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Business Commentary/ Pritish Nandy

The end of manufacturing

People are now beginning to listen. To listen to what some of us have been saying for years. That the era of manufacturing is dead.

In the first place, India did not need these ghastly factories that pollute our skies, poison our rivers, kill our forests, and transform our skilled people into underpaid industrial labour.

It was Nehru's nightmare. He encouraged them, to promote his warped ideas of self-sufficiency and industrial growth which were based on shopworn socialist dogma and a distinct failure to understand what Gandhi meant by Swaraj.

Nehru had no clue as to what modern India required and so he went about trying to build it the only way he knew. By blindly emulating the Industrial Revolution of Britain, not realising that the world had completely changed in the meantime.

The temples of modern India, as Nehru called his filthy factories, never worked at an efficiency better than 40 per cent, never produced world class products at a decent cost. A cost that made them affordable in local markets. All they did was condemn us to industrial mediocrity and lose India thousands of millions every year in subsidies.

These millions would have been far better spent if we had, instead, focussed on our core competencies in the service and knowledge sectors or supported our genius in media and entertainment, if we had stuck to what we are good at instead of chasing silly dreams of making India into this huge industrial nation full of steel and cement factories.

What did these factories belch out? Shoddy products born of outdated technology. An illiterate labour force that never worked to its full efficiency, never responded to training and lost, therefore, the advantage of being low cost. What is worse, they got caught in the crossfire between greedy, corrupt factory owners and selfish trade union leaders who used them to target their own goals.

India became an inward-looking economy churning out the worst quality products. We were forced to buy these at extortionist prices because imports were taboo. This means that while the whole world was buying the best products at the cheapest price (through the open mechanisms of global trade) we were buying shoddy goods at absurdly high prices simply to keep our local businessmen rich.

As a result, through corruption, bribery and swadeshi rhetoric, we created tariff barriers all around us and built a high cost economy that is no longer able to sustain itself.

We would never have known how stupid and self-destructive we are if it were not for technology. The television boom brought news and entertainment to our homes. It also opened our eyes to what the rest of the world was doing.

Those in power tried to stop this. We will resist this cultural invasion, they argued. We will not allow globalisation to destroy our identity. But these were only pretexts. What they were resisting was not cultural invasion. It was education, knowledge, information. They wanted to keep India isolated. The fact that the government owned huge chunks of Indian industry, through its PSUs, meant that they too had a vested interest in keeping quality and competition out.

That is how Indian businessmen and the government kept their stranglehold over the world's second largest marketplace and made huge, extortionist profits. Till television opened up the skies and, suddenly, we realised that the Indian consumer was being looted. Independent news exposed the shady nexus between government and business and, at the same time, showed us how rapidly the rest of the world was changing while we were caught in our smug political rhetoric.

At the same time, NRI success stories started hitting the headlines worldwide. They showed us how more and more Indians were becoming rich and famous in an open environment where talent met talent head-on and governments did not intervene. It showed us how an open economy could work to everyone's advantage.

Sridhar Iyengar, the KPMG chief in India, was telling me last Friday that over 60 per cent of venture capital requests in Silicon Valley come from first generation Indian entrepreneurs.

Immigration data from Washington DC show that the richest community in the US is no longer the Japanese or the Koreans. It is the Indians. They work harder, earn more, live better.

In Britain too, more and more Indians are joining the list of the super rich every year, most of them having made their millions from the service sector.

Be it Zee TV or Hotmail or Junglee, the key to their success lies in industrialising an idea whose time has come. They know that value addition comes from creativity, not plant management or industrial engineering. Their assets are libraries, talent, ingenious ideas. Hardware merely supports their creativity; it is not meant to be an independent profit line.

A cinema hall owner can never earn as much as a movie-maker, even if he builds the most lavish multiplex in the world. But he is important because halls are part of the distribution system. That is why those who lack the talent to invest in the high risk, high profit and extremely creative business of movies end up investing in the more conservative real estate projects like studios and cinema halls. Such investments are for the donkeys of showbiz, not the whizkids.

But in India it is these donkeys who get all the support. From the government, the banks, the financial institutions. Not those who create wealth but those who manipulate it. Who build factories to churn out stuff that we can easily import at half the cost. Of infinitely better quality.

You need not look far for the reason. Manufacturing is best done by nations more conscious of quality than we are, who export more and can, therefore, get economies of scale.

A global auto brand that sells three million cars a year can obviously invest more money on R&D and quality than an Indian plant selling 30,000. He can also give you your car at a much cheaper price. So, instead of buying a good, cost-efficient international car, why do you need to build a second rate Indian car factory with no economies of scale?

Most of us never realise the huge cost of this. Every factory, every machine installed is funded by you and me. We pay over 70 per cent of the cost through banks and FIs. The entrepreneur puts in barely 30 per cent and sometimes not even that. They over-invoice the plant and get away with zero investment. Which is why our industrialists are so keen on setting up manufacturing plants.

Last week, one of the most powerful advisers to the finance minister was sacked. The reason? He had quietly manipulated a bail-out package for one of India's largest business groups currently teetering at the edge. Everyone knows who they are. They have diversified into many manufacturing businesses to hide the fact that they are doing badly in all. The group is disastrously managed by family members and yet, every time they are in trouble, they have powerful friends who run to their rescue. Despite the CBI case against them!

The proposed bail-out package this time was over Rs 18 billion and guess who led the consortium? The IDBI, no less. Luckily, someone in the PMO blew the whistle in time. Now, with Parliament about to start, everyone will lie low for a while.

But my larger concern is: When will India learn to value those who actually create wealth? Content designers, service providers, skilled professionals, doctors and surgeons, entertainers, computer whizkids, hoteliers and restaurateurs, architects and management consultants, teachers, musicians, imagists and brand builders who can take us into the next millennium.

Even the humble NRI who works in the Gulf and sends back to Kerala his meagre salary every month. Instead of backing them, our system is geared towards backing real estate sharks, importers of obsolete plants, builders of shoddy and corrupt industrial empires. Because these are the chaps who know how to manipulate the system and have been doing so for over fifty years now.

I guess it depends on what India wants to be. A third-rate industrial power or a first rate nation of creative talent, world class professionals and ingenious service providers?

Pritish Nandy

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