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The Collection Wed, 12 Feb 25 |
Multiple stories, multiple perspectives, one theme worth your time—every week. |
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“The madman theory posits that a leader who behaves as if he could do just about anything has a better chance of persuading other global actors to make concessions they otherwise would not make.”
That was Foreign Policy magazine pondering over at least one possible reason for US President Donald Trump’s habit of unpredictability.
Trump has been in the White House less than a month and we’ve already seen new tariffs proclaimed on goods from Mexico, Canada, and China; a pause on tariffs on Canada and Mexico, but not China; and just this Monday, higher tariffs on all steel and iron imports into the US, which resulted in an immediate 3–4% dip in Indian steel stocks.
With the European Union and China already threatening “proportionate counter-measures”, it isn’t surprising that the term “trade war” is being liberally thrown around.
Regardless of how successful you think Trump’s pet tariffs will work out for Americans, and some significant economists think it’ll backfire, it is undeniable that we are looking at an extensive reshaping of the global trade landscape. Through sheer uncertainty and intimidation, if not real action.
If Trump is serious about “reciprocal tariffs” with “no exemptions, no exceptions”, India and Thailand could be among the countries most exposed to risks, Bloomberg reported on Monday. Reports suggest Indian Prime Minister Narendra Modi’s meeting with Trump later this week may see India offer tariff concessions in order to stave off the worst effects.
What does all this mean for India’s ambitions to become a global manufacturing powerhouse? What does this mean for her manufacturers?
Over the last several quarters, The Ken has covered multiple stories in India’s manufacturing sector, and how its policies to incentivise large manufacturers have actually worked out.
With a lot of things suddenly up in the air, perhaps this week’s collection of stories on the current state of Indian manufacturing will help you find your feet.
China+1 and PLI vs labour glitches and wonky policy design
“China+1” is a strategy major global businesses started espousing once they realised they would rather diversify their manufacturing base into other countries than let it concentrate in China. India was expected to benefit from this trend, especially after the production-linked incentive (PLI) schemes it rolled out for manufacturers across sectors.
Some of those benefits have started to accrue.
Smartphones, which ranked 167th in India’s export mix 10 years ago, now rank second. Apple’s shipments out of India, for instance, crossed 1 trillion units this financial year.
But not everything is working out the way it was intended, even with ostensible success stories like Apple.
A September 2024 deep dive by my colleague Shristi Achar, who tracks tech manufacturing for The Ken, explored how China-like ambitions have resulted in China-like labour models in some of India’s new factories. The Tata Electronics facility in Hosur, Tamil Nadu, a major supplier for Apple, plans to hire thousands of workers from out of the state and house them in dormitories onsite—a system that would create a workforce with no local networks, and lower attrition and unionisation.
Tata’s iPhone factory dorms are fully charged. But the talent it wants is out of coverage area
The US$155-billion Indian tech-manufacturing industry needs skilled talent and high productivity—something companies can’t find closer to their factories
There are also, of course, skill issues. Some manufacturers are having to compromise on recruiting standards for even blue-collar roles such as assembly-line operators. They started hiring even those who had only cleared the eighth grade. But filling blue-collar roles is still far easier than finding talent for jobs higher up the chain.
But training workers for blue-collar roles isn’t really a problem, countered Atul Lall, vice chairman and managing director of electronics-maker Dixon Technologies India. The need of the hour, according to him, is to get engineering talent of a higher order if the country aspires to move up the value chain—from merely assembling devices to becoming a component manufacturer.
To make his point, Lall gave the example of the latest iPhones or Samsung smartphones. “They are all made of titanium. Do we have [enough] engineers who understand that kind of organic chemistry, how titanium is processed, and what its properties are?”
You can read more about the talent demand-supply mismatch in this February 2024 story.
India’s manufacturing resurgence has a people problem. Ask Tamil Nadu
As orders swell, desperate electronics makers are even hiring those who have only cleared eighth grade
In other cases, even when talent is available, companies have chosen to lean heavily into automation. A handy reduction in employee costs, I’m sure, but what about that key “Make in India” promise of creating thousands of new jobs? Our October 2024 story explores this conundrum.
The Make in India paradox: how Kaynes Tech hit a $4.3B valuation by hiring fewer workers
The initiative is aimed at manufacturing locally and creating millions of jobs. But companies like Kaynes, an electronics maker, are happy doing one without the other
If labour and skills are particularly tricky bottlenecks, so is policy design.
Take the case of fabless manufacturing—where companies design microchips to be produced by someone else on a contract basis. India has over 200 such firms and one-fifth of the world’s design talentpool. The government introduced a design-linked incentive (DLI) scheme in 2021, but only a tiny fraction of the total outlay for the sector (Rs 1,000 crore out of Rs 76,000 crore) goes to the semicon-design ecosystem.
The government expects the scheme to “nurture” 100-chip design firms by 2026 and ensure that at least 20 such companies have a turnover of over Rs 1,500 crore, but so far, only 12 firms have benefitted.
It’s because there is a “design” issue with these incentives, we wrote last month.
India wants a thriving semiconductor industry. If only it could keep chip designers happy
A fabless company needs at least US$10 million to build a basic chip; that’s far above the limit usually made available for them
Such misalignments aren’t limited to the semiconductor industry either.
Take air-conditioner manufacturing, where demand for ACs is going through the roof, but supply of compressors, a key part, is limited, so imports make up the shortfall. The industry needs 10–12 million units every year, but the four companies that manufacture compressors in India can only supply 6–8 million. In fact, almost 65% of compressors are sourced from China.
Trump’s election in November goaded Chinese suppliers into redirecting as much of their supply to the US as possible before any tariffs could be imposed, which only exacerbated the shortage in India.
The Indian government had launched a PLI scheme for white goods three years ago to address precisely such problems. But this hasn’t worked very well, because these incentives weren’t really based on “production” but sales.
Even though AC demand is soaring, manufacturers don’t want to take the financial risk of ramping up compressor production. As Thiagarajan put it, PLI incentives aren’t based on production—they’re based on sales growth.
“If there is an X-axis of investment, the Y-axis is the incentive I will get—between 4% to 6%, depending on the year from which it starts,” he elaborated. Translation: the more ACs you sell, the more government money you get. But if you invest in compressors and they don’t sell fast enough? Tough luck.
For example, companies that made a minimum Rs 150 crore investment in 2021 need to generate Rs 3,000 crore in sales by 2026 to qualify for full PLI benefits.
What is being done to remedy the situation? How does it affect you? You should definitely give this story a read, especially if you’re planning to buy an AC anytime soon.
Summer is coming. For India’s AC makers, winter is coming
Demand is soaring, but supply is still mostly imported. Factories are running, but compressors are missing. And until the industry makes all the parts it needs, every summer will be a race against shortages
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Rahul leads the promotion and distribution efforts for the journalism produced by The Ken. He works at the intersection of the publication's editorial and business operations.
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