian work force is one of Indias key competitive advantages
(1) Global Competitiveness Index
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FDI inflow into India has doubled from USD 3.4 bn in 2001 to USD 8 bn in 2005

(2) Brazil, Russia, India, China

Source: National Manufacturing Competitiveness Council, IMaCS analysis

Key sectors in Indian manufacturing

Auto Industry: The Indian auto industry is a USD 44 bn industry (Automotives is USD 34 bn and Auto components is USD 10 bn) Chemicals: The size of chemical industry in India (Petrochemicals to Paints) is USD 30 bn The electronics industry is USD 11 bn (consumer electronics to electronic components) Food Processing: A USD 70 bn industry growing at 9% to 12% Gems & Jewellery: A USD 13 bn industry (Gold growing at 15% p.a and Diamond growing at 27% p.a) Leather: Machine Tools: Industry size is USD 4 bn Industry Size is USD 225 mn Industry Size is USD 38 bn

Electronics:

Textiles: Engineering: A USD 22 bn including including heavy and light engineering

These sunrise sectors(1) of Indian manufacturing is enabling higher growth rates for the manufacturing sector

(1) - list illustrative and not exhaustive Source: IMaCS analysis

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Capital Goods
y

Concentration level shows a marked increase in :

Boilers (dominated by the PSU, BHEL) Chemical Machinery (L&T) Portable Power Generation Sets (Honda Siel Power Products and Birla Power Solutions, 100%)

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Intermediate Goods
y

Concentration level shows a marked increase in :

Polyester Staple Fibre (Reliance: 54%, worlds 5th largest producer of PSF) Viscose Staple Fibre (Grasim: 91%, worlds largest plant for producing VSF) Paints & Varnishes (dominated by three firms) Storage Batteries (Exide Batteries: 62%)

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Growth rate and market share

y

Concentration level shows a marked increase in:

Automobile tyres (MRF: 24%) Motorcycles (Hero Honda: 50%) Bicyles (Hero Cycles: 40%) Three-wheelers (Bajaj Auto: 75%)

Each of these industries have one major firm with a high market share

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Domestic and Export competitiveness in manufacturing : Key drivers

Domestic Competitiveness
Indias liberalization, key policy interventions, competition and infrastructure build up have been key drivers

Export Competitiveness

Regional FTAs, FDI in select sectors, stable currency, stable economic regime have been key drivers

This interplay has enhanced Indias competitiveness Indias manpower advantage, indigenous technology advantage have played a leading role in achieving domestic competitiveness Many Indian sectors (e.g. Textiles, Glass, Automotive, Jewellery, Leather, Agro based, Pharmaceuticals, etc) have achieved export competitiveness

India's manufacturing output is USD 450 bn

Source: IMaCS analysis

Indian manufacturing exports have been growing at a CAGR of 14% for the last five years

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A handful of sectors contribute to 75% of Indias manufacturing exports

Gems The balance 25% exports are from sectors like 1) Automotive 2) Cement 3) Food Processing 4) Drugs/Pharmaceuticals 5) Telecom equipt 6) IT hardware/Electronics 7) Paper 8) Minerals and Metals Jewellery 75% of mfg exports Chemicals Indian manufacturing is forecasted to grow at 12%14% over the next decade and sectors like Automotive, Food Processing and Pharmaceuticals are expected to be the growth drivers

Leather

Textiles India is presently at the cusp of a Engg Goods Manufacturing take-off

Source: National Manufacturing Competitiveness Council

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Where does the advantage arise from.....

Indias manufacturing cost advantages vis--vis high-cost locations

a)

Production design and Process Engineering cost

Savings to the extent of 80% vis--vis plants in developed markets (due to the low cost, high quality engineering talent in India)

b)

Capital Cost efficiency

Savings to the extent of 30% to 60% vis--vis plants in developed markets (due to local fabrication and labour intensiveness)

c)

Higher Asset utilization

Many manufacturing units in India follow a 3 shift seven day week (unlike a 2 shift-5 day week in high cost locations)

A sustainable competitive advantage for India in Manufacturing

Source: IMaCS analysis

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Contents
Market Overview

Government regulations & policy

Business Opportunities and Advantage India

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Regulatory Scenario for Indian manufacturers

Central (Federal) Government 1) Government of India offers a five year tax holiday for
a) b) c) d) e)

State (Provincial) Government 1. Each state & Union Territory (UT) offers their unique industrial and sectoral policy and incentives 2. The policies offered relate to industrial estates, taxes, power tariff, capital investment subsidies 3. States and UT in India typically follow a Single Window Clearance (SWC) mechanism 4. Competition among the states and UT to attract investment has proven to be beneficial for investors 5. Customized packages designed for capital intensive projects

Power projects Firms engaged in exports New industries in notified states Units in Electronic hardware, software parks EOUs and Free Trade Zones

Regulatory advantage Better project economics

2) Tax deductions of 100% on export profits 3) Deduction of 30% on net income for 10 years for new industries 4) Deduction in respect of certain intercorporate dividends

Source: GoI website, IMaCS analysis

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Foreign Investment Policy relating to the manufacturing sector

Indian capital markets are open to FIIs Decision on all foreign investment proposals within 30 days of application FDI approval are processed through the automatic route or the FIPB(1) route FDI (automatic route) => No approval of GoI or Reserve Bank of India reqd FDI (FIPB route) => Subject to approval of the board and the respective sector wise guidelines FDI inflow into India has doubled in the last five years
(1) FIPB: Foreign Investment Promotion Board (2) Except refining

Some of the sectors in which 100% FDI is allowed 1) 2) 3) 4) 5) 6) 7) 8) 9) Airports Coal Agro & allied Roads Ports Coffee Tea Telecom equipment Hazardous Chemicals 10) 11) 12) 13) 14) Mining SEZ / FTZ Rubber Construction Petroleum (2)

Source: FDI policy 2006, GoI

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expected to facilitate manufacturing

Investment in infrastructure is estimated to reach USD 125 bn between 2005 - 2010
Roads Four laning 6000 kms of highways that link Indias top 4 metros has been nearly completed (Golden Quadrilateral) The project linking the ten major ports of the country to the GQ mentioned above is nearing completion FDI investment upto 100% permitted in the road sector Ports Indias long coastline (7517 kms) and the 12 major ports cater close to 90% of Indias foreign trade in volume terms and 70% in value terms FDI investment upto 100% permitted in the port sector 18 port privatization projects worth USD 1.39 bn are under way (Private participants are P&O, PSA, Maersk, Gammon India, CWC and Dubai Port Authority) Airports India has 450 airports including 11international airports India plans to invest USD 5.07 bn in the next five years FDI investment upto 100% permitted in the port sector The privatization of New Delhi and Mumbai airports have been completed

Emphasis on infrastructure development would support Indian manufacturing to be competitive

Source: IMaCS analysis

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Contents
Market Overview

Government regulations & policy

Business Opportunities and Advantage India

www.imacs.in

Attractiveness of India as a manufacturing destination

Investors expectations manufacturing locations 1. Economics and Ease of operations 2. Favourable economic policies, flexible manufacturing practices in terms of design, scale and delivery 3. Robust domestic demand for the manufactured goods 4. Infrastructure support, Favourable legal systems, Policy framework, Ancilliary linkages and Services support 5. Skilled and Productive labour force India has compelling advantages Indias manufacturing competitiveness 1. Economical labour costs and business transactions costs 2. Many manufacturing companies have emerged as centres of manufacturing excellence 3. The aspirational huge Indian middle class is a readily available market 4. Competition among states/UTs to attract investments is addressing these issues 5. Large pool of well qualified manpower

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to a preferred manufacturing destination

Manpower advantage: Over 58 % of the Indian population is under the age of 20 (Approx. 564 mn people) Market advantage: The 300 million aspirational Middle-class is growing at 5% per annum Technology Advantage: Around 100 Fortune 500 have their R&D base in India

Over the next few decades India can overtake the economic growth rate of Brazil, Russia, China (the other fast growing economies)@

Source: IMaCS analysis @ BRIC report by Goldman Sachs

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Key players in India

Illustrative, not exhaustive

A conglomerate of 96 operating companies in several sectors with revenues of USD 72 bn (5% of India GDP) in 2010. The Tata brand is a household name in India

One of Indias largest private sector enterprise, with interests in downstream petrochemicals. Group revenues are about USD 44bn. Reliance Industries Limited is a Fortune 500 company

Pepsi is one of the biggest FMCG brands in the country. The company plans to invest around USD 1 billion in India this year

Ford is one of Indias popular brands in the car market. Ford manufactures around 100,000 cars per annum in India

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Key players in India

Illustrative, not exhaustive
Coca Cola is one of the largest beverage player in the country. The company has invested more than USD 1 bn since its entry into India

Wockhardt is one of Indias leading companies with interests in pharmaceuticals and healthcare with a market capitalization of USD 1.3 bn and an annual turnover of over USD 300 mn

Present in India for over 50 years. Leading player in the power sector. Employs over 4,000 people in India; has its global R&D centre in Bangalore

A US$ 30bn conglomerate, with a market capitalisation of US$ 45 bn, it is anchored by 82,000 employees belonging to over 20 different nationalities

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Facts of the Indian Cement Industry

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Introduction
y y

From 1914 till 1924, nascent stage Signs of growth during 1924-41, severe competition, depressing prices and profitability; and Associated Cement Company (ACC) Production and distribution under direct control in 1942

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Nature of the Industry

y y y y y y y

India is the Worlds second largest cement producing country Factories clustered in a few locations depending on raw material availability Regional in nature Southern region (largest market, insulated from competition) Eastern region (isolated, monopoly in serving north-eastern states) Western region (most open to competition) Emergence of a few big players through M&As

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Facts on indian Steel Industry

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Introduction
Highly heterogeneous and fragmented industry, with widely differentiated products y Strong public sector presence y Complete abolition of price and distribution controls during early nineties
y

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Competition Concerns
y

Differential Pricing
Downstream producers compete with integrated producers for the same end-product Allegations of differential pricing between the intermediate and the end product

Cartelisation?
Threat of imports, public perception, users of HRC constitute a large lobby Suspicions of concerted action by steel majors (PSUs operation) Cartelisation, when the market is strong, but not when it is weak

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