An Apple Lesson Made Newton Wise. Is India next?

Volume is a short term USP. It's easy for another emerging nation to emulate low-quality assembly lines. Quality is permanent. India's MSMEs should be taught that quality matters. In Olympics. In manufacturing. In services. And in exports!

Steven Philip Warner | October 2016 Issue | The Dollar Business

If you want a happy ending, where you stop the ink matters. It’s the case with fiction and reality, individuals, nations and companies alike. But I won’t as much begin with a conclusion, as I will with a question. Can one brand – a company – tell a convincing tale about another – a nation – in an era that seems to be indefinitely moving into the past at warp speed? 

The company – Apple, a widely sung symbol amongst the modern digitalised and globalised human race, the only company to be ever valued at over $700 billion, and the most valuable brand in the world today as per Interbrand and Brand Finance. The nation – India, which given its young demographics, manufacturing potential of the future, services delivery in the present, and a strong-willed government, should be the world’s most valuable nation (when measured by equivalent fractions of cerebral and emotional capacities). It isn’t though; but I’d prefer viewing its trade potential as more like a gracious ‘Made-for-the-world’ furniture set with an incredible ability to grow itself or a highway that self-repairs (or…anything that’s nothing short of magical). Going back to the question – what can Apple tell about India?

To keep my logic simple, allow me to flip the calendar by a month. On September 7, Tim Cook and his other officials in intense moods, launched amongst other new products, the much awaited iPhone 7. I will not give you a tech-review of the product, except that it does carry a couple of remarkable features – true innovations as you’d call them. But beyond the product, what is most relevant to those who are still pondering on the question I asked, is the company’s decision to launch the product in three phases, with India’s launch scheduled in the third! Technically, that put India at number 52 in the queue, and on Apple’s list of markets, after nations like Andorra, Bosnia and Herzegovina, Cyprus, Estonia, Greece, Greenland, Guernsey, Isle of Man, Jersey, Kosovo, Latvia, Liechtenstein, Lithuania, Maldives, Malta, Monaco and Slovenia. For those willing to give the company the benefit of doubt, a month is not so long a wait. But the fact remains, India has never featured in the first batch of launch markets for Apple. Imagine this – you consider a market important and hungry for quality and manufacturing technology that’s about to be rolled out of your plant(s), and you omit that market in your very first phase list of launch markets, each year, for nine years on the trot? A thought and an action at odds, isn’t it?

Makes me wonder. Why does a brand like Apple consider a Guernsey or an Isle of Man more important to be served first? (Imagine the world map. Now picture where these two nations lie on it. Confused?). It’s not that Indian consumers lack the capacity to consume high quality products. India buys more iPhones each year than all except two markets that iPhone sells in (behind US and China; y-o-y sales of Apple’s flagship product rose the highest in Q1, 2016, in India – by 76% as compared to 45% in Korea, Middle-East and Africa, and 18% in China; this, despite the so considered “exorbitant” pricing for the iPhone 6s).
The problem is “perception”. A story that appeared last month (around the time I was penning down this note), in The New Yorker (one of the most popular publications in US) titled, 'Apple's big problem: Will India buy iPhones', sums that up quite well. And that, as much as it is a reflection of how India is perceived as an import market, also goes to show how foreign buyers too do not consider India an entirely high-quality export-manufacturing hub. That isn’t entirely shocking though.

Apparently, a focus on “quality-in-practice” is a must have (rather than a good to have) chapter in the ‘Make in India’ campaign that turned two in September this year. Easier said than done though. India has its unique set of problems.

I take you back to a third noteworthy incidence that occurred last month. PM Modi’s visit to Laos. While addressing the ASEAN-India Summit in Vientiane on September 8, he stated categorically that the ASEAN bloc was “central to India’s Act East Policy”. The policy adopted by the new government since taking charge in 2014, was meant to be a more effective form of the Look East Policy that had been in vogue for two decades, especially to enhance India’s trade and trade relations with the world. I won’t comment on relations as foreign policy, as you’d know, is subject to the winds of constantly changing diplomatic moods. But how the Act East Policy was meant to change fortunes of India’s exports, and how it hasn’t, is a case to be considered. Since the Act East Policy was launched, our average annual trade deficit with the so called trade bloc that’s apparently central to the policy has increased by 170% (in CY2014 & CY2015, as compared to the five year-long period leading to CY2013). The average quarterly deficit in the nine months leading to Q2, CY2016, showed a 56% rise as compared to the same duration in the immediate period before Act East was adopted. There is actually nothing political about this backslide. Look East or Act East, India’s problems in merchandise trade remains central to the fact that our manufacturing hasn’t reached a point where quality can become the next talk of town.

Even today, we are worried about how our industrial production (IIP) may tiptoe past the 0% mark, into the negative zone, any month. [Some coincidence, but it did that again in July this year! IIP fell 2.4% y-o-y in July 2016 – the biggest decline in almost a year.] Every time you hear the phrase ‘Make in India’, the word “manufacturing” comes to mind. Not “high-quality manufacturing”. That will snowball into a bigger problem in the years to come. A mention of China here is unavoidable. It’s easy to speak of China’s problems in a time when world trade is facing the heat. (What else would you expect? China doesn’t yet export to Mars!) But China didn’t become the World’s Factory by just manufacturing air conditioners, laptops, mobile phones, and shoes and…mostly everything. Besides being a famed hotspot of mass manufacturing, it has also kept aside a big chunk of its capacity – one that’s dedicated to ‘quality’ air-conditioners (80% of the world’s ACs are Made in China), ‘quality’ laptops (91% of the world’s cellphones are Made in China), ‘quality’ mobile phones (71% are Made in China), ‘quality’ footwear (63% are Made in China), and ‘quality’ mostly everything! (Data source: Bank of America Merrill Lynch)

What is remarkable is the very fact that even the concept of “high-tech” manufacturing is misunderstood in India. Through its media and Internet arms, The Dollar Business gets a chance to strike a detailed dialogue with over 500 MSMEs each day in India (and I mean a dialogue!). Most of these MSMEs seem to care little about the need for giving quality a preference over simply…mass manufacturing. For them, their competence lies in being able to supply low cost components (and goods) to bigger Indian and foreign firms only for whom, branding and quality become important in the context of exports. For a nation where MSMEs (and SSIs) contribute to nearly 50% of exports (FY2016), that is bad news.

Each year, The Dollar Business explores MSME clusters across India – from Gujarat in the west to Mizoram in the east, from Kashmir in the north to Kerala in the south – to understand what’s on at cities and towns that are quietly adding those precious greenbacks to our kitty. [This issue marks the third annual issue of Export Temples in as many years.] Alleppey, Agra, Bellary, Butibori, Coimbatore, Chimakurty, Dewas, Elluru, Firozabad, Gangtok, Guntur, Hooghly, Jodhpur, Kanpur, Kishangarh, Kashmir, Karimnagar, Kolkata, Kolhapur, Ludhiana, Moradabad, Mizoram, Mysore, Namakkal, Panipat…you can literally count them from A to Z…and since The Dollar Business has toured and analysed all those mentioned above and many more, we’ve come to identify that one common characteristic shared by these clusters besides being worthy of being called an export temple – while they are all far isolated from Make in India, for them, 'Make high-quality in India' is a thought for perhaps the next-to-next generation.

Let me give you a quick update on live findings from just eight of the over two dozen export temples from North, South, East, West and Central India, that The Dollar Business editorial team members visited in the past month. The challenges described should give you a clear idea of how MSMEs are way behind even when it comes to just manufacturing, forget paying attention to serious quality.

In the North, Ludhiana still suffers from poor infrastructure and connectivity issues. Imagine, in one of India’s leading export-manufacturing clusters, there is still no airport, roads are in such poor condition and there are insufficient freight trains to-and-from the region. Especially in hosiery exports, high raw material prices and competition from Bangladesh (not only does the Bangladeshi government offer double-digit export incentives, the nation's preferential trade status in US and Europe is also spoiling the case of Ludhiana’s hosiery manufacturing cluster), makes happy manufacturing a distant dream for Ludhiana’s MSMEs. Agra’s leather manufacturing cluster and Kishangarh’s (Rajasthan) marble industry have quite a similar story to share. Lack of logistics, absence of ancillary support systems (forward and backward linkages absent as seen in China), a pro-big industry State policy and corruption practices prevalent in the Customs (many MSMEs claim that corruption is so rampant at Customs, the trade officers arbitrarily decide the nature - quality, quantity, and volume - of goods and their worth and tax them at will!), unsustainable supply of raw material (especially in Agra which suffers due to lack of systematic breeding programs, despite being present in a state with the largest livestock supply in India), gap in awareness about export markets, product-wise opportunities, export incentives and financial support schemes, are some issues that you’ll come to hear from these aspiring manufacturing clans for whom Make in India is just a power statement, fit for the global stage. It isn’t difficult to make out, but they’re unhappy doing what they are because even at an age where other developing nations have started giving them a run for their money in both volume and quality play in businesses of their expertise, they continue doing what they were in the last millennium.

I’ll be quick with the other regions. In the East, clusters in Hooghly, Kolkata and Sikkim complain of a lack of promotion of their products in international markets, depleting count of artists and craftsmen, close to zero training and development, logistical headaches, lack of R&D thereby leading to damaged organic crops, poor development plan of the cluster, etc. In West and Central India, MSMEs across Dewas (MP) and Butibori (Maharashtra) are concerned that despite the government showing excitement about improving manufacturing in the country, they are still exposed to vagaries of nature, and subject to producing low-priced goods due to lack of adequate incentive and remission schemes that could enable them to produce higher quality goods at higher costs, and alongside spare them some change for marketing and branding their products in the international markets. Logistics, which seems a universal problem remains a roadblock in these two regions too. For instance, there is massive wastage of oranges fit for exports in Nagpur because roadway and rail resources remain booked for close to two months. Even textile companies in the region have had to make alternate arrangements to ship their goods to prevent damages to the extent that they can. In the South, Coimbatore in Tamil Nadu – a cluster popular for its engineering machines & tool-making industry – suffers from a lack of adequate connectivity to major cities such as Chennai and Bangalore. Connectivity among various industrial clusters such as Pollachi, Mettupalayam or Tiruppur is also not satisfactory. Absence of incubation centres, patent information cell, R&D centres, and presence of cross-subsidy charges (that kill manufacturing competitiveness) and cabotage rules (that present hindrances to cost-effective inward raw material movement to the city), etc., are headaches to the MSME community in this cluster.

Power outages, lack of logistics, failure to adopt economies of scale, zero training and development, lack of attention from local authorities and state government, corruption, etc. – if India has to gallop ahead of the other developing nations in making high-quality goods for the world, these clusters that altogether combine to form MSMEs, have to be treated like a natural heart and not a
replaceable, artificial pacemaker.

Hopefully, the detailed account of the distressing state of affairs at many of India's export temples in this issue’s cover story will serve a wake-up call to various state governments and the Centre. Perhaps it’s time for the states to take the responsibility of exports into their hands. Three years back, there was much excitement about making state-level five-year export policies a reality. There is silence on that front now. Perhaps it’s time from the Centre to make the states realise that a band of heroes sitting in New Delhi along cannot make Act East work for India, or ‘Make high-quality in India’ dream a reality. The states will necessarily have to pitch in. And soon.

Volume is a short term USP. It doesn’t take much for another emerging nation to emulate low-quality assembly lines. Quality is permanent. And I don’t mean that Indian MSMEs should immediately start cultivating overnight aspirations to become the Apple of the global marketing world’s eyes (as Apple is today). Let that take time. But they should also forever remember that quality matters. In Olympics. In brands. In manufacturing. In services. And most importantly, in exports!

Simple mathematics – sell a pair of shoes for Rs.10,000 or 100 for Rs.100, the one selling lower volumes in this case doesn’t just make equal revenues but earns greater ROI and saves on time, logistical headaches (found aplenty in India!), marketing & sales expenditure, manpower investments, and perhaps in the process ends up building a more respectable brand that’s famed for quality.

It’s time a new flavour is added to Make in India. And this can really be the next big leap. How about “Make high-quality in India”? Usually if you want a happy ending, where you stop the ink matters. In India’s romantic manufacturing novel titled, ‘Make in India’ however, whether we are able to add new chapters will matter. How about one on ‘quality’? And then, the world will admit, “touché!” Even Tim Cook.