What Warren Buffett’s Manufacturing Buy And Foxconn’s FDI Mean For #MakeInIndia

There is little point in competing with China for the mass global market, but for innovative, engineered products, we should make a play.

When Swarajya invited me to write about the impact on #MakeInIndia of a couple of events this week as an Independence Day Special, I thought the answer was straightforward. The events were Berkshire Hathaway’s $37 billion purchase of Precision Castparts, a maker mostly of aerospace equipment, and Foxconn’s announcement of a $5 billion investment in India to create a dozen mega-factories, expected to create as many as a million jobs in electronics manufacturing.

Clearly, the Berkshire Hathway purchase, an ‘elephant’ in Warren Buffett’s words, and its largest ever investment, is a strong vote of confidence in American domestic manufacturing, as well as a bet on the medium-term prospects of airlines, especially in Asia, where demand is booming. In addition to its 70% exposure to aerospace, Precision has a portfolio in the energy sector, which is also likely to do well in the long run.

Similarly, the investment in India by Foxconn of Taiwan, a signal success for #MakeInIndia, shows two things: one, that the Chinese market is no longer the only game in town for electronics manufacturers, and two, that India can be an attractive investment destination for companies if properly positioned, even in hitherto difficult sectors.

In both cases, there are elements of innovation and intellectual property. Precision has IPR including trade secrets for proprietary technology that makes fasteners and other forged metal components for planes and jet engines. With the growth in aerospace demand, those in the supply chain – like Precision – should benefit in the medium term. Interestingly, one of the biggest deals for Airbus, a Precision customer, is with Indigo, the Indian airline, which has placed a very large order to be delivered over a long period.

Foxconn’s choice of India is interesting. The company that became famous for Apple iPhones is the largest private-sector employer in China, where it has a million employees. Despite the rise in Chinese wages, it has been generally believed that not many electronics companies would leave the country because of its supply chain links to component manufacturers, especially in the Shenzhen area. I was under the impression that electronics manufacturing would continue to be ‘sticky’ in China.

The fact that Foxconn is willing to take such a big bet on India suggests a few things. One is that the ‘Factory Asia’ supply chain – which has tied China tightly to suppliers in China itself and in Southeast Asia, thus creating a massive barrier to entry to other countries – is now loosening. Or at least it is becoming more flexible, so that it is possible for India and others to make a play for electronics.

This is a major issue for India. I read India’s National Electronics Policy 2012, as well as the Commerce Ministry’s recent projections. If I remember right, it is estimated that demand for electronic products, principally cellphones and consumer electronics, is sky-rocketing, and will reach $400 billion by 2020. Only $100 billion of this will be manufactured in India, leading to an enormous import bill of $300 billion, higher than the import bill for oil and gas!

The only alternative is to kick-start an electronics manufacturing boom in India. In fact, I am helping set up an electronics incubator in Kerala; a friend from California is likely to set up an Internet-of-Things incubator in Andhra, and there is news that the first Foxconn-Xiaomi smartphone made in India was recently released at the Sri City industrial park on the Andhra-Tamil Nadu border near Chennai.

So the fact that Foxconn has decided to come into India in a big way — $5 billion may well be one of the very largest FDI in India ever – is significant. And why is Foxconn doing this? In addition to the obvious reason that the market is here, I believe a major factor is also that they are convinced of the process ingenuity and innovation capability of the Indian engineering force (as seen in pharma, and at ISRO).

On the other hand, India still suffers from a problem of factor productivity. That is, the availability of the factors of production, as well as their productivity, are dismally poor in India. Labor laws are arcane, discouraging firing, and therefore hiring. The quality of the workforce is poor. There is great difficulty in getting hold of land – which is being exacerbated by the antics of the Opposition in Parliament in preventing a decent Land Bill and the Goods and Service Tax (GST) from being passed.

The less said about infrastructure, including ports, airports, roads, water and especially power, the better. The proposed GST would reduce some bottlenecks by removing excise checkposts that cause huge backups at state borders. A recent article in The Economist, “Stuck on the Runway”, looked at ways that Indian manufacturing can improve. It considered Mahindra Aerospace, a high-value-added engineering firm, as an example of what could be done in India.

But there is another factor in the background. A third major story this week was that of Google restructuring itself to become more agile and to support more innovation with judicious asset allocation as well as accountability. It has split its cash-cow and highly profitable Internet businesses away from its ‘moonshot’ ventures into such speculative areas as self-driving cars, internet provision, medical devices and longevity.

The issue lurking in the background in all three – Berkshire Hathaway, Foxconn, and Google – is the tango between asset-light and asset-heavy business models. Obviously Google has been one of the champions of the asset-light model, along with peers such as Amazon, Apple, and Facebook. By moving an enormous amount of data onto the Internet and the mobile phone – such as maps, photographs, encyclopedias, music, financial transactions, shopping, office applications, car rental, vacation rental – they have helped the asset-light model and the sharing economy become prevalent.

The irony, however, is that what the consumer perceives as asset-light requires an enormous amount of assets at the back end: so Google, Facebook, and Amazon are all owners of vast quantities of heavy assets: physical hardware. And as they go forward, all of them are getting into physical things: Amazon (like Alibaba.com) will likely buy brick-and-mortar retail; Facebook is getting into Internet provision via drone; and Google is building self-driving cars, Glass, Internet via balloon, and the medical device built into contact lenses.

It appears to me that they are suggesting there’s a sweet spot of mild asset-heaviness. That is to say, even given the sharing economy, some things need to be owned. You may not need a car, for instance (a good article in The Economist on this is “If Autonomous Vehicles Rule the World”) because you can hail a future Ola cab that will drive itself to your doorstep. And you may need fewer roads because one self-driving car can supply the equivalent of ten people-driven cars. But there will have to be somebody making cars still, others buying cars (fleet owners) and some roads being built.

India has been on the lower end of this spectrum by being too asset-light: we didn’t invest in anything – infrastructure, research, and most damningly, in education. On the other hand, the Chinese did too much investing in assets: too many ghost cities, too many under-utilized high-speed trains. The optimum is somewhere in between, and India’s move towards light manufacturing is appropriate.

A seminal paper by David Teece of UC Berkeley from 1986, “Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy” suggests that manufacturing has to be a major part of a nation’s industrial policy. India has tried to convince itself that asset-light services (eg. IT services) are the answer. Not so, as is evident from the downswing in the pure IT services market.

China’s problem is the opposite: it has built a huge asset base, including its “Silk Roads” transportation networks, assuming that there will be massive manufacturing in their country and that these finished goods will need to be shipped abroad by rail and ships; and that conversely they’d need huge energy and raw material supplies coming in reverse. Given the recent slowdown in their economy, neither of these may be true in future, which means they would have wasted their money. The law of unintended consequences strikes again: backfire?

India historically had a strength in light manufacturing – for instance, textiles, metallurgy including high-quality steel, leather, jewelry, etc. – and it is time, as the world’s manufacturing shifts around, that India stake a claim to highly-engineered goods. What better than electronics? There is still little point in competing with China for the mass global market, but for innovative, engineered products, we should make a play. #DigitalIndia and #SkillIndia come into the picture as well. Design and engineering are India’s key competencies.