This can boost export of high-value goods and ensure the benefit of value-addition accrues to our companies
In his Independence Day speech, the Prime Minister laid stress on ‘Design for India, Design for the World’. This, in addition to his call for a sustained focus on India becoming a global manufacturing powerhouse. Also, in March, Union Minister Ashwini Vaishnaw said: ‘India will become a product nation and many products will come from deep tech sectors which will affect every citizen’s life.’ Why is it important for India to become a product nation?
Many of us have come across the smiling curve. It is a graphical depiction of how value-added varies across the different stages of bringing a product to the market. The concept was first proposed in the early 1990s by Stan Shih, the founder of Acer Inc., an IT company headquartered in Taiwan. According to Shih’s observation, the two ends of the value chain command higher value-added to the product than the middle part of the value chain — that is, manufacturing. If this phenomenon is presented in a graph with Y-axis for value-added and X-axis for value chain (stage of production), the resulting curve appears like a “smile”. Shih was a contract manufacturer of computers for brands like IBM and Compaq. He understood soon enough why his customers were much better known and more profitable. He, therefore, invested in research, branding and distribution, and today we know his company as ‘Acer’, one of the top selling computer brands worldwide, with respect to laptop PCs, tablets, gaming accessories, etc.
Another oft-quoted example of the advantage of being a product company is that of Apple Inc (with a market capitalisation of over $3 trillion) vis-a-vis Foxconn, Apple’s contract manufacturer. Foxconn is also the world’s largest technology contractor (market cap of only $85 billion) to buttress the argument in favour of a product company. This means that while we as a country must focus on manufacturing — as we have to provide jobs for the millions of young people coming into the workforce every year — once scale or critical volumes are achieved, as has been done in automobiles, we must ensure that we migrate upstream to R&D and design, and downstream into branding, distribution and servicing, so that the benefit of value-addition accrues to our companies and our nation and not elsewhere.
In short, the closer one is to the customer, the greater the ability to influence customer engagement and loyalty and, therefore, the vastly enhanced potential to capture value. However, in the case of electronics, we will first have to achieve scale and then endeavour to capture value. But our aspiration must always be to do so. A product-based economy — consisting of tens of thousands of product companies — can drive sustainable economic growth, create jobs, reduce the over-reliance on services, create a culture of R&D pushing us to the forefront of innovation, with products designed in India for the world. This will consequently, boost our export potential to high-value goods, foster entrepreneurship and start-ups, thereby not only making the economy more resilient, but also provide India and Indian brands with global competitiveness and recognition.
The US, Germany, France and Japan are examples of product-based nations. Of late, South Korea, China and Taiwan are transforming into product-based nations. Examples include Korea’s Samsung, which has evolved from a trading company to a leading electronics manufacturer; China’s Huawei, which grew from a small telecom equipment provider to a global tech leader; and Taiwan’s HTC, which transformed from a contract manufacturer to a global smartphone brand. Examples from the West are well-known; the shoe and apparel brands of Nike, Adidas, H&M and Gap, which predominantly outsource their manufacturing and capture value through design, branding and distribution.
Becoming a Product Nation
Product is not the same as engineering. Product goes well beyond that. Building a product involves category understanding, shifting to a product mindset, devising the packaging, creating the right pricing position, and figuring out the distribution model. Further, design thinking requires sticking one’s neck out to understand what a customer might want, and while doing so, making sure there is no overspecification, resulting in waste. Design is the package that goes around products to make them meaningful over being purely functional. Great design keeps customers coming back.
Left to themselves engineers like engineering. They would invariably want to design and build — as an example for automobiles, a new electric luxury SUV. A beautiful, next generation technology that make them proud, often of themselves. However, it may sell only a few hundred. What may be needed is a people’s electric sedan. Perhaps an entry level electric car for the mass market — recall the Maruti in the 1980s — that meets expectations and delivers promise at a price the customer can afford, and therefore may sell in hundreds of thousands or even millions. In effect, appropriate product definition, coupled with world-class engineering will deliver a world-class affordable product of world-class quality standards.
Perhaps the sectors that have the greatest opportunity of providing leadership to India’s ambition of becoming a product nation are the 13 which are covered by the PLI scheme. There are already examples of manufacturing companies in the automobile sector — both two- and four-wheelers — transitioning rapidly to becoming product companies. Similarly, there are sound examples of service companies including ITeS, component suppliers and start-ups with a global product potential, all with promising signs of investment in R&D and innovation, branding and a global ambition.
To further accelerate the transition, both the Central and State governments and the private sector in partnership, should continue to invest in R&D, train and upskill young people in product design and engineering, focus on global quality, and develop strong brands with appropriate distribution that can compete globally. Developing infrastructure (for example, the proposal to create 12 industrial parks announced in the recent Budget) is critical. Industrial parks will further add to the growing success of existing industry clusters that synergise industry-academia-public-state efforts in creating product companies. Examples are clusters of the automotive sector (Chennai, Pune and Gurugram), pharmaceuticals (Hyderabad and Pune), electronics (Chennai and Bengaluru), and space and defence technologies (Bengaluru and Hyderabad) amongst others. We need many more. The Smile Curve must always be at the back of our mind. The importance of India becoming a product nation with globally recognised brands cannot be overstated. It is a critical pillar in India’s quest to becoming an atmanirbhar Viksit Bharat by 2047.
Sondhi, an Independent Director, is a former MD and CEO of Ashok Leyland and JCB India; Srivastava is Professor, Indian School of Business, Hyderabad.
Vipin Sondhi Rajen