Thursday, 21 September 2023

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India’s manufacturing woes: Production challenges faced by Pfizer and Apple

Last month (18 May), Multinational drug company Pfizer announced suspension of four of its antibiotics in India due to manufacturing issues at a contractor plant. The four antibiotics are Magnex, Zosyn, Magnamycin and Magnex Forte.

Pfizer issued the warning due to “deviations” at a manufacturing facility operated by its contractor, Astral Steritech Private Limited.

“Whilst the manufacturer is currently investigating the matter, they have requested Pfizer, as an abundant precautionary measure and as per best practices, to temporarily suspend the sale/distribution/supply and use of the aforementioned products, pending the investigation by the manufacturer,” Pfizer announced in a letter to physicians in India. It added that it’s taking “all reasonable efforts” to resolve the situation.

Astral Steritech is a contractor of Pfizer with its plant based in Gujarat, India – the state where Indian PM Narendra Modi came from.

Apple having manufacturing issues in India

And in February this year, it was reported that Multinational IT company Apple has also run into trouble with its manufacturing endeavors in India, including weak infrastructure, logistics, and poor yield.

Financial Times (FT) reported that Tata, one of Apple’s major subcontractors, has seen only a 50% yield in their production line at a casings factory in Hosur in the state of Tamil Nadu. Apple has all along strived for zero defects in its manufacturing. Its expansion into India has been slow owing to issues with logistics, tariffs and infrastructure, FT disclosed.

Apple has been trying to shift its manufacturing operations out from China to reduce its reliance on China, where US trade restrictions and Covid-related disruptions have made manufacturing riskier.

However, its India output has thus far been limited to the iPhone, making AirPods the second Apple product now partially manufactured in the country. Certainly, Apple has a long way to go to diversify out of China, which makes nearly 98% of iPhones.

A former Apple engineer told FT that operations in India are running at a slow pace. “There just isn’t a sense of urgency (in India),” he said.

Mark Zetter, president of Venture Outsource, a consultancy for the contract electronics industry, said such inertia has been a problem in India for years. He said Indian contract manufacturers would “frequently claim they can fulfil any need” for an electronics client. But in reality they would be “slow to respond to customer concerns after the deal is signed” and “lack flexibility” to respond to changes.

The Apple engineers have also, at times, been housed at city-centre hotels in Chennai, the capital of Tamil Nadu, two hours away from the factories where they are working. This requires four hours of daily commuting, with occasionally poor WiFi connections along the route.

Issues besetting India

Certainly, there are many issues besetting India in its strife to become a manufacturing powerhouse of the world.

The first and most significant challenge is the lack of infrastructure. The manufacturing sector requires robust infrastructure, including transportation, power, and telecommunications, to function smoothly.

For example, last September, heavy rainfall hit Bangalore, the Silicon Valley of India, causing massive traffic bottlenecks, power outages, houses flooded, vehicles submerged, inundated roads and streets, all due to poor drainage. Many IT employees had to ride on farm tractors to go to work with enterprising farmers turning their tractors into taxis.

Businesses at Microsoft Corp, Intel Corp, Goldman Sachs Group Inc. and Morgan Stanley in Bangalore were also affected. The poor infrastructure in Bangalore is “bringing down the efficiency and productivity of the companies and putting employees’ safety and wellbeing at risk,” complained the multinational companies to the chief minister of Karnataka state in a strongly-worded letter.

Another significant challenge is the lack of skilled labour. India’s education system has not been able to keep up with the changing needs of the economy, and there is a shortage of skilled workers in the manufacturing sector. This has resulted in a mismatch between the skills that are available and the skills that are required.

One of the biggest challenges facing the Indian manufacturing sector is the regulatory environment. India’s regulations are often complex and difficult to navigate with many bureaucratic hurdles. Its ease of doing business ranking has not improved significantly in the last few years.

MNCs left India

Eight years after PM Modi first urged multinational companies to “Make in India”, it is seeing many foreign firms give up on India. A slew of big names including German retailer Metro AG, Swiss building-materials firm Holcim, US automaker Ford, UK banking major Royal Bank of Scotland, US bike maker Harley-Davidson and US banking behemoth Citibank have chosen to pull the plug on their operations in India or downsize their presence in India.

A total of 2,783 foreign companies with registered offices or subsidiaries in India closed their operations between 2014 and November 2021, according to India’s own Commerce and Industry Minister Piyush Goyal who told Parliament in late 2021. That is not a small figure, given that there are only 12,458 active foreign subsidiaries operating in India, the figure stated by the Minister.

Many revealed that they have given up on India due to regulatory flip-flops, high tariff barriers, red tape, perplexing land policies, infrastructure issues and others tied to the ease of doing business. To make things worse, there are 26,134 imprisonment clauses in India’s business laws, which highlights the risks faced by entrepreneurs and corporations in doing business in India.

“India suffers from ‘regulatory cholesterol’ that is getting in the way of doing business. The legislations, rules and regulations enacted by the union and state governments have over time created barriers to the smooth flow of ideas, organisation, money, entrepreneurship and through them the creation of jobs, wealth and GDP,” according to Gautam Chikermane, Vice President at ORF, and Rishi Agrawal, co-founder and CEO at Avantis RegTech.

“India’s struggle has been its inability to simplify regulations. Complex framework causes confusion and proves to be tedious for investors. However, simplification leads to exploitation and tax leakage,” Agarwala said.

Indian School of Business Professor Shekhar Tomar also commented, “Stability in tariff structure is very important to allow MNCs to integrate India in global value chains. Similarly, many laws vary by state and they need to play a proactive role to attract MNCs.”

Meanwhile, an Indian Parliamentary Standing Committee report had noted that foreign companies that shifted their manufacturing bases out of China during the pandemic picked countries such as Vietnam, Taiwan and Thailand, and only a few came to India.
The report noted that key challenges in attracting investments from MNCs to India include: administrative and regulatory hurdles, inadequate and costly credit, tedious land acquisition procedure and inadequate infrastructural facilities, high logistics cost and large unorganised manufacturing sector.
Despite MNCs leaving India, the Singapore government continues to be very positive about investing in the country.

In fact, Singapore signed the Comprehensive Economic Cooperation Agreement (CECA) with India in 2005 to enable GIC, Temasek and GLCs to invest in India. In FY23, Singapore again emerged as the largest investor in India with USD 17.2 billion investment.
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