India can be global hub for outsourced manufacturing, says McKinsey

Leveraging its highly-skilled engineering talent and long history in manufacturing, India is well-positioned to be the manufacturing base of Asia, according to the McKinsey Quarterly Report on 'Fulfilling India's Promise'.

The report was released in Bangalore on Friday during CII's meet on the manufacturing industry. It states that in all skill-intensive areas that include auto-component and assembly, fabricated metal products, machinery, pharmaceutical and telecom equipment sectors, India is going to be the primary sourcing and manufacturing base by 2015.

"We believe that the next wave of global outsourcing in manufacturing will take place in these kinds of industries, many global companies will be attracted to India and other developing countries," said Ramesh Mangaleswaran, principal, McKinsey & Company.

India produces 4 lakh graduate engineers, which is next only to China which produces 4.9 lakh engineers annually. Already half of all offshore manufacturing by US companies involves skill-intensive sectors and the figure could rise to 70 per cent by 2015. "With high-skill sectors amounting to 40 per cent of the manufacturing output of India, it's in a good position to absorb some of the increase in outsourced manufacturing," Mangaleswaran added.

The McKinsey report states that India is already a preferred destination for sourcing auto components by almost all the big global automakers. However, India's share in the outsourcing of auto components is still less that of China, Thailand and Mexico.

Facing the twin pressure to innovate and reduction of costs, the companies will increase their focus in sourcing components. As a result, sourcing in the sector could be worth $375 billion by 2015, up from $65 billion in 2002.

"We think that India could capture up to $25 billion of the amount, to become one of the developing world's top sourcing bases, along with China, Mexico and Thailand," the report says. Apart from the low costs, India's auto component industry has the advantage of skills in process, product and capital engineering system, thanks to the country's long manufacturing history and higher education system.

"The multinationals can reduce their overall cost substantially, leveraging India's process-engineering skills, which can be applied to such tasks as the redesign of manufacturing processes to make them more labour intensive and less capital intensive," it adds.

The reports says that price pressure and low profitability in developed countries will force them to offshore manufacturing and sourcing of specialty chemicals, which is still at a nascent stage.

"Given India's capabilities in chemistry, engineering and cost reduction, it has the potential to become one of the developing world's top two exporters of specialty chemicals and increase its exports to as much as $15 billion, from the $2 billion in 2002." Quoting the India head of a specialty-chemical global company, the report says the MNCs can achieve European levels of labour productivity at their plans in India.

In electrical and electronics products, the report says that although India made a late entry into this huge market, its export in this sector will go up to $18 billion a year, by 2015, with the cost among other factors propelling its growth.

However, the report says that when global firms evaluate India as a hub for off-shore manufacturing and sourcing, they have to overcome the problems of erratic power, poor roads, gridlocked seaports and airports while contending with government policies that discourage hiring.