A strong 'product' ecosystem is the key for long-term growth

We need discussion on developing an ecosystem to enable launch of "products" and "global brands"

The buzzword in the Indian corporate circles these days is “Make in India”, which is receiving a tremendous boost from the Narendra Modi-led NDA government. While much of the focus is on how India can emerge as a hub of “manufacturing”, there is no discussion about developing an ecosystem that enables launch of “products” and “global brands”. A strong product ecosystem create lot of more value and drive demand for healthy manufacturing.  
 
Over the last 15-20 years, while India has been primarily focused on “services”, China though started with “manufacturing” but quickly extended its focus to “product” companies. As a results, in addition to being the manufacturing behemoth, China has also produced product brands like Lenovo, Huawei, ZTE, Xiaomi, Baidu, Alibaba, Spreadtrum etc., spanning hardware, software and e-commerce. India desperately needs to create several high value product companies to meet domestic demand and create wealth. Make in India shouldn’t be just about “manufacturing” but also be about making products” i.e. designing, developing and selling various hardware and software products right here in India for India and the world.  

 
Product companies command 30-50 per cent profit margins while manufacturing companies barely can manage 3-5 per cent. A good example is comparison between Apple and Foxconn, #1 and #10 in the list of top information technology companies with more than $50 billion in revenues. The market capitalisation of Apple Inc is approximately $750 billion on approximately $180 billion revenues. At the same time, Foxconn is valued at $32 billion on the revenues of US$130 billion.

Product companies can maintain higher margins because their focus is on innovation and develop new and differential products while manufacturing relies more on labour and low cost. Make in India focus seems to be more on manufacturing because it is visible and could possibly generate more jobs. But, at the same time, it has low barriers for entry. As a result, just like manufacturing moved out of the US to Japan then to South Korea and now to China, it can also move out of India to Africa or other low-cost countries. Also, labour costs could become lesser and lesser of an issue as we continue to make progress on automation, robotics and artificial intelligence. 3D printing is a good example. It is not farfetched to be able to print toys, office supplies, household utensils and other goods using $500-$1,000 3D printer. Imagine the implications of this on manufacturing industry. So, it is important that we focus on product level innovation and product centric companies even if we push on manufacturing

 
Product centric start-ups require a totally different mindset and approach. They tend to take tens to hundreds of millions of dollars and five to 10 years before reaching profitability. This is quite a contrast from the “services” model that doesn’t require lot of capital and usually has small but quick returns. But, product companies create lot more value and wealth. India must create Apple, Google, Amazon, Intel, Oracle, Lenovo, Xiaomi, Alibaba, and Facebooks of the world. Currently, India doesn’t figure in the list of countries that has top 100 companies by valuation as show in the table below.



Product companies can maintain higher margins because their focus is on innovation and develop new and differential products while manufacturing relies more on labour and low cost. Make in India focus seems to be more on manufacturing because it is visible and could possibly generate more jobs. But, at the same time, it has low barriers for entry. As a result, just like manufacturing moved out of the US to Japan then to South Korea and now to China, it can also move out of India to Africa or other low-cost countries. Also, labour costs could become lesser and lesser of an issue as we continue to make progress on automation, robotics and artificial intelligence. 3D printing is a good example. It is not farfetched to be able to print toys, office supplies, household utensils and other goods using $500-$1,000 3D printer. Imagine the implications of this on manufacturing industry. So, it is important that we focus on product level innovation and product centric companies even if we push on manufacturing.

Product centric start-ups require a totally different mindset and approach. They tend to take tens to hundreds of millions of dollars and five to 10 years before reaching profitability. This is quite a contrast from the “services” model that doesn’t require lot of capital and usually has small but quick returns. But, product companies create lot more value and wealth. India must create Apple, Google, Amazon, Intel, Oracle, Lenovo, Xiaomi, Alibaba, and Facebooks of the world. Currently, India doesn’t figure in the list of countries that has top 100 companies by valuation as show in the table below.



It is clear that Make in India should be about “products” as much as it is about “manufacturing”. This will be the success formula for both short term and long term value and job creation and make India globally competitive and respected. There are plenty of opportunities in the consumer, mobile, home, infrastructure, industrial, enterprise markets riding smart, sensor and IoT world. Product innovation could span from hardware to software to e-commerce to services.

The author is co-founder and chief business officer, Soft Machines