by Rajen KumarIndia's Manufacturing Muddle
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Foreign SME plan to do Business with Indian SME
India's GDP on a Purchasing Power Parity basis is estimated at $4.726 trillion (January 2008) which makes it the fourth largest economy in the world. With middle class population, more than the population of the EU and with an average annual economic growth rate in excess of 8.5% for the last four years, India is one of the most attractive destinations for most international companies today. After the large Transnational Companies it is now the turn of foreign SMEs who are beginning to take a close look at India. This interest in India is not an accident but a result of several factors.
Why India from a foreign SME perspective?
• Progressive movement towards delicensing and deregulation.
• India is the world's largest democracy.
• Consistently high economic growth rate for the last 5 years
• Large pool of young skilled labour force cost effective production facilities, large domestic market.
• Capacity up gradation in infrastructure, industrial base and intellectual capital.
• Progressive tax reforms
• Progressive opening of the economy to FDI
• Portfolio investment regime liberalized
• Liberal policy on technology collaboration
• Economic and political stability
• Established judicial system
The global financial crisis has resulted in faster deceleration of growth in developed markets. With the United States in recession and most countries in European Union growing at less than 1%, it is clear that these regions will not see a demand recovery anytime in the near future. Companies from these regions will therefore need to look beyond North America and EU to expand their sales and scales. Most foreign SMEs, like Indian SMEs, are family-owned and conservatively run and expanding to India (or anywhere in Asia) is a big decision. A Western European SME for instance has been happy to shift to Eastern Europe and Turkey because of cultural and distance factors. India has always been far away. Foreign SMEs which have earlier shown reluctance to market in India will now need to look at our country more closely, given that growth in their markets is negligible.
Shifting production bases
We see more foreign SMEs shifting all or at least some of their global production in India. Several companies are exploring opportunities to license their technology or production processes to SME manufacturers in India. This trend is on account of global re-alignment of supply chains. Large MNCs have realized that manufacturing costs in Asia are cheaper than that of Europe or North America. Past trends have shown that manufacturing bases shift closer to consumption centres to minimize transportation costs. With more of the large MNCs setting up shop in India, their global SME suppliers are following them into our country as well. This trend was first visible in the auto sector where Tier II and Tier III auto component suppliers (which are global SMEs) followed the OEMs and Tier I auto component suppliers in setting up manufacturing bases in India. This trend is likely to be replicated in other industries as well.
The China factor
Now discussion about how foreign SMEs view global manufacturing and can India compete with China. While China remains the undisputed #1 producer of the world by a long distance, there is recent evidence that India is beginning to bridge the gap. The main reasons are increase in labour costs in China, gradual removal of direct and indirect subsidies by the Chinese government and appreciation of the Yuan. Many global SMEs already have their manufacturing bases in China and are looking to ersify their risks by establishing their operations in India. This trend is expected to gather further momentum in 2009.
- Winner of appreciation award for promoting SMEs in India.
- 1st ever Indian magazine to penetrate tier II, III cities & the rural belt.
- Industry Partnerships include CII, FICCI, ASSOCHAM, PHDCC, AIMA, ITPO, SME Network, Federation of Indian Micro Small Enterprises (FISME)
- Official Magazine Partners for several national & international MSME events.
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