EXIM BANK

EXIM BANK

Ways and Means to Increase India’s Manufactured Exports

S. Sridhar

Executive Director

Exim Bank, Mumbai

EXIM BANK

EXIM BANKChanging Global Scenario

Growth in manufacturing activity was faster than the world economic growth in the last two decades.

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1981-1990 1991-2000

GDP growthMVA growth

EXIM BANK

EXIM BANKChanging Global Scenario

• Trade in manufacturing has increased even more rapidly

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1995-2000 2000 2002

Manufactured exports Manufacture productionGDP

EXIM BANK

EXIM BANKChanging Global Scenario• US $ 4708 billion worth global trade in

manufacturing • Accounts for 3/4th of world merchandise trade.• Certain functions which were earlier linked to

the manufacturing chain like R&D, design development, marketing and customer support are being outsourced.

• Growing trade volumes have made it economical to break-up these functions and outsource.

• These manufacturing activities are now being considered as services activity associated with manufacturing.

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Why this Change is Happening?

• Internationalisation of the production process across the countries.

• Movement towards low efficient and low cost locations

• Opportunity to developing countries, including India, to join in this model

• Increase in inter-dependency of countries• Many firms in the NIEs used this approach • India can learn lessons from their experiences

Emergence of Global Value Chain (GVC) Model

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Features of GVC Model

• Geography and national boundaries are no longer considered as constraints in this model.

• MNCs through FDI investment have spread this model across the globe.

• To join this model, countries like India should gradually move up in the value chain.

• If India is not an active player in this network, we will lose several growth opportunities.

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Paths of GVC

• Process Innovation – improving the efficiency of transforming inputs into outputs

• Product innovation – improving quality and differentiated products and upgradation of models

• Functional innovation – new ideas like contract manufacturing, outsourcing of marketing networks and production logistics

• Interchain innovation – moving to new and more profitable product segments

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Benefits of GVC

• Begin production with existing level of capabilities

• Upgrade capabilities of manufacturing• Learn process and product innovation skills• Access technological knowledge

– Knowledge transfers involved were multifaceted

• Access to large export markets• Exploit economies of scale• Eventually catch up with the advanced firms

EXIM BANK

EXIM BANKCase Study: Knowledge Transfer• Mexico’s experience with the Maquiladroa

initiative and the automobile industry. • Border industrialization programme designed to

attract foreign manufacturing facilities along the US Mexico border.

• Most Maquiladoras began as subsidiaries of US firms

• USA Shifted labor-intensive assembly operations to Mexico because of low wages in Mexico.

• However, the Maquiladoras now employ sophisticated production techniques, many of them transferred from the USA.

EXIM BANK

EXIM BANKDeveloping Countries• Ultimate Beneficiary – Developing

countries• Resource usage in competitive activities• Can be witnessed in rapid growth in

exports of parts and components• The share of parts and components in

total manufactured exports also increased

• Increasing intra-firm trade by multinationals

• Dampen the effect of adverse shocks

EXIM BANK

EXIM BANKPattern of Concentration

• Highly concentrated in countries with strong policy regimes, skilled workforces and adequate infrastructure.

• Asia – China, Mexico, Korea. Rep, Malaysia and Thailand) accounted for 78% of developing countries’ exports of parts and components.

• The next largest five countries accounted for 14%.

EXIM BANK

EXIM BANKPattern of Concentration

• Developing countries outside the top 10 made only about 8%.

• South Asia, Sub-Saharan Africa, Middle East and North Africa together account for only 2% of developing countries’ parts and components exports.

• 2/3 of that amount is from South Africa and India.

EXIM BANK

EXIM BANKRecent News• Huyndai small car to be outsourced from

India • Ford motor company – ‘India Sourcing

Programme’ • Matsushita of Japan sourcing programme in

India• GE, under its Global Development Center

(GDC) program for outsourcing, signed up long term contracts with four strategic suppliers in India.

• Other major MNCs have plans to use India as a sourcing base for their requirements

EXIM BANK

EXIM BANKRecent News

• Major MNCs like Volvo, GM, GE, Chrysler, Ford, Toyota, Unilever, Clariant, Cummins and Delphi are sourcing components and hardware from India

• Bharat Forge world’s largest forging facility• Essel Propack world’s largest manufacturers

of laminated tubes • Hero Honda world’s largest manufacturer of

motorbikes• Indica being exported to Europe as Rovercity

EXIM BANK

EXIM BANKWhy India being considered?• Outsourcing - not quality-driven. • Driven by cost effective operations – studies

estimate saving potential of 70% of cost of operations, if outsourced to India

• Basic infrastructure has improved • Fluency in English. • Enabling conditions – political stability, sound

macro-economic management, enforceable legal and regulatory framework protecting IPR, transparency in policy making, well-functioning institutions and low-cost business environment.

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Creation of Indian MNCs

• Developed strong technological and industrial capabilities in several sectors;

• Sustained and continuous efforts over the years have been initiated for promoting exports of technologies, services and project exports

• Also liberalized policies are being evolved to encourage technology related investments abroad.

EXIM BANK

EXIM BANKFew Imperatives –

for joining this model

• Infrastructure and other services must meet international quality, cost and delivery.

• Efficient markets of labour, capital and information

• Competitive strategies for achieving efficiency and dynamism at sectoral level

By offering Tax Incentives for foreign companies and encouraging outsourcing and related services, India can become major outsourcing destination on the global map.

EXIM BANK

EXIM BANKEntry Strategies for GVC Model• FDI• Joint ventures• Foreign and local buyers • Licensing• Sub-contracting• Informal means (eg. training, hiring and

returnees)• OEM• Own Design and Manufacture (ODM)• Strategic partnership for technology• Overseas acquisition equity

EXIM BANK

EXIM BANKBusiness Practices of Select Manufacturing Sectors

• Exim Bank conducted a study on 6 sectors to understand the Business Practices of Successful Indian Exporters.

• The study covered the following manufacturing sectors– Apparel, Pharmaceuticals, Auto components

and Agro-chemicals

EXIM BANK

EXIM BANKCritical Success Factors in Apparel Manufacturing

• Professionalism

• Entrepreneurial Zeal

• Quota mastering – post 2005 it will be market penetration strategy

• Effective Logistics Management

• Market Diversity

• Focus on specialised areas of operation

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EXIM BANKCritical Success Factors for Pharmaceuticals Sector

• Market focus

• Global perspective and knowledge

• Moving up in the value chain

• World class manufacturing

• R & D investment

• Establishing direct relationship with buyers

• Global networking

• Scale in bulk drug manufacturing

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EXIM BANKCritical Success Factors for Agro-Chemicals

• To have international network for marketing and distribution

• Moving up in value chain with branded formulations

• High level of backward integration – to reduce raw material costs

• Broader product portfolio and registrations abroad – to reduce business risks

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EXIM BANKCritical Success Factors for Auto-Components Sector

• Achieving international quality

• Strong domestic market base

• Access to best production technology

• In-house expertise to developing and absorbing the technology

• R & D

• Capacity to meet global demand

• OEM centric export strategy

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EXIM BANKInter industry – Generic Success Factors

• Global market intelligence• Strong global networking• Direct relationship with buyers• Clear product-market strategy for exports• Strong R & D skills• Technology access• Competitive raw material sourcing skills• World class manufacturing and quality standards• Timely execution of orders• Moving up in the global value chain• Clear export thrust• Entrepreneurial Zeal

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Need for Transfer of Success

• Only few firms are successful and others are unaware of the success factors and business practices adopted by them

• There is a need for initiating the transfer process of success in order to tap the business opportunities in the global arena

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Process of Transferring the Success

• Undertake awareness programme – through industry associations, export promotion councils and cluster association

• Setting up of National Export Information Repository – to provide information in enhancing the success factors

• Joint programmes – with common objective of implementing the critical success factors at firm levels

• Inter-industry learning – to understand the export dynamics and transferability.

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Formulating Firm Level Strategies

• Identify main comparators – – Neighbours with similar advantages– Immediate competitors in similar activities– Potential competitors that may emerge as challengers– Role models, those who are pioneers in technology

• Benchmark at the level of industry, technology or clusters

• Benchmark the drivers of industrial performance and analyse the strengths and weaknesses.

EXIM BANK

EXIM BANKOutlook• Mode of change will be the biggest force in

operation.• Level of change will be dissimilar for various

segments and various players within a segment• Players and segments which can assimilate this

change will survive and prosper.• In some segments India can prosper and in

others India could lose out to countries like China, Korea and Taiwan.

• Firms should make a realistic assessment of what their strengths are, how much they can influence in the international markets and how to influence.

EXIM BANK

EXIM BANKPartnership for Success• Government, Institutions and firms join

together for success of GVC model.

• Responsibilities of Government

General Specific

•Establish a basic legal framework•Competition law•Restrictive trade practices and monopoly regulations•Quick entry / exit of firms•Stable macro economic policies

•Correction of market imper-• -fections•Pro-active FDI policies•Creation of EPZs•Promotion of industrial clusters

EXIM BANK

EXIM BANKRole of Pvt. sector• Technology Generation

– Conceptualise state of art technology suitable for India

– Evolve indigenous technology with international standards

– Earmarking a percentage of turnover for R&D– Diversify R&D efforts to focus on services, systems,

products and markets

• Manufacturing world class products– Develop products that are suited for Indian

conditions; test before entering international markets

– Concentrate neighbouring (developing countries) markets

EXIM BANK

EXIM BANKImportance of Trade Facilitation

Efficiency at all levels

• Supply Chain Management

• Implementation of EDI– Inter-enterprise logistics management– Electronic commerce– Bar coding– Electronic catalogues

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EXIM BANK

Importance of Trade Facilitation

• Need for Efficient Export infrastructure

• Special Economic Zones – an export platform

• Lowering of Transaction time/cost

EXIM BANK

EXIM BANKExim Bank’s efforts in thriving the manufacturing performance

• Technological efforts – Finance for import of technology, Product development and R & D finance

• FDI for technology transfer and global manufacturing - Advisory services for location of joint venture partners and structuring and facilitation of JV

• Quality accreditation and global marketing – Provides and information and necessary support, export marketing finance, marketing services

• World class production infrastructure – Term finance for EOU projects, working capital loans, overseas investment finance

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Thank You