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India is on its way to become a major contract manufacturing hub. Are entrepreneurs ready to pitch in?

Contract manufacturing involves outsourcing or sub-contracting to a company, which has the resources to manufacture products or components at low-cost without compromising on quality.

The firm that outsources work owns the design and patent rights, and is called the original equipment manufacturer (OEM). The business model involves economies of scale with OEMs focusing on their core competence by outsourcing manufacturing to low-cost destinations. For long, Taiwan and China have been at the centre of the manufacturing boom in Asia. So much so, that 80% of toys sold in the US are made in China. But things are slowly working in favour of India. There is a huge opportunity in manufacturing waiting to be tapped.
A proper synergy between the OEM and the contract manufacturer (CM) may also result in the latter bagging marketing rights of the product using the OEM’s brand name.

The OEM either invites bids from empanelled contract manufacturers or approaches a CM of its choice with its design. Based on the cost of labour, process and tooling, a CM quotes its price. The OEM then decides on the CM taking into account various factors such as shipping costs and tax benefits. Various sectors involve contract manufacturing with pharmaceutical, automobile and electronics hardware being the major ones.

Advantage India
The face of Indian manufacturing underwent a sea change after the liberalisation wave of 1991. The sector that lagged behind for decades because of licence permit raj and lack of technological know-how is today poised for growth. The country has become a favourite manufacturing outsourcing destination because of cheap labour, talented and knowledgeable workforce, supportive government policies, improved quality control measures, world-class technology and consistent economic growth.

“India is changing from a command economy focused on self-sufficiency to becoming a key link in the global economic chain,” KPMG says in its report titled ‘Manufacturing in India: opportunities, challenges and myths’. As a global manufacturer, India is well placed by geography, language, and historical association to service customers in advanced economies, while as a regional manufacturer India has highly developed historical trading links with the Middle East and Africa as well as its own south Asian back yard, it says.

The big market
Manufacturing exports from India could touch $300 billion by 2015, according to a CII-McKinsey study titled ‘Made in India’. The most promising sectors for India are auto components, pharmaceuticals, electronic hardware, apparel, footware, toys and specialty chemicals. Another McKinsey analysis states that global outsourcing in the automotive components sector could be worth $375 billion by 2015, up from $65 billion in 2002. India could capture up to $25 billion of this amount, to become (along with China, Mexico and Thailand) one of the developing world’s top sourcing bases. Out of a sample of more than 400 Indian suppliers, 80% have ISO 9000 certification—the international standard for quality management.

On the other hand, pharma contract research and manufacturing (CRAMS) market in India, which was valued at $532.10 million in 2005, is expected to touch $900 million by 2010, according to ASSOCHAM.

The country could exploit its strengths to export electrical and electronic goods worth up to $18 billion a year by 2015, say analysts. India’s toy exports have doubled from Rs 200 crore in 2003 to Rs 400 crore in 2007, according to reports.

AUTO COMPONENTS

Potential Potential of over $5 billion for investment India amongst the most competitive manufacturers of auto components; especially: Metal intensive components such as forgings, stampings and castings Labour-intensive components such as machining Hi-tech components such as electronic fuel injectors Highlights Highly fragmented industry 50% exports are to Europe and the US Majors including Delphi and Bosch have set up operations in India GM, Ford, Toyota have set up International Purchasing Offices Daimler, Suzuki and GM have set up development centers 100% FDI allowed through the automatic route Major player / customers Bharat Forge: BMW, Ford, Volvo, GM etc Tata Auto Components System: Daimler, Fiat, Hyundai etc Sundaram Fasteners: Volvo, Proton, MAN, Ford, GM etc Brakes India: Swaraj Mazda, Tata, Toyota etc Source: Investment Commission, CII, Electronic Industries Association of India (ELCINA)

PHARMA

Potential The contract manufacturing segment likely to grow at 10-12% Cost of manufacturing in India is 30-40% lower compared to western countries Highlights About 20,000 manufacturing units. 80% are into contract manufacturing Firms offering drug development due to the new product patent regime Pharma MNCs offering preferred vendor status to Indian firms India has the largest number of USFDA approved plants outside the US Six times the number of trained professionals as the US Major Players Dishman Pharma Jubilant Organosys Shasun Chemicals Suven Pharma Orchid Pharmaceutical Source: Investment Commission, CII, Electronic Industries Association of India (ELCINA)

ELECTRONICS HARDWARE

Potential Global market opportunities in electronic manufacturing services: Contract Manufacturing: $500 billion outsourcing opportunity by 2010 of which India can tap $11 billion Design Services: $7 billion projected by 2010 Component Exports: $5 billion projected by 2010 Availability of low-cost, high-skill manpower Booming domestic market for electronic goods and mobile handsets Highlights Revenues to touch $2.03 billion in 2009 Electronics industry likely to grow to $40 billion by 2010 100% FDI allowed under the automatic route with a few exceptions Electronic Hardware Technology Parks in several cities Major players / customers Flextronics: Casio, Dell, Ericsson etc Elcoteq: Nokia, Ericsson, RIM etc Jabil Circuit: Nokia, IBM etc Source: Investment Commission, CII, Electronic Industries Association of India (ELCINA)

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