China for more than a decade has been the world’s go-to country for manufactured goods. But competitive advantages do not last forever. Soaring labor and materials costs are eroding China’s edge, opening the door for other emerging economies to challenge China’s manufacturing preeminence.
India, in particular, is increasingly seen as a potential alternative to China as a world-class manufacturer and exporter. Already a leader in software services and a major exporter of textiles and chemicals, the world’s second most-populous country boasts exceptionally low labor costs. The average Indian factory worker was paid about 90 cents an hour in 2011, among the lowest rates in the world.
At the same time, government policies aimed at boosting economic growth make India an up-and-coming exporting nation. According to the 2013 Global Manufacturing Competitiveness Index (GMCI), a survey of 550 senior manufacturing executives from around the world, India currently ranks a surprising fourth in manufacturing competitiveness, behind only China, Germany and the U.S.
That’s fourth with a bullet. Executives who participated in the survey, conducted by consultancy Deloitte Touche Tohmatsu and the U.S. Council on Competitiveness, predicted that in five years, India will be closing in on China, rising to second place in manufacturing competitiveness–ahead of Germany, the U.S., South Korea and Taiwan.
Though India in the past has not been known as a major trading nation, the country’s manufacturing exports grew at a compound annual rate of 17.1 percent between 2006 and 2011. Awareness of the country’s growing prowess is increasing.
Small businesses in the U.S. are beginning to recognize the potential cost savings involved in sourcing inventory globally. India is high on their list of potential trading partners. In a survey conducted by e-commerce companies Alibaba.com, Vendio and Auctiva, 30% of small businesses in the U.S. are looking to import new products from abroad. India was identified as the third-largest market of opportunity for them, behind only the U.K. and China. My company, international trading website Alibaba.com, currently has 2.9 million India-based members and hosts more Indian suppliers than suppliers from any other country outside of China.
Western buyers who trade with India often cite the fact that English is widely spoken on the subcontinent as an important factor in their decision. The ability to communicate with suppliers via phone, e-mail and Skype in a common language reduces confusion, response time and translation errors.
But India’s main attraction to buyers is low price, according to companies such as Tamil Nadu-based CareNow Medical, which makes mosquito-repelling sprays and wipes. Competitive pricing “is a major factor in India being recognized as an important supplier base,” says Anand Venkat, CareNow’s managing director.
And cheap labor is why the country’s manufacturers can hold down prices. According to the GMCI survey, in 2011 India had the lowest average labor costs among the top 10 manufacturing countries: 90 cents an hour, as previously mentioned. That’s just one third the average hourly wage in the next-cheapest country, China, where workers earned $2.80. According to the GMCI, workers in Taiwan earned $9.20 an hour, South Korea’s average hourly labor cost was $17.70, while U.S. workers earned $35.40.
Low price does not necessarily mean shoddy goods. Indian manufacturers tend to have years of experience making products for domestic markets, where cash-strapped consumers place a premium on durability when making purchasing decisions.
Moreover, India has a deep talent pool of scientists and researchers offering cost-efficient research and development, according to the GMCI report. As some Indian factories turn to exporting, they are moving away from low-skill manufacturing processes in favor of more innovative, value-added production.
For example, Decent Lites, a maker of decorative glassware based in Uttar Pradesh, employs sophisticated machinery in the manufacture of unusual decanters, chandeliers, lampshades and other products that traditionally have been made almost entirely by hand. “The two main reasons why European countries and the U.S. have been interested in sourcing from us is because our business now focuses on the quality of our products rather than the quantity,” says Decent Lites CEO Ashish Agarwal.
Still, a large share of India’s exports continues to be in the form of low value-added, labor-intensive goods. The country has a lot of ground to make up in terms of innovation and manufacturing productivity, two categories in which the country ranked last among top manufacturing nations in the GMCI survey.
To address some of these shortcomings, India’s government in 2011 approved a National Manufacturing Policy to help lower taxes, provide faster permits and ease restrictive labor laws. Leaders hope to boost manufacturing’s share of GDP from 16 percent in 2009 to 25 percent by 2022, over the same period adding 100 million jobs in the manufacturing sector. New Delhi also plans to spend $1 trillion through 2017 to upgrade the nation’s creaky infrastructure, promising increased efficiency and lower operating costs for manufacturers.
With continued meaningful investments like these, India stands to continue its rise as a global manufacturing power and become a legitimate challenger to China’s dominant position as the world’s factory floor.