Tuesday, 15 August 2023 07:50

Rare Story of a Global Indian Manufacturing Success

August 15, 2023 00:43 EDT
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Sharad Kumar Saraf graduated from the Indian Institute of Technology (IIT), Bombay, in 1969 when IIT Bombay was churning out talent for American universities. Almost 69% of his classmates left for the US, but Saraf stayed on to achieve a rare and spectacular success in manufacturing in India.

Saraf himself had scholarships to two American universities. However, one night he asked himself what was wrong with his country and decided to stay back. Of course, his mother was chuffed. Saraf did not have a clue as to what to do but soon began working for his cousins who manufactured electric motors. Today, the REMI Group is recognized as a pioneer in manufacturing electric and geared motors in India.

His relatives packed him off to the German Democratic Republic, better known as East Germany, where Saraf learned the tricks of the trade. He stayed on after work to observe their processes and copied the industrial secrets they had not shared with this young Indian engineer. Saraf did what the Americans did to the British and what the Chinese are doing to the Americans in the never-ending cycle of acquiring technology.

Eventually, Saraf and his brother (also an IIT Bombay alumnus) decided to make closures for 200-liter steel drums, which store oil, chemicals and other liquids. Drums have two screwed openings, one two-inch and the other three-quarters-inch. The two brothers took on an American company that monopolized the drum closure market—and won. Today, Technocraft Industries India Limited, the company started by the Saraf brothers in 1972, is the only other market player in the space.

Making these screwed closures is complicated. Technocraft Industries’ secretive American competitors shredded their scrap to avoid anyone reverse engineering their product. The Saraf brothers nearly went bankrupt in trying to crack the code for making these closures. They made many mistakes and managed to succeed despite having no resources.

Saraf credits his education at IIT Bombay, which taught him and his brother to think outside the box, go deep and never give up. Both brothers plowed profits back into the business. They kept improving their technology and reducing their workforce every year. Efficiency gains helped Technocraft Industries become a world leader by 1990. They were exporting to more than 40 countries.

About 135 million steel drums are produced every year. Saraf’s company produces 65 million closures and, unlike their competitors, they do not make their own drums. Therefore, they have no captive market and give their customers a top product as well as many value-added services.

Earlier, Technocraft Industries imported its steel. Since 1995, Saraf’s company has been buying all its steel from Jindal Steel Works (JSW). Today, the company has two factories in India and one in China. This factory serves the Chinese market and produces 15 million closures per year. This figure is in addition to the 65 million produced in India.

Because the Saraf brothers are in India, quality control is better, supervision is easier and volumes are higher. In China, manufacturing costs are higher. Power costs more, as does labor. Chinese steel is cheaper but medium, small and micro enterprises (MSME) pack what they produce and do not do quality control. So, Technocraft Industries Limited would have to send eight to ten people to train their suppliers. Now, things are better.

The biggest disadvantage in India is the bureaucracy, the red tape and the corruption. Saraf takes the view that corruption in India is far worse than in China. Thankfully, in over ten years, no inspector has ever visited Saraf’s factory in Anhui to ask for a bribe or cause Saraf any grief. In India, the laws are unclear, bureaucrats have far too much discretion and no deadlines when it comes to making decisions. In fact, India’s officials can sit on a file for years. There is no accountability for these officials. Furthermore, goalposts change constantly and decisions of officials are arbitrary. In contrast, Chinese officials make decisions in a time-bound manner. In business, time is money and India’s officials make life very difficult for manufacturers.

India’s colonial state was anti-manufacturing and anti-business. Its job was to cut Indian competition off at the knees so that British industry could use India as a captive market. Since independence, the government has tried to industrialize, but officials have become corrupt and want bribes. So, transaction costs have simultaneously gone up and are not accurately measurable. Manufacturers have to show false profits to pay venal officials.

After independence in 1947, the government turned socialist and made the paternalistic assumption that Indians were ignorant and all sectors needed regulation. This mindset is fallacious because Indians have proven themselves to be an entrepreneurial lot around the world. The license-permit-quota raj hobbled the Indian economy. Till 1991, this shackled the Indian economy.

Officials gave manufacturers a license to manufacture. They set production limits. This penalized efficiency gains. The government was obsessed with controlling the economy. The Aditya Birla Group wanted to produce pulp in India, but the government refused permission, and this led the industrial group to set up its factory in Thailand. Today, the Aditya Birla Group imports pulp from its own factory in Thailand. As a result, India missed out on the multiplier effect of jobs, incomes and wealth.

This Kafkaesque system encouraged shady players. For example, the Steel Controller of India gave licenses for steel production. There were such controllers for all sorts of industries. Shady operators got licenses without having factories. This operator could not have used the steel he hypothetically produced because the license had a user condition: the one with a license had to use the steel himself. However, this operator was neither manufacturing nor using steel. Honest manufacturers were forced to buy steel in the black market from this operator, though, because he owned a license. The system was incorrigibly corrupt and horribly inefficient, holding India back for decades.

Saraf points to the success of Indians in information technology (IT) and other sectors. In 1998, the IT industry was $40 million and today it is $200 billion, a figure IT pioneer Ashank Desai points to very proudly. Saraf attributes this success to the lack of controls over the IT sector.

As a man with dirt under his fingernails, Saraf proposes reforms. He advises the government to incentivize revenue collectors in each district to promote industry. If industry does not increase in their district, then the district officials should suffer. With 766 districts, India should have 600 industry clusters. The government must emulate Germany and create its own Mittelstand, the MSME of that European industrial superpower.

Saraf suggests simplifying extremely complicated land laws. Converting land to industrial use is still extremely hard. The government has realized the need for industrialization and brought in schemes like Production Linked Incentive. Yet, things have still not changed at the ground level. For instance, India’s forest laws are crazy, and officials are worse. They have designated land without a single tree as “forest.” This means no manufacturer can start a factory on such so-called forest land.

Instead of such insane classification, the government could require manufacturers who cut trees for new factories to plant and maintain 20 trees for every tree they cut down. The Chinese and, especially, the Swiss have this policy. Forest cover in European countries has increased because of incentives to plant trees, not barriers to starting factories.

The government must lower transaction costs as well. It must make banking policy simpler. Currently, banks ask for high collateral. This shuts out new entrants. As a result, entry barriers are the biggest obstacle to growth in manufacturing. Saraf remarks that, after a successful entry, life is easy even as compared to China, but the first five years are hell.

Saraf is no free-market absolutist though. He believes that there is a case for government intervention. The state has a role to play. India suffers from an extraordinary skill shortage. The country of over 1.4 billion people lacks good engineers and technicians. Currently, the government is paying dole to encourage people to get technical training, but the carrot approach is not working.

So, the government must use a stick instead. The government must make it mandatory for industry to employ only certified skilled labor. This would lead to the quality of masons, plumbers and electricians improving. This approach would be cheaper and better. India would produce higher-quality goods, and the economy would grow faster.

The views expressed in this article/podcast are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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