The Commodity Approach to Production Domestic consumer goods major Videocon manufactures TVs for Akai and Sansui

Home appliances for Kenstar and audio systems for Toshiba and Kenwood. C.K.Birla's Hindustan Motors makes the Opel Astra and Corsa for General Motors and the Lancer for Mitsubishi, all at its Hallol plant near Vadodara. If negotiations with Malaysian car-maker Proton had not fallen through, a sustained portion of Hindustan Motor's Indore plant would have been given over to making the Wira. The Doshis of Premier Auto make cars for Italian giant fiat. Delhibased Anil Guptas Hotline exited the consumer electronics market in 1990 and ever since, has been manufacturing TVs for Onida, BPL, Videocon, Konka, Haier and at various points of time, for LG Electronics and TCL as well. Contract manufacturing may not be new trend in India - the small-scale sector has been making products reserved for them (like biscuits and ice cream) but marketed by conglomerates for years. But it has certainly turned upwardly mobile. Like the Dhoots, the Birlas and the Doshis, there are scores of larger corporations that are making a lucrative business out of helping other companies, mostly multinationals, gain market. It would be too early to predict that India Inc is turning into a collective contract manufacturer, but it is a trend that has accelerated in direct proportion to economic liberalization. Products from new entrants Aiwa, TCL and Thomson, for instance, are outsourced to manufacturing outfits in Vadodara and Noida - some of these units record turnovers of as much as Rs. 500 crore and more. At one level, the move to give over manufacturing capacities to the competition can be considered sheer pragmatism. Few domestic companies stand out for their marketing acumen so, as the clich goes, if you can't beat them join them. It looks tike a great arrangement all round. If you choose your partner well, manufacturing for a successful brand can help keep the assembly lines running at optimum capacity and hasten growth with the minimum of effort. Videocon, for instance, considers both market share and "production share" as benchmarks for success. In TVs, for example, the companys brands have a market share of roughly 20 per cent. When it comes to production share, the number more than doubles to the forties. Videocon executives admit that without manufacturing for other majors, production share would be in the low twenties. Manufacturers also get the benefit of foreign quality systems since production is done according to the marketers' specifications. On their part, foreign companies testing the Indian waters are often reluctant to sink millions in to brick and mortar facilities from which they will be hard put to extricate themselves if they fail. They also save on such things as inventory costs, which the manufacturer shoulders, and avoid the hundreds of niggling regulatory requirements that go into setting up a factory in India. Without the headaches of manufacturing on their backs, therefore, these companies can focus on the tough business of sales and marketing. All this works well however; in a semi-protected environment where tariff barriers to imports are still relatively high. Multinationals can afford to outsource because Indian assemblers still enjoy a substantial cost advantage. Even accounting for local imposts,

a 14 inch TV set manufactured in India is about 30 per cent cheaper than, say, a set imported from the huge assembly lines in China, the closed competing souring point. But this is likely to be a temporary advantage - as the current hysteria over Chinese imports (or dumping, depending on which way you look at it) suggests manufacturers admit that the ex-factory price of a 14 - inch TV in China is still cheaper than that of India - it is the duties that nearly double the landed cost. Once these come down as they are eventually bound to, Indian manufacturers will rapidly lose what is clearly an artificial advantage. A sign of things to come is already emerging in the brown goods sector, where easier import norms are encouraging domestic brown goods companies to jettison the Made in India label altogether. Last year, companies like Sumeet, Turner Morrison company Inalsa, and Maharaja Appliances flooded the market with steam irons, toasters, pressure cookers, microwave ovens and blenders all sourced from China or Eastern Europe. With reason, most brown goods have been deserved, and even with the duties, the price differentials between imports and domestic products are skewed in favour of the former. Sumeet's chairman Vivek Mathur, for instance, said his high-end steam iron, which was to retail for Rs. 9,000, would have cost Rs. 20,000 if it were to be manufactured in India! Throw in the quality angle and there's practically no contest. This development holds a clear and obvious message for companies that see an easy advantage in taking the "commodity" approach to manufacturing. Without durable valueaddition of their own, they're likely to be left with empty assembly lines. The other tougher option for contract manufacturers would be to invest heavily in IT and pare costs so drastically as to make domestic production aggressively competitive. Can they do it? Despite more than a decade of exposure to the best global manufacturing practices, the slow pace of the revolution on the shop floor suggests not.