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Yes, a real tiger! My introduction to manufacturing localization

I had worked in the global automobile industry for more than 15 years before my first trip to India. It was 2004, and I had recently resigned from my position as chief engineer of the Expedition and Navigator full-size SUVs at Ford Motor Company to lead a start-up motor scooter manufacturing venture that would be based in Africa.

I was visiting the city of Pune, in India’s Maharashtra state, for meetings with Kinetic Motors, one of the leading motorcycle and motor scooter manufacturers in India. Kinetic had recently secured the rights to build the motor scooter designs of bankrupt Italian manufacturer Italjet Moto SpA. Manufacturing of these models had recently begun in Kinetic’s Pithampur plant near the city of Indore. My start-up company was looking to source parts kits of these Italian-designed, India-produced bikes, assemble them in Africa, and ship them to the US market.

While I was well aware of India’s strengths in the textiles and clothing, pharmaceuticals, information technology, customer call centers, and tea sectors, I had no expectations for “made in India” two-wheelers. It’s not that I thought the bikes would not be “strong,” which is how Ghanaians describe vehicles of good quality; it was that I did not expect much vertical integration. I expected motorbike assembly instead of hard-core, ground-up manufacturing. My expectation for the India plant was that I would see crates of motor scooter parts–shipped in from Italjet’s former Italian suppliers in Bologna–being assembled by local Indian workers, like parents putting together their child’s new Schwinn 10-speed bicycle in a living room on Christmas morning.

Instead, what I saw taking place at the Kinetic plant was both surprising and impressive. The plastic body panels and fenders for the scooters were being injection-molded out of raw resin pellets. These body panels, along with the stamped steel fuel tanks for Kinetic’s motorcycle models, were then painted using waterborne paint processes similar to the paint booths and spray guns used at the Ford Expedition/Lincoln Navigator plant in Wayne, Michigan. Aluminum engine blocks that had been locally cast from melted ingots in the next town were machined, coated, and finished on site. Gears, sprockets, and camshafts were heat-treated for added strength and durability. An on-site materials engineering lab confirmed their finished quality. Handlebars, kickstands, and wheels were dipped in nickel-plating baths to create a chrome finish. And in another nearby supplier’s plant, seats were fabricated in foam molds, then upholstered using locally produced vinyl and fabrics of various textures and colors. As I watched, one of the scooter seats was trimmed in a very realistic looking red leather-like vinyl of a shade you might see in the interior of a Ferrari 488 GTB.

While seeing this complex manufacturing capability at the Kinetic plant in India was initially a surprise, the more I learned about the local Indian manufacturing sector on this first visit to the subcontinent, the more things made sense. After all, India’s Bajaj Auto had started building vehicles by securing a license to locally produce the iconic Vespa motor scooter in the 1970s. After many years of assembling and selling Vespas in India, industrious entrepreneurs figured out how to manufacture replacement and production parts for the scooters. In the early 2000s, as part of their cost-reduction strategy, Vespa parent Piaggio & C. SpA, decided to move the production of its new generation Vespa from Pontedera, Italy, to India. Also, for more than a decade, local Indian companies like Hero and Maruti had partnered with established global two-wheel manufacturers and were building Honda and Suzuki bikes, respectively, in India for both local market consumption and export.

The parts suppliers followed suit. Starting in the mid 1970s, they built factories and brought in the machines and tools necessary to build batteries, tires, wiring harnesses, filters, lighting, and other parts at the required scale and quantities. A local supply chain was established in India. As proven by my walk-through of the Kinetic plant, all the necessary parts could either be built in house or purchased from an Indian company in the next town. Kinetic had achieved localization. Kinetic and its local Indian supplier companies were no longer just assembling motorcycles and scooters, but were manufacturing motorcycles and scooters. They were not simply participating in the two-wheel industry, but had industrialized two-wheel production.

Back to my visit...In addition to seeing their bike production and vertically integrated parts production operations, I also had the opportunity to spend time with their design team, engineers, and road test operations. A product and technology development center was in a rural area not far from the Indore plant. Adjacent to the center was an on-road and off-road test track. I test-rode several of the Kinetic models on the track, from 50cc to 250cc (engine displacement) models. All had cleaner burning four-stroke engines, as Kinetic, like many other two-wheeler companies, had eliminated 2-strokes from their engine portfolios to reduce emissions. While taking either the fourth or fifth model through the off-road portion of the track, I stopped after crossing through one of the puddles formed by the morning rain to admire the view and chat with a few of the engineers and technicians. One of the technicians, Jaggdish, casually commented that he had seen a tiger on the track earlier in the morning. Yes, a real tiger! That ended my test rides, and we headed back into the technology center.

Concurrent with my evaluation of suppliers and product, other members of my team were conducting research to evaluate the market’s acceptance of motor scooters in West Africa. While there was interest in the product, the projected sales volume was much lower than expected and not sufficient to meet our business case objectives. The people and the products of Kinetic were great, but simply taking and kit-assembling their portfolio of products in West Africa would not meet the needs of the market and would not make business sense. We decided to not move forward with that venture. We concluded that if we could launch a more vertically integrated business, with more control of the part production costs and more flexibility to tailor the products to the local West African market, we could revisit this opportunity in the future, once the market was ready.

Definitions and Progression

From a Manufacturing Business to Sustainable Industrialization

Manufacturing business –

A manufacturing business is created when raw materials, labor, machines, and energy are brought together and organized to repeatedly produce quantities of a good that a customer finds desirable and is willing to purchase. Think about any product manufacturing company existing today. No matter its size, years in business, location, or number of employees, it was first started by a single entrepreneur or group of entrepreneurs. At some point in this company’s history, an individual or group of individuals recognized a market need, felt they had the ideas and skills to address the need, and decided to take the risk to build a business that could fulfill that need. The motivations to get started may have been planned and deliberate, or they may have been opportunistic.

For example, Kofi is a successful carpenter and wood sculptor working for a home construction company. He decides to make a new set of cabinets for his kitchen during his spare time in the evenings and on weekends. His neighbors see his work, are very impressed, and decide that they want to remodel their kitchens with Kofi’s cabinets as well. Kofi builds their cabinets. The neighbors each post photos of their new cabinets on social media. The photos are a hit and receive lots of “likes" and "follows.” Because of the photos, many of Kofi’s neighbors’ relatives across town, across the state, and across the country all decide that they also want a set of Kofi’s cabinets. Kofi buys extra drills and power saws, places a bulk order for wood, and hires two of his wood finishing colleagues from the construction company to help build the frames and stain the doors. What started out as a side hobby project turns into a revenue generating enterprise. Kofi’s Cabinet Works Limited is born. Demand continues to grow and other kitchen remodelers around the country want his work. Kofi now needs to go from building seven cabinet sets per week to 75 sets per week. Kofi decides to invest in the equipment needed to automatically cut the special wood joints for the drawers, and a computer numerical control (CNC) lathe to high-speed cut his unique and complex design patterns for the cabinet doors. The addition of this equipment and the employees needed to operate it gives the company the production capacity to efficiently meet its customers' demands. Kofi’s Cabinet Works is now a cabinet manufacturer.

Industry –

Multiple customers for a product create a market for the product. Great business is all about the customer, the customer, and the customer. A business without customers is just a hobby. The multiple businesses in pursuit of these customers are competitors. If the product offerings are similar or undifferentiated between multiple businesses offering the product–like crude oil, wheat, rice, or steel–the product is considered to be a commodity. Commodity products compete with each other primarily on the basis of price. The producer’s profit margins are squeezed and the best deal typically wins. Adding unique designs, branding, business models, and distribution channels help enable price premiums and move a product from a low-margin commodity category to a higher margin differentiated offering.

An industry is created when multiple manufacturing or non-manufacturing businesses each produce and offer entries in a particular sector of products and services and vie for acceptance by customers and the marketplace. As the market opportunity is proven to be sufficient, multiple competitors are attracted. Many customers result in the development of many competitors, and many competitors help to create an industry. Again, it all comes back to the customer.

Entrepreneurs who see and seize on business opportunities in the marketplace become competitors and are drivers of industry development. Local government policy and support, infrastructure availability, the skill level of human capital, and other external factors also play a role in the development of an industry. The businesses that have grown out of the combined impact of customer demands, market opportunities, and external support factors are why many cities, states, and even countries are known primarily for their local industries.

Examples –

Chicago meatpackers: The US city of Chicago was once famous for its leadership role in the meatpacking industry, earning this distinction after the American Civil War (1865). As income levels in major cities increased, the market demand for meat began to rise. This created increased opportunities for innovation and new business in commercial butchering. The railway system and networks that linked Chicago to many of the rural cities throughout the Midwest, where cattle and pigs were raised, allowed for easy transport of this livestock. Chicago’s infrastructure advantage enabled the commercial butchering and meatpacking industries to develop and flourish.¹ Chicago has since diversified its local economy toward other industries, including other forms of transportation networks, manufacturing, financial services, commodities brokerage, insurance, software, and information technology. In this list of local industries, we can also include Chicago’s many entertainment venues and professional sports franchises, including the 2016 Major League Baseball World Champion Chicago Cubs!

North Carolina furniture: For approximately one hundred years, the US state of North Carolina and the city of High Point was known as the furniture manufacturing capital of the world. Immigrants with artisan skills in woodworking had settled in the region since the seventeenth century. The state was also home to vast reserves of hardwood forests. Entrepreneurs combined these advantages in skilled labor and natural resources with capital to develop a local furniture industry. The proximity to rail and highway infrastructure also made High Point a strong location for a major annual furniture trade fair. While global competition has reduced the region’s role as a major furniture manufacturer, the twice-a-year High Point Market furniture fair continues to draw more than 75,000 people from around the world.²

Silicon Valley technology: Silicon Valley’s leadership in the computer hardware, software technology, and internet industries primarily grew out of the region’s advantage from having multiple engineering-focused universities in the area, including University of California at Berkeley, Stanford University, and California Institute of Technology. What catapulted the region’s notoriety for technology innovation was the 1960s race between the US and Soviet Union to be the first on the moon. Semiconductor manufacturers leveraged the local high-tech talent and the nation’s moonshot goal towards the development of the technology industry. The Cold War competition between the US and Soviet Union not only resulted in the creation of several commercially viable technologies, but it also launched a culture of innovation, risk taking, and entrepreneurship. Learnings from the successes and failures from one venture or industry were shared and applied to other ventures. Besides semiconductors, the successful development of other technology-based industries such as social media and ride sharing is partially due to the Silicon Valley culture and professional ecosystem.³

The Motor City: In the late 1800s, the US city of Detroit was primarily known for making cooking stoves, small machinery, and cigars. These skills in basic manufacturing, plus Detroit’s proximity to large reserves of copper, coal, and iron mining, made the region ripe for the development of the motor vehicle industry. By the early 1900s, after the invention of the internal combustion engine, entrepreneurs had launched more than one hundred twenty-five auto companies that were operating in Detroit. An automobile industry had been born. While the number of automakers declined as the industry matured, the number of vehicles produced and sold continued to rise.

These examples of industry by region are numerous: the US state of Texas is known for the barbecue industry; Orlando, Florida is known for The Walt Disney Company and the amusement park industry; and Hollywood, Mumbai, and Lagos are each globally known for the motion picture industry in the US, India, and Nigeria, respectively. Entrepreneurs use market opportunity and local advantages to launch companies that serve a need. When the market need is confirmed, competitors follow suit. Once there are several competitors serving a proven market, an industry is born.

"Businesses that grow by development and improvement do not die.” Henry Ford, 1923

Industrialization –

Industrialization is when businesses and governments collaborate to put in place the factors of production–raw materials, energy, supply chain, appropriately skilled labor, logistics, infrastructure, and public policy–to enable and support the success of a given industry. This partnership between the private and public sector occurs in the most successful examples of industrialization. Entrepreneurs and other businesspeople recognize a market opportunity that could result if they were to locate a production facility or warehouse in a particular region. The people who live in the region see an opportunity to use their skills and talents in perhaps a more productive way. The local government sees the potential opportunity for job creation and a tax base, and offers to help. The help could come in the form of investment and tax incentives, education and training support at the local community college, public land leases, or roads, sewers, power lines, and other infrastructure development. If the region implementing an industrialization strategy has previously only operated in the farming or livestock businesses, the energy infrastructure may not be in place to support manufacturing. In most cases the nearest utility provider must be part of the private-public partnership to enable the industry to flourish in the region. Horse power must be converted into horsepower. (You’re welcome.)

The external and internal material and labor inputs and the sequence of processes needed to produce and distribute products for a given industry are collectively known as the supply chain. North Carolina’s furniture manufacturing companies and the furniture industry were initially enabled by the skilled woodworkers who lived in the area and the large supply of hardwood trees right in the backyards of High Point. To complete these bedroom bureaus and night stands, the “hardware”–steel hinges, drawer knobs, slide tracks, and fasteners–were first either made by the wood carvers themselves, imported, or sourced from the small metalworking shops in Detroit and around the country. If a local entrepreneur were to begin producing and offering the “hardware” near High Point, the industry would improve cost and convenience by having the parts close by. Also, as the artisans migrated from hand carving each drawer and table leg to using more power tools enabled by the new local power station, then the average furniture maker would be able to increase production from five dining room sets per week to five dining room sets per hour! While there may be fewer jobs for hand hardwood carvers initially, as a result of the increased production volume capacity, overall skilled and lightly skilled jobs would grow significantly. Once the companies were successful at selling the increased production volume of dining room sets, more suppliers and other business, both competing and supporting businesses, would flock to the region in search of new business and the efficiency improvements would have the potential to continue.

All around the world and throughout history, periods of industrial development have followed generations of farming as the main driver of the economy in a region. Industrialization typically also involves the workers in a society trading in a relatively limited number of farming jobs for a significantly larger number of higher-paying jobs in factories, yielding growth in employment opportunities. These transformations in how the local population works also lead to mass numbers moving away from rural areas and making their homes in growing urban centers. This clearly has been the dominant trend in China over the last two decades.

A point to keep in mind is that after this manufacturing process and capability is put in place and operating, the industrialization journey is far from over. The industrialization of a particular product is not a one-and-done process. Continuous improvement of the new facility or process must be the norm for sustainable success. As technology continues to evolve, new applications will continue to be developed that can improve the performance of the business. On the cost side of the equation, to remain efficient and profitable, companies must work to improve their raw and input material purchase costs. Cutting the distance that parts have to travel is one way to reduce this cost. Manufacturers must also continuously work to eliminate defects, optimize quality, improve productivity, and reduce wasted steps in the manufacturing process. For example, improving quality will result in fewer production parts being scrapped or having to be reworked. The customer wins and the cost structure wins.

On the revenue side, to satisfy the needs of the customer, the industrial enterprise must implement new technologies as developed, add or drop product lines based on customer preferences, and ensure that there is sufficient capacity in the plant and the workforce to meet customer demand. As a product line succeeds in the marketplace, the enterprise may need to increase its capacity to build more products. As a product’s sales demand declines due to a new competitor or industry transformation, often it may make sense to redeploy its capacity to produce the more popular models. As industrialization succeeds and returns are generated, the process requires more investment, people, and skills training. The virtuous cycle (a chain of events that reinforces itself) of industrialization continues, as it becomes apparent that the skills and technologies from one product sector, especially automotive, can be transferred or introduced to other product sectors. Home appliances, consumer durables, industrial machinery, electric vehicle battery chargers, and solar and other renewable energy systems are examples of products that can be produced by leveraging the skills and capabilities of a region that has industrialized for automobile production.

Sustainable industrialization –

Sustainable industrialization is the next paradigm for industrialization. It involves a deliberate set of strategic and tactical actions taken to optimize the discussed factors of product production for the long-term success and profitability of the business, while at the same time ensuring that the business has a positive impact on the environment, society, and local community.

As defined in Motoring Africa, sustainable industrialization consists of four key elements:

 Optimized Productivity & Cost Structure – Elimination of waste throughout the product design and production value chain to optimize profitability and long-term success of the enterprise. Optimizing product cost structure and operations through use of lean enterprise tools and methodologies.

 Green Product and Operations – Optimal use of renewable sources of energy in the product creation, manufacturing, and distribution processes. Use of advanced manufacturing tools and processes. Responsible use of non-renewable energy sources.

 Circular Economy – Implementation of circular economy strategies, i.e., maximizing opportunities for product sharing during its life cycle, and product restoration and repurposing at the end of its life cycle. Circular economy strategies should be factored into the design, manufacturing, distribution, use, and end-of-life reuse and recycling of the product.

 Community Linkages – Responsible management of relationship between the company and the local community and stakeholders. This includes ethical labor practices and responsive community support.

Sustainable industrialization means growing the business to operate at an ideal scale and performance level to optimize the cost structure and margins, thereby enabling the business to sustain and succeed over time. Reducing waste contributes to both the business profitability goals and environmental responsibility. Sustainable industrialization also means utilizing the latest tools, processes, and emerging trends to responsibly manage the environmental and societal impact of the business. This means optimizing the use of renewable energy sources and responsibly limiting the use of non-renewable fossil fuels.

It also means incorporating product use sharing and end of life cycle reuse opportunities into the design, manufacturing, and distribution processes. For example, BMW recently started a program in the US called ReachNow, which allows customers to hail rides from a specific model BMW and a driver, just as they would an Uber ride sharing service. Customers get all of the convenience of owning a BMW without the cost of paying for the car when it’s parked, thus reducing the impact on the environment. The company is also extending this service to its MINI brand, allowing MINI Cooper owners to rent out their vehicles for set periods of time when they are at work, out of town on business, or time periods when they are not in use.

From a societal standpoint, sustainable industrialization will also drive leadership to operate the company with ethical work practices and have a positive impact on the local community. These actions, done correctly, need not add cost or burden to the company. Sustainable industrialization is industrialization updated and optimized. Putting the team on the field is industrialization, training the team to championship level performance is sustainable industrialization!

2 Million Resistors

In the summer of 2011, during my time in consulting, I made a business trip to Taipei, Taiwan to visit Xinyi Electronics (not their real name). Xinyi manufactured and supplied circuits to my client, a solar energy systems manufacturer based in the US. One component made by Xinyi Electronics was resistors.

Taking a quick flashback to high school or college physics class…Resistors are electrical components that are used to reduce or regulate the flow of electrical current. In this physics class application, they are small devices about 4” in total length, made up of nearly 2” metal leads on each end and a 1/4” long by 1/16” diameter wide metal element in the middle covered with insulation. Thinking about the lab assignments in our physics class, the bands of various colors printed on the insulated element told us the resistance value (measured in ohms) of the part.

In the 1960s, multinational electronics companies had begun to locate assembly operations in small business enclaves in Taiwan. By the 1970s, Taiwan’s local government decided to make electronics manufacturing a core industry. Specializing in the production of a specific product and its internal components can enable a company and region to become quite skilled at it. Success gives them a lot of practice, and the more they practice, the more productive and efficient they become. Quality improves, costs go down, prices can be lowered and market share can rise. Industrial optimization creates a virtuous cycle on the cost structure and income statement of a business.

Fast forward forty years to my 2011 visit to Xinyi Electronics. With great focus, by this time they had achieved over 70% of the global market share for resistors. The high-speed manufacturing equipment and technical know-how developed over the years gave Xinyi the capability, scale, and capacity to build two million of these resistors per day! Seeing so many of a particular product being built at that speed is an amazing sight.

The raw materials, skilled labor, machinery, and government support were all in place for Taiwan to industrialize resistor and electronic circuit production. Over the years, Xinyi had optimized the application and use of these production factors and had achieved a high degree of customer acceptance (the 70% global market share) and outstanding financial performance. Xinyi and its founders were also known to have great relations with the local community in Taipei. Their overall strategy towards environmental stewardship was less obvious to me at the time, but their track record for building and selling products for the alternative energy sector was a positive indicator. Xinyi had achieved sustainable industrialization, or was on the path to do so.

The definition of industrialization does not stop with the manufacturing of a raw material into a product and the assembly of multiple products into a finished good. Developing and newly industrializing nations should aspire to go further up the value chain. While manufacturing adds value to a material, the desirability of the end product increases the magnitude of the value ascribed by the customer. That is, customers are willing to pay more for products that are tailored to their needs and products that they love! After mastering the stages of being assemblers and manufacturers, businesses that industrialize must next work to develop the requisite skills to move to the stage of being innovators and designers of products that customers love. Imagine if the African ingenuity and resourcefulness used to keep those decades-old Japanese taxis on the road in Ghana were trained and applied to vehicle design and vehicle systems engineering. African ingenuity has historically been absent from industrial sectors. How many more devices like the engine stop-start (to conserve fuel like our taxi drivers in Ghana) are in Africa waiting to be invented?

For developing economies like those on the African continent, sustainable industrialization strategies are not just preferred, they are imperative. They are a plan to maximize value creation as opposed to a plan to simply participate. As various African nations begin to industrialize production in various sectors, they must leapfrog traditional industrialization approaches and go all-in on sustainable industrialization. As a country begins a cycle of learning to produce products in a given industry, it is important to learn the tools and processes that are aligned with where the industry is headed in the future, as opposed to where the industry has been in the past. Also, many of the advanced manufacturing tools–such as 3D printing and computer numerical control (CNC) machining–currently in use in developed markets require less up-front capital investment and less production volume scale to pay for them. These tools make manufacturing a more accessible economic alternative. Employing and mastering sustainable industrialization strategies and techniques can help give local companies the opportunity to not only succeed over time, but also become industry innovators and disruptors.

Conclusion: Going all-in on industrialization can change a region’s position from an industry participant to a potential industry leader.