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Faridabad: Tata truck showroom (Mint)
Faridabad: Tata truck showroom (Mint)

The learning factories that India needs for rapid industrialization

Opening up markets to imports may satisfy Indian consumers, who can buy a greater variety of products less expensively

Friedrich Hegel said we learn from history that we don’t learn from history. A popular misconception is that India was in the dark ages before the economic reforms of 1991. There are many lessons India’s policymakers can learn from Indian history before the 1991 enlightenment. Especially now, when India must build its industrial capabilities to create jobs rapidly and compete in global trade.

Economists are debating whether to “think global" or “think local". This is a false dichotomy because competitive industrial capabilities are built by combining both. Nations don’t compete with nations; firms in nations compete with firms in other nations. The story of India’s commercial vehicle industry, which was built before the 1991 reforms, is instructive. Its lesson is that competitive capabilities are built when leaders focus on raising the pace at which their organizations learn. They must learn faster than firms in industrially advanced countries, which are also learning and improving, to catch up with them. In fact, their only sustainable competitive advantage is their ability to learn faster than any potential competition.

Tata Engineering and Locomotive Company (Telco) was one of four firms licensed to produce commercial vehicles when India embarked on industrialization in the 1950s. All four had foreign partners from whom they could learn. They were permitted imports of technology and parts with the stipulation that they must learn fast and produce 95% of the product content within India in 15 years. Commercial vehicles are complex products with thousands of high-precision mechanical and electrical components. To meet that “indigenization" target—which was a “learning" target, in effect—capabilities had to be developed in a large base of domestic suppliers, in addition to capability enhancements within Telco’s own factories.

Telco was the fastest learner of the four. Before 15 years, Tata vehicles were over 95% indigenous. Sumant Moolgaokar, the company’s visionary leader, reminded Tata managers that they were not building a truck; they were building an industry. He called the new factory he designed in Pune a “learning factory". There, Telco learnt from other foreign companies how to build sophisticated machine tools, and also built a research and development centre to design new models of trucks. The company had become so large in the domestic market that Moolgaokar feared it would become complacent. He insisted that Telco must export vehicles while it learned. It exported its products to over 50 countries, where it competed with the world’s best manufacturers. Its engineers were constantly on their toes, improving products. All this before 1991.

In the mid-1980s, Telco developed a pick-up truck, the Tatamobile. The Indian government persuaded it to explore the US market because it wanted to earn hard currency from exports. The Tatamobile seemed to have potential. A study revealed that the US had imposed a 25% duty on the import of pick-up trucks (which was surprising, considering that the US insisted on other countries reducing import duties). The US car market was being overrun by Japanese companies. Pick-up trucks were a protected segment of the market in which America’s big three automobile makers could make most of their profits.

Though costs in India were lower than in the US, a 25% hurdle was too high for the Tatamobile. The study revealed an opening, however, for Telco’s component suppliers. They could meet US quality standards. And they could export parts directly to US original equipment manufacturers, unencumbered by import duties. Many Indian parts producers built profitable export businesses, even acquiring factories in the US and Europe, and integrating operations with global supply chains.

Telco is now called Tata Motors and the principal lesson of this story is that industries are built by accelerated learning, with time-bound targets, not by unbridled free trade. Japan and South Korea built their impressive industrial capabilities in the last century, with industrial policies that pushed domestic firms to learn faster while connecting them opportunistically to export markets. China has followed the same path. In 1991, the concept of an “industrial policy" was declared taboo by the Washington Consensus, to which Indian economists were drawn, and time-bound localization programmes were rejected as policy instruments. China did not bend to the new rules of the game. It continued building its capabilities, often being accused of “stealing" technology whenever its firms learnt from their foreign partners.

Trade and industry must go hand-in-hand. The goal of building competitive industries must unite their policies. “Think local" must guide “think global". Commerce and industry were always part of a single ministry in India because trade and industrial policy must work together. After 1991, when trade became more glamorous, the commerce wing in the ministry began to dominate even as the industry wing withered, tarnished by an old “protectionist" image.

Opening up markets to imports may satisfy Indian consumers, who can buy a greater variety of products less expensively. However, if Indians do not learn to produce more within the country, they will not be able to earn enough to buy the products on offer. Lack of decent employment is frustrating the aspirations of India’s youth. The touted “demographic dividend" is turning into a potential disaster due to the failure of industrial policy—in fact due to an ideological avoidance of it for too long.

Industrialization is a process by which firms acquire capabilities. For this, many policies must be integrated—on trade, skills, technology, employment, etc. The goal uniting all must be the creation of more opportunities for young Indians to learn and earn in enterprises within India. For this, India’s policymakers and industry builders must nurture the most abundant resource that India has, which is its large number of young people. They are assets who can increase their own value if they are provided environments in which they can earn and learn faster.

India needs many more “learning factories", and more “learning clusters" of enterprises. This is among the lessons to be learnt from other countries and India’s own history.

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