Indian White Goods Sector's Big Challenge

The appliance manufacturing sector has benefited hugely from foreign investment. FDI has helped raise Indian manufacturing standards and improved product quality and productivity. But the Indian government as well as industry need to recognise the fact that Indian products and processes have to continuously move up the value chain if India is to enhance its global competitiveness, writes Rajeev Karwal, in this exclusive article for www.icfdc.com.

It's a debate that is currently the flavour of the season among financial analysts and the international media. Can India become the second China and match up to the  spectacular growth that the Chinese economy has achieved in the last decade? India is increasingly being recognised for its prowess in information technology and in fact it is in this area that the Chinese are lagging behind the Indians. But a constant worry for India is its inability to rack up foreign investment. Compared to China's  FDI inflows of $50 billion, India has managed just $5 billion. While analysts argue that India, as a foreign investment destination, is a much more secure place, given that it is a democracy and has a well established judicial system, the fact remains that this argument is not translating into greater investment in the short term. Lack of infrastructure, unfavourable labour laws, corruption, barriers in doing business and bureaucratic delays in getting necessary approvals continue to be the all important reasons for India's inability to attract more foreign investment.

The Indian appliance industry however has had no dearth of foreign investors. Virtually every large multinational - including Philips, Electrolux, Whirlpool, Samsung, LG among others - has set up production facilities in India to manufacture appliances. What's more, some of these companies are outsourcing their R&D and design and innovation cells to India. So, what has been the impact of foreign investment on the Indian white goods sector? And will the industry help the country to take India to the next level of the value chain? Can it empower India to become an economy that is more than just an offshoring destination because of its low-cost advantage, but a nation that is sought after because of its superior quality of human resources and its ability to value-add in the high-end technological areas?

But before we discuss the potential, let's take a look at what foreign investment in the white goods sector has meant for the industry. Foreign investment in the white goods sector in India has proved beneficial in not just raising Indian manufacturing standards to global ones but it has also led to a tremendous improvement in quality of products and productivity of employees. The overall trend towards higher foreign participation in this sector has also translated into government reducing levies and duties. For instance, duties on air conditioners have come down to 16 per cent from the all time high of 40 per cent. Besides consumers have benefited hugely as they now have products that meet global quality standards as well as offer more consumer-friendly features such as energy efficiency.


In terms of the sheer size of appliance markets, India is nowhere near China. Indian markets for most appliances are simply not large enough. Colour televisions and refrigerators, to some extent, have volumes on their side: a 10 million CTV market and a 3.7 million market for refrigerators. But the numbers are still small in the majority of the other product segments like washing machines (1.6 million), air conditioners (1.2 million), microwave ovens (650,000). India's competitive advantage in manufacturing lies in products with mechanical-electro-mechanical features. India can capitalise on its large pool of workers to leverage its  labour cost advantage. As a result, India has emerged as a world leader in the manufacturing of auto components. In electronics and  plastics India is simply not competitive on input costs. Until this deficiency is overcome, India will have to continue to import electronic and plastic components for use in appliance manufacturing.

To grow the domestic market for appliances, a number of barriers have to be overcome, including unavailability of cheap and reliable power in rural areas as well as in many of the urban areas; lack of infrastructure and poor condition of roads. Purchasing power of a vast majority of the Indian population too continues to be low and therefore is a major barrier in terms of growth of demand. The problem of poor infrastructure dogs industries as well. For instance, one of the major reasons for Electrolux pulling out of India was the fact that two of its factories were located in areas that had very bad roads and the power situation was abysmal. The accelerating costs of transportation became an unviable proposition for the company. Therefore it is necessary that the government take up immediate steps to improve infrastructure and ensure that industries have access to reliable power supply that is reasonably priced.

As the Indian economy integrates into the global economy, purchasing power is bound to grow. With almost a million new homes being added as potential buyers of appliances every year, the industry is banking on big time growth in the not-too-distant future. As domestic consumption grows, the industry is bound to develop further and attain global competitiveness.

Another major difference between India and China is in the so-called economic model of growth that the two countries follow. India is focused on an entrepreneurship-based growth model. As a result entrepreneurs are reluctant to invest in projects that have a high gestation period. Chinese projects, on the other hand, have strong government support and the Chinese state makes funds available to business groups to set up huge plants that offer economies of scale. Take for instance the DVD players market. The Chinese government saw the potential in the innovation - which was developed by Philips - and invested huge sums of money to set up plants to manufacture DVD players and allied products. The government's proactive strategies have helped China to become a leading player in the global consumer electronics scene. The Indian government as well as the industry need to recognise the fact that Indian products and processes have to continuously move up the value chain and only that can enhance India's global competitiveness. So, for instance, if nanotechnology is likely to play a big role in the future in appliance-manufacturing, India needs to invest more heavily in this field so that it has appropriate human resources, technology and other resources to benefit from this and take the Indian white goods industry into the next level of technological upgradation. Such a national strategy would help in quickly enhancing India's global competitiveness in this sector.

Rajeev Karwal, is the former CEO of Electrolux India and has headed the marketing operations of several multinationals, including LG Electronics India Ltd and Philips India.