India’s services

and China’s manufacturing

Updated 19 March 2012

There is a persistent view that China is focused on manufacturing and India on services.  This may have been so 10-15 years ago. But today, both countries are moving into each other’s ‘specialities’.

This page is about Indian services

India is not only the home of call centres, and business process outsourcing (BPO)

India’s services sector contributed in 2008 to 53% of GDP (23% of employment), manufacturing to 29% (17% employment); and agriculture to 18% (60% of employment). Although 70% of outsourcing is done for US or UK firms, the rest of the world is catching up. Consequently, language schools have sprung up in call cities with major call centre business teaching Spanish to cater for Latin American business, and many other languages. Since 2007, off-shored tutoring has been on offer. One of these is working with HarperCollins. Pearson has a similar service. Not only IT and BPO (business process outsourcing) is at play but also lawyers and architects. The latter is aided by the increasing use of computer aided design which is easier to do remotely.

Often, Indian firms set up offices in other countries to cater for neighbouring clients, such as Wipro’s Chengdu office in China caters for both Chinese and Japanese business and its Romanian office looks after French and Italian clients. The other reason is that there is both a shortage of suitable talent and increasing pay for those that do fit. More recnetly, there is anecdotal evidence that some US and UK firms are reversing the trend and moving some call centres back. This is mainly due to issues with customer service arising out of the lack of loacl knowledge by Indian operatives. But some think that the cost balance is shifting out of favour for outsourcers.

What has not been evident until recently is that outsourcing is not only used by foreign firms but by Indian firms themselves. As in many countries Indian labour laws favour the employee. This has caused an issue with companies that wish not to have too many permanent staff and all the labour issues that pertain.  Naturally, according to the Indian Labour Bureau, contract workers as a percentage of all workers has risen from under 16% to over 24% between 2000 and 2007. Another unique feature of Indian business is that whilst 4% of China’s businesses employ less than 10 staff, India has a massive 89%. But problems are brewing as contract workers are typically paid less and have fewer benefits. But changes in labour laws will be slow in coming, as with many aspects of Indian ‘bureaucracy’.

But India also has IT centres of excellence, pharma, auto, etc. Some 400,000 engineers graduate each year.

Indian major acquisitions include:

  • Steel: India’s Mittal Steel bought Acelor in France and Tata Steel bought Corus in Britain
  • Cars: India’s Tata Motors bought Jaguar-Land Rover and is making a great turnaround having weathered the recent recession. Tata, of course, is an old-fashioned conglomerate with 85 companies of which 27 are listed. It is into all sorts of other businesses including tea, power, telecoms and IT consulting and outsourcing.
  • Inward Foreign Direct Investment FDI is increasing, companies like the UK insurer Prudential has sets its sights on Asia and forging alliances, such as with AIA based in Hong Kong but which covers India. Although China is big on personal savings, apparently India is even bigger, estimated at 30%. This augers well for financial services which need funds rather than those who wish to lend to consumers.
  • Outward Foreign Direct Investment FDI now equal to inward FDI, but growing faster

During 2010-11:

  • India’s manufacturing overtook agriculture for the first time. It contributes above 20% to the economy, with agriculture around 20%, but employing nearly 60% of the population.
  • Tata launched the Nano for the average Indian family and is producing 500 per day at their Ahmedabad plant, which is planned to double in 2012; ready for export in 2013.
  • Inward investment doubled to $24bn
  • $billionaires also doubled to 48
  • 300 Special Enterprise Zones SEZs being set up
  • 40% of top 340 multinationals plan to manufacture in India by 2012. In July 2011, two states are in contention to attract Peugeot-Citroen to build a $1bn car factory in Sanand, Gujerat to start operations in 2014. It will be the last of the major car firms to manufacture in India. According to OICA and International Organisation of Motor Vehicle Manufacturers, India produced over 2.8m passenger vehicles in 2010 versus USA’s 2.7m (China produced over 13m).
  • Germany has become a major exporter of machine tools to India of £30bn in 2011 rising to £95bn by end of 2015.
  • Additionally, the government has finally awaken up to the importance of infrastructure and is planning to spend over $500bn in the current five-year plan having only spent $200bn in the previous one.

Couple of examples

Pharma

The Indian pharmaceutical Industry is in front rank of India’s science-based industries with capabilities in complex field of drug manufacture and technology. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5bn, growing at about 8 to 9 % annually, 2010 projection $25bn. It boasts of quality producers and many units approved by regulatory authorities in USA and UK.

The sector is highly fragmented with more than 20,000 registered units. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It meets around 70% of India’s demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles and is an exporter, mainly to third world countries.

Following the de-licensing of the industry, industrial licensing for most of the drugs and pharmaceutical products has been eliminated. Manufacturers are free to produce drugs approved by the Drug Control Authority. The Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime is well set to take on the world market.In October 2011, GSK said it had earmarked $2bn for appropriate acquisitions in India.

Information technology

CISCO: in Sold on India, Business Week Nov 25, 2005: The networking giant sees an edge there, even with most competitors resolutely set on growth in China’. Partly because of earlier major investment in China and partly because of concern of local firms ‘copying’ Cisco technology; e.g. law suit against Huawei was settled out of court.

India is home to many of the top IT services firms: Wipro, Infosys, Satyam and TCS – Tata Consulting Services employs 160,000 in India and has its largest employment outside of India in US with 14,000 staff. TCS has a plan to be amongst the top 3 IT companies in each of the BRIC countries. In 2008-09 IT and BPO accounted for $60bn of which $46bn were exports.

Wages are rising in India and despite steady flow of new graduates, Indian IT services firms are now opening operations in Mexico, Brazil, Poland, and even China – to tap into local markets. Part of the reason is that only 15% of the fresh graduates are deemed suitable.  So Infosys and others have set up their own universities to train up to 50,000 people a year.

In fact IBM India has grown steadily since is now largest entity outside of US, 74,000 employees. No 4 after TCS, Infosys and WIPRO.

The recent recession hardly affected India as it is not yet a major exporter and consumer spending rose as well at the cost of household savings. The IT sector, while affected, was not impacted as the ‘hard industries’ would have been. Local industries were hardly affected.

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