Coincidence, Connectivity and Correlation: The 3C’s of Perceptive Observation and Research

The other day, a very striking research finding that turned conventional wisdom and generational practice upside down was published widely (http://www.thehindu.com/sci-tech/health/high-milk-intake-tied-to-increased-mortality-risk/article6544831.ece). It said that those who drink more than three glasses of milk (700 ml), instead of facing a lower risk of fractures as believed hitherto, faced instead a risk of higher mortality. This, obviously, is counter to the received wisdom that it is beneficial to drink more milk as it leads to greater calcium intake and thus leads to healthy bones, apart from it being a wholesome food for general human development. The study was carried out by the reputed Uppsala University of Sweden and covered 61,000 women and 45,000 men of certain age groups for more than 20 years. This study caps a series of such studies which question the past precautions, biases and beliefs on a variety of subjects, ranging from eggs and coconuts to salt and cocoa (one such study is that intake of certain types of fat is good for brain health!).

At the end of the milk research summary, however, there was a caveat that the study pointed to an association rather than a link. It suggested more investigations to conclude on the topic. This caveat is not surprising given the diversified nature of human genetics, the multi-factorial nature of human aging and disease affliction. Identification of the core ingredients of prophylactic and therapeutic potency as well as side effects and adverse effects of natural or synthetic ingredients is wrought with great complexity. Potentially, these research journeys would continue, leading one day to more conclusive and more validated hypotheses on what causes what. While the complexities of understanding these bio-chemical challenges at molecular level are understandable, it is intriguing that apparently simpler and more visible aspects of human relationships should threaten the stability of, and cause volatility in, human relationships at family, organizational, social and national levels. This blog post presents certain models of researching and understanding human behaviour as a way of development.    

Individuality and conformity

The evolution of one’s personality over the years is the result of continuous interplay of one’s quest for individuality and the individual’s ecosystem’s norm for conformity. The ecosystem could variously be the family (pre-marriage and post-marriage), the school and college, the organization and the society. At every point of time, the individual is simultaneously advised to be expressive and empowered as well as conformist and compliant. While absorbing this indoctrination, the individual also constantly observes the players and role models he or she encounters in the various ecosystems. The observed behaviours are much like the various items of food that one ingests for biological development; they are the complex ingredients of food for emotional health. Much like the example of milk above, the behavioural inputs that are embedded as features of ecosystems are akin to  inner ingredients like lactose and galactose sugar in milk that are now found to cause oxidative stress and inflammation for individuals. There are more complexities, in addition.

Nations with developing and diversified habitat conditions such as India have multiple and diverse ecosystems at different points in scales of extreme polarities; poor and rich, rural and urban, squalor and luxury, unemployed and unemployed, and so on. Amidst all this diversity, there are two common national cultural trends; aspiration for growth and passion for equity. Each individual develops his or her own personality that expresses individuality and conformity that are not only influenced by the observed behavioural inputs but also the embedded factors of the ecosystems. These influences on individual personality development and collective social motive force are rarely appreciated with the needed perspicacity so much so the pressures get built up to alarming levels. Sudden and volatile expressions of resentment in families, institutions, firms and societies are a result of insensitivity to what could constitute an optimum balance of individuality and conformity on one dimension and economic growth and social equity on the other dimension.

Observation and research

Unfortunately, by the time one gets to recognize the need for personality optimization, much of one’s personality gets formed. The only way one rebalances and optimizes one’s personality is through observation and research. And the start point of one’s observation and research must be revalidation of the hypotheses that have been allowed to embed themselves over the years; like the several food and nutrition examples that have led to contrarian conclusions through more objective and intensive observation and research. Observation is the act or faculty of watching something or someone carefully for a period of time, especially to learn something. Research takes observation to the next level. Research is the careful study of a subject, especially with a view to discover new facts or information about it. Observation and research are an essential component of personality redevelopment that has several facets to it. Observation becomes relevant only with an open state of mind while research becomes helpful only with an analytical bent of mind.

The triggers for an individual to be motivated to observe and research are rooted in relative success of others and one’s own outlook. At a national level, countries aspire to achieve a national comparative advantage to achieve superior economic growth; but a few countries like India tend to be sensitive, rightly so, to social acceptance of economic platforms. At an entity level, firms seek to achieve firm level competitive advantage to achieve superior business growth. At an individual level, people seek to achieve personalized intellectual advantage to achieve superior career development. These are achieved not merely through past achievements but more through contemporary benchmarking and futuristic aspiration. Korea needed to observe and benchmark with Japan to develop itself as an Asian Tiger. India desires to observe and benefit from multiple national models, from China and Singapore to USA and Japan. The US automobile industry observed and learnt from the Japanese automotive industry to rediscover itself. An NITian (a student of National Institute of Technology) observes and wonders why he or she cannot be better than an IITian (a student of the Indian Institute of Technology). The whole group in any typical class wonders why all of its constituents cannot land themselves into plum jobs offered by Google or McKinsey.

Coincidence, connectivity and correlation

The processes of observation and research have three nuances. These are coincidence, connectivity and correlation. Coincidence is the fact of two things happening at the same time by chance, in a surprising way. Life, it is said, is full of coincidences. The occurrence of someone putting in low effort and achieving high success is more a coincidence than a law (possibly related to a more compassionate evaluator rather than anything else). Connectivity is the state of two things being associated together; it is a state of association by which one causes the other. Passive or active smoking and development of cancer are connected events. Make in Japan is, for example, associated with higher quality and high cost. Correlation is a variable state of connectivity where a change in one factor is accompanied by a change in the other factor. The incidence of diabetes in a society is correlated with an increase in consumption of junk food, for example. The processes of observation and research must learn to differentiate between coincidence, connectivity and correlation. In a meritocracy, getting handpicked for performance based on random interactions would be a coincidence while knowledge and experience would more surely get connected with performance and reward. At a micro level, multiple factors like nature of qualification, type of institution, depth of experience, nature of industry etc., get statistically correlated with career advantage.

While life does have a fair share of coincidences, in so far as performance is concerned, it is best to assume that there can be no coincidence. Many people confuse opportunities with coincidences. An aspirant job-hopper travelling by plane for a scheduled interview may happen to be seated next to a CEO of a different organization in a plane; this “coincidence” may lead to a conversation and a job offer if the CEO is impressed. The opportunity may seem to be a coincidence or a matter of luck but underlying the opportunity lies the ability of the individual to network and impress, the openness of the CEO to be inquisitive, and the willingness of both to make a considered choice. Life may be full of incidents and occurrences like the one mentioned but it is the connectivity between ability and accomplishment that matters. Oftentimes, a simple two factor connectivity may not suffice. In the case of a firm, for example, a firm’s performance may be correlated to its product diversity, geographic diversity, capital expenditure premium talent pool, export share etc., different firms may have different equations of correlation for the same independent variables. Right optics and smart analytics are required to ensure that the processes of observation and research are effective.

Discrimination, differentiation

As an individual observes his or her role model or as an organization observes its industry leader, it is important to develop the right optic (the right sense of sight) to observe, and the right analytics to differentiate between coincidence, connectivity and correlation. Fortunately, both right optic and smart analytics have one faculty in common - discrimination. Discrimination is the ability to recognize differences, and more importantly, the ability to judge the good quality of anything or anyone. Discrimination comes in multiple hues. One set of hues relates to an ability to discriminate between data and information, information and knowledge, and knowledge and wisdom. Another set of hues relates to an ability to discriminate between revenue and profitability, growth and sustainability, market share and revenue share, focus and specialization, and enterprise value and market capitalization. National set of hues relates to an ability to discriminate between economic growth and per capita economic growth, employment and inflation, and economic equality and social equity. Even regulators have the needs to discriminate; for example between monopoly and monopsony, premium and predatory, private weal and public good, and proprietary protection and corporate veil.

The moment an individual, entity or nation decides to become superior, association (and correlation) between enablers and outcomes needs to be established. The correlating variables and the factors of association or connectivity need to be established. The observation and research may lead from the macro to micro as in the case of the Uppsala University’s milk and mortality study wherein the connection between higher milk consumption and higher mortality was first established and then probable contributory causes such as lactose and galactose sugar were later drilled down. In the study of leaders, an association between the leadership styles and firm performance may be first established at a macro level and the more impacting correlations established later. Firms may identify an association between operational excellence and firm performance at a macro level and seek multiple correlations thereafter. The blog post has proposed observation and research, enhanced by right optics and smart analytics and bound together by discrimination as the fundamental tool kit to think beyond coincidence, and establish connectivity and collaboration for development of individuals, entities, societies, and nations.

Posted by Dr CB Rao on November 9, 2014   

     

Economic Independence of India: Need for Multiple Regulators, Three Missions and Three Objectives

As India celebrates the season of sixty seventh anniversary of Indian Independence, there is a new hope and aspiration, which is reflected by the President Shri Pranab Mukherjee who said in his customary pre-Independence Day speech, that the twenty first century belongs to India. The Prime Minister, Shri Narendra Modi, reinforced the message while unfurling the national flag at the Red Fort on the Independence Day with a call to make India strong with economic growth and social equity. A cornerstone of the new aspirations will need to be economic independence for the country. This has a connotation greater than non-independence on economies of other nations. True economic independence means the emergence of a policy structure that rests on the logic of economic growth and social equity than on dogmas like self-reliance or maximizing foreign direct investment (FDI).

True economic independence happens when every adult in every family has a productive and earning job, whether through agriculture, manufacturing or services. The Prime Minister has given a number of inspirational slogans ever since he took office; these could verily serve as credos of development for a New India. Some of these are; ‘Skills, Scale and Speed’, ‘Per Drop, More Crop’, ‘Minimum Government, Maximum Governance’, ‘Come, Make in India’, ‘Zero Defects, Made in India’, ‘Reduce Imports, Maximize Exports’, ‘Zero Defect (of Product), Zero Effect (on Environment), and other exhortations are reflective of Modiji’s passion to develop India as an economic power. To these, if ‘Zero Unemployment, Productive Deployment’ gets added as the exhortation that is translated gainful realization through tangible action it could lead to micro level wealth creation. The issue with economic development is that there tend to be no easy solutions. A holistic approach is needed to make things work for true economic independence.

From licensor to regulator

One of the first tenets of economic liberalization of the 1990s was that licensing stymies industrial and economic development. The two decades of liberalization has demonstrated how unshackling of industries and businesses can lead to unleashing of growth. Two caveats are, however, necessary.  Firstly, growth cannot be fuelled only by continuous removal of licenses or liberalization of investment caps. All said and done, there would continue to exist sectors of strategic importance where licensing or investment controls would be in play. Barring a few such strategic sectors (defence, multi brand retail, railways, insurance and banking, oil and gas, mining, for example), all the rest are probably free of licensing and investment controls but are still anemic in growth for various reasons. Secondly, free market economy does not by itself guarantee non-cartelization nor does it by itself prevent exploitative economics (real estate, for example). There must be an oversight role for the governments, particularly in a huge democracy like India where the disparities in wealth, education and health are three of the most galling pain points.     

At a conceptual level, the governments must move from being licensors to regulators. Regulation commonly is seen as taking care of customer interests through good business practices including pricing. Truly effective regulation goes deeper, with an approach and guidance that ensures quality, innovation and competitiveness. Each of this is an important parameter that must be defining in its essence. National regulatory bodies should have expertise to monitor how various industrial and business sectors are performing in terms of the three parameters and periodically issue guidelines, rules and regulations to course-correct the erring or sub-optimized industries. Regulators, who will be industry specific need to matrix with three pan-industry commissions on each of the three parameters mentioned above; quality, innovation and competitiveness. Three national expert commissions can be conceptualized as discussed below.

Three national missions

Quality, of the product and process, is the key to make India global manufacturing hub. From a situation where the quality standards are derived from the developed world, India must be able to set global quality standards. Looks unbelievable? In the 1950s, setting global quality standards appeared infeasible for Japan and in the 1970s for Korea. Yet, today Japan and Korea lead in quality. Why not, therefore, India? If the Indian industry and talent pool is seen to deliver quality, India would automatically become a global manufacturing hub. For that, the existing base must be developed to reach and set higher standards of quality. A National Quality Mission would be well in order.

Innovation, of the product and process, is the engine of growth. Innovation leads to new products and processes as well as continuous improvement in existing ones. Innovation is commonly seen as a result of research. However, innovation, as with quality, is a matter of mindset. An inventive mindset is required to foster innovation as much as laboratories are required to convert ideation into innovation. For a resource scarce country like India, innovation lies in doing more with less; for example, more crop per drop. The ability to identify sources, uses and forms of innovation is a characteristic of successful nations such as Japan and Korea. India requires a continuous scan of product and process landscape to drive innovation; a National Innovation Mission would help.   

Many times, competition is misconstrued as competitiveness. Competition is simply presence of more players in the industry, which it is hoped will lead to each firm excelling over one another offering improved products or services to customers (it is a hope, not a given!) . Competitiveness, on the other hand, is the ability of a company to excel over the others in the industry in terms of products or services to the customers (it is a demonstrated competency, not a hope!). Mere competition, however high it is, does not guarantee competitiveness; in fact, excessive fragmentation affects viability. Indian airline industry and domestic pharmaceutical industry are examples. Competitiveness builds on quality and innovation with management and leadership processes that assure business growth and sustainability. A National Competitiveness Mission would identify appropriate technical and managerial perspectives.

Three national objectives

There are three beliefs that inhibit the genuine embedding of the three principles of quality, innovation and competitiveness in emerging economies, and these need to be countered by the three expert missions. The first is a sense of false correlation between the product level and quality level. It may be presumed, for example, that a Mercedes Benz E series car is one of higher quality than a lower end popular car. Such thinking leads manufacturers and consumers equate specifications with quality, which is not necessarily right. Each product needs to be designed, manufactured and delivered with a purpose in mind, and quality represents fitness for the purpose as expressed through specifications. The functionality, design principles and quality levels form a total ecosystem, which must be continuously elevated. Whatever be the level of product, the level of quality cannot be compromised. A smart phone and a feature phone are both bound by respective quality parameters as would a blacktopped road and concrete road would need to be. The National Quality Mission would need to embed Quality as a national mindset.    

The second is a belief in generational lag, in products and processes, and in social and industrial infrastructure, almost as if it is a matter of destiny for emerging economies. Domestic governments and consumers as well as foreign investors and corporations believe that the latest technologies must first get embedded in the advanced countries before they can be offered, developed or manufactured in an emerging nation. As a result of this belief, which is driven by technological protectionism of innovating countries and the economic weakness of follower countries, emerging nations tend to be in a perpetual catch-up game in respect of innovation. The National Innovation Mission must continuously explore where, why and how India should leapfrog in innovation rather than be just content with followership.

The third is a belief that competitiveness is a firm level concept, and government has only fiscal policies to improve or reduce competitiveness. As Porter’s study on comparative advantage of nations showed (Michael E Porter, The Competitive Advantage of Nations), certain nations tend to become good, and internationally competitive, in certain industries or businesses relative to others. Governments in India, Centre and States, can integrate infrastructure developmental initiatives with industrial development initiatives as well as social development initiatives to generate competitive advantage at firm level and comparative advantage at national level. The freight corridors that are being developed with Japanese investment could be combined with Indo-Japanese industrial clusters and social communities that provide free flow of technologies and goods and services between India and Japan. The same could be accomplished in multiple manners with multiple nations, in diverse product lines. The National Competitiveness Mission must analyze and integrate the several public, private initiatives to generate national comparative advantage.

Challenges as opportunities

Modiji has exhorted to minimize imports and maximize exports. India imports 80 percent of its crude requirements. India also imports gold, and most of the sophisticated plant and machinery for a wide range of industries. It may therefore look impossible to minimize imports. However, if value added export platform is adopted as the basis, all imports can be exported as value added products; for example, gold as ornaments, and even crude as diesel and petrol, at least to the neighboring nations. Sophisticated plant and machinery may be assembled at site with local content rather than imported as complete built units. This, in turn, requires confidence that the Indian industry is at its pinnacle on quality, innovation and competitiveness.

Skill, Scale and Speed have helped China achieve exactly this, as Shri Narendra Modi aptly observed. China’s acquired expertise in telecom gear, smart phones, fermentation and bullet trains are striking examples. For India to be up to speed on this platform, governments and industries should backward integrate to the fullest extent, in a complete sense. There is certainly utility in indigenously producing new generation products even if in imported equipment, compared to import of the products. However, the full utility accrues when the equipment is also indigenously produced. India, a nation of 1.3 billion people, has now global scale demand levels for a range of products and, therefore, for plant & machinery for such products. It requires holistic planning and execution to recalibrate India on a global scale. The paradigm of industry specific national regulators, and quality, innovation and competitiveness specific national missions have the potential to help translate all of the Prime Minister’s powerful principles into national wealth with social equity.

Posted by Dr CB Rao on August 17, 2014

Space, Time and Effort Management (STEM): A Paradigm for Resource and Performance Optimization

Maximization of performance is a goal avidly pursued by administrators, leaders and managers. Eventually, they discover that maximization tends to bring in other costs that erode the apparent benefits of resource utilization and performance maximization. For example, addictive workaholic behavior without any life balance dimineshes a person's energy levels eventually. All-night studies sap the energy and creativity of aspiring students. Pursuit of revenue maximization per se at any cost has landed many corporations suffer in terms of profitability and even quality. Clearly, unidirectional pursuit of singular objectives in today's multidimensional world leads to suboptimal results.

The world has occasionally discovered, but also has consistently sought to ignore, from time to time, that the earth's resources are finite. Building high for more dwelling accommodation per unit area has been as unhelpful as drilling deep for more massive fuels per unit of industrial and social activity. While concepts such as carbon credits and green building have helped focus attention on newer avenues of conservation, the world continues to splurge money and exploit resources. As a result, several campaigns have been launched by several corporations to confirm their sustainability standing. However, we need to incorporate the essentials of meaningful conservation and true optimization, both as bottom-up and top-down approaches.

Base, apex

The base of conservation lies in an understanding of the principle of finiteness. Expansion of wants and desires from the very young age characterizes a madly consumption society. While consumption is necessary to expand economic activity and drive growth, extravagance and waste are wholly deleterious to the society, diverting scarce resources to redundant production and consumption. The principle of "one need-one item" was the basis of a frugal society of the past. While it would be anachronistic to expect a slip-back to caveman days, there is clearly a need to avoid "buffet spread" culture that seems to dominate all activities and across all sections of the society. Potentially, it would commence from the very early schooling days with lean backpacks but with weighty knowledge.

The leadership pendulum swings between enviable and unenviable positions. In good times, the leadership has the luxury of high living to attract talent while in bad times it squeezes itself and the organization dry. In some cases, leadership focuses on visible cost reductions but ignores the relevance of strategic value additions and plays down the impact of invisible time and effort losses. Responsible leadership views space, time and energy in a stable fashion, in good times as well as difficult times. Large airlines like Kingfisher would not have faced the current crisis had the leadership been appreciative of the fundamental drivers of competitiveness in the volatile airlines industry.

Pull to optimize

The success of the famous Toyota Production System in particular, and the Japanese National System in general, is based on conservation. Compact buildings, single column flyovers, underground cities, over-the-ground bullet trains, avoidance of car transportation in weekdays characterize the national space management ethos. Night time construction, upgrade of machinery, pull-type demand and production planning, just-in-time deliveries and stocking, low inter-machine spacing, multi-level layouts typify wise use of space, time and effort. Interestingly, the Japanese system teaches us that if we plan our space prudently, we will automatically be enabling an optimal use of our time and effort.

To be able to effectively utilize the pull system, several hackneyed concepts such as large shells for future growth, build to inventory, stock to saturate, produce to drive share, and high work-in-process need to be jettisoned. The financial cost of profligacy in industrial infrastructure strikes at the very roots of industrial competitiveness. There may not be one-glove-fits-all solution though. In some cases, vertical planning of space would be ideal while in other cases horizontal expansion could be the solution. To be able to achieve optimal results, however, optimal planning of space, time and effort would need to be the foundation of all industrial and service design.

Conserve more, utilize more

There are essentially two options of space conservation; either compress the space to match optimal utility or expand the space available to generate optimal value. The tablet computer is a great example of the note book computer real estate being cut by half without affecting the functionality. As an extension, if the note book computer has to be better utilized in the space department, at the minimum three displays can be incorporated; the frontal large screening and the base key pad could have two small screens on either side of the touch pad. Or, the bottom base can also be converted into a touch display cum querty screen. Even automobile makers are now rethinking their design paradigms, combining compactness with luxury features. The latest advertisement of Audi, famous for its large, luxury cars, extols the virtues of smallness stating that small spaces need big thinking!

At the core of conservation lies the strategic thinking on the needs. Apple has demonstrated how few models with minimalist designs could achieve market dominance which multiple models with extravagant designs were not able to achieve. This is not to suggest that we need to return to the days of Henry Ford's single automobile or that every product can be multi-functional like an Apple product. Beneath all the extravagance, however, lies the fallibility of chief product designers that attempts overlaying buffers and modules in a please-all effort.

'Operanomics', beyond ergonomics

Extending the example of automobile industry further, it can be seen that the Japanese simple and lean thinking has achieved massive operational flexibility without affecting production scale or productivity. In the 1970s, the popular Western concept for machining of an automobile engine was the machining centre which performed customized multiple operations on the cylinder block and cylinder head with the help of dedicated jigs and fixtures and tools, rotating the two components around vertical axes of the machining centres. This, however, meant that different machining centres had to be designed for different blocks and heads depending on the number of cylinders, bore and stroke and the external dimensions. Apart from the huge dedicated investments such approach entailed, it also made low volume production unviable.

The Japanese hit upon a simple but ingenuous idea of unit operations to tackle this issue. Under the unit operations concept, the machine tool would only do one operation, for example honing of the cylinder bore. While apparently the unit operations approach may seem to ask for more machine tools, the inherent flexibility to turn out cylinder blocks of multiple dimensions and sizes enhances the investment efficiency and competitive advantage of the unit operations approach enormously. Adopting this Japanese approach, a leading Indian automotive manufacturer could manufacture four different series of diesel engines, having wide dimensional disparity and cubic variation from 4 to 10 litre capacity, in one simple machining line.

The Japanese concepts of optimal space, time and effort usage also led to replacement of long lines of sequential machining with one operator per machine to compact horse shoe lines of unitized balanced operations with one operator manning many machines. The skill in this approach lies in splitting the total cycle into unit operations and also balancing the unitized operations to synchronize movement of the workman from machine to machine within the overall line and individual machine cycle times. Examples of other operational economics involve creation of conveyor lines and work spaces around human ergonomics, use of gravity to move parts, color clustering of parts per model, error proofing of components and assemblies, and rapid changeover of giant press tools and fixtures. In addition, the Japanese system never fights shy of stopping a line if it has problems. Here again, the Japanese have an underlying concept of space; the line problems are not to be solved in distant offices but are actually solved closest to the problem area - on the line itself!

STEM, an optimization paradigm

The fundamental building block of all engineering knowledge is the concept of space. An ability to visualize and dimension in space needs to be a virtual intuitive forte of a good engineer or a designer. Over the years, however, the dimension of space rather than the functionality of space started taking control of engineering perspectives. The Japanese society, cramped as it is for space, has given a new meaning to functionality of space. Along with optimal spatial planning came the benefits of optimizing time and effort as a virtual corollary. A well planned facility, which is compactly designed, will be a natural enabler of good ergonomics.

Spatial planning is not all about squeezing things in. Where required, as in the case of highways, roadways, transit points, ports and certain other infrastructure projects spatial planning is all about expansiveness to accommodate future throughput and sustain productivity. It is also about holistic spatial development of core residential or business districts with all amenities and support services built in. USA is a great example of expansive, futuristic spatial development triggering and sustaining orderly growth for decades. The aim of spatial planning must be to optimize transaction times and costs through accessibility.

In order to give a fillip to such thinking, architecture needs to be incorporated as a core course of all engineering curricula. Ergonomics must be expanded to encompass whole lines and facilities as opposed to limited study of optimized man-machine interfaces at individual man and machine levels. Forecasting techniques must focus not merely on demand outcomes but also on activity and churn levels. For example, malls must be designed to offer choice with contiguity, shelf space with footfall estate and display splendor with spatial optimality. Process design must integrate technical elements with ergonomic optimality and productivity efficiency. Machine tools and accessories must be developed to support versatile manufacture with rapid changeovers. Complexity of whole systems must be addressed with simplicity of unit operations.

Human engineering through STEM

Engineering must go beyond providing brilliant technical solutions. Engineering must merge the machine factor with human form and facility infrastructure with social sustainability. Emerging markets such as India and China have traditionally played on the liberal land factor to attract investments. Land, however, is finite. There are already pressures related to extravagant land allocations to developers and miniscule land utilization by them. Understanding of STEM as a paradigm would enable administrators, managers and leaders seek a balance in land allocation and usage. In a larger perspective, STEM leads to resource conservation as a guiding principle all design and development work.

Toyota Prius hybrid car is a great example of human engineering and environmental sustainability where energy and motion are mutually substitutional and synergistic. The value of such pioneering development is being emulated years later by car manufacturers such as Hyundai who swore only by fuel driven cars and debunked hybrids (see their admission while launching Sonata Hybrid car recently). Space compaction, time compression and effort saving when they happen together go beyond conservation of resources; the phenomenon leads to energy recycling. The first step to spur the thinking of young engineers and wise leaders towards sustainable resource conservation is STEM as outlined in this post.

Posted by Dr CB Rao on November 25, 2011

Insights from Maruti-Suzuki Saga : Japanese Management as Indian Ecosystem

When a pioneering institution founded on seemingly impeccable foundations encounters periodic upheavals, the causes could be systemic and often beyond the obvious. The periodic workers' unrest at Maruti Suzuki India Limited (Maruti-Suzuki), India's premiere automobile company draws attention to this. Maruti Suzuki India Limited (initially Maruti Udyog Limited, established in 1981) became a 50:50 Joint Venture (JV) between the Government of India (GoI) and Suzuki Motor Corporation of Japan (Suzuki) in 1983. Establishing a state-of-the-world automobile plant in 1983-84 with Suzuki technology, long before India's economic liberalization of 1992, Maruti-Suzuki had a phenomenal impact on India's industrialization and economic development. It revolutionized India's primitive automobile industry, led the influx of state-of-the-art Japanese automotive and component technologies through scores of follow-on ventures, enabled the Indian industry adopt the famed Japanese management concepts and demonstrated that with aligned vision and goals, public-private partnerships and 50:50 joint ventures can succeed. With the sale of the GoI stake to Suzuki and the public offering, Maruti-Suzuki became a subsidiary of Suzuki, Japan by 2007.

Despite the presence of virtually every international automotive company in India, and despite Suzuki having bought up the GoI share, and the attendant structural changes, Maruti-Suzuki continued to be the market leader in the Indian passenger car market, especially the small car segment. In 2009-10, the company achieved a peak sale of over one million vehicles and a peak turnover of USD 8.4 billion. Against this virtuous performance, the series of strikes affecting the production and climate at Maruti-Suzuki, some dating back to 2000, is indeed distressing. While the current strife is variously attributed to trade union matters, public-private partnership issues, work culture and management methods, and will be resolved sooner than later hopefully, the loss of sheen in the original jewel of India's manufacturing crown has some lessons that are relevant to sustain India's growth as a global manufacturing hub.

Troubling hypothesis

In the words of Mr R C Bhargava, Chairman of Maruti-Suzuki (Interview inThe Hindu Business Line, October 23, 2011), since June 2011 when the dispute started, the Company has lost USD 350 Million. He also said, "Unfortunately, at Manesar, the Gurgaon plant's harmonious work culture has not taken roots. Partly because it's a young facility, the workforce is younger and political influence is much stronger. Also, in 1983-84, when the Gurgaon plant was set up, Maruti was a low-key company, still outside the radar of politicians. But when the Manesar plant came up, it was a part of a very successful industrial establishment. Trade unions like to work in areas where workers are prosperous. How come they are not as active among the unorganised sector? The Gurgaon-Manesar belt is known for industrial unrest, particularly in automobiles, as it is one of the most prosperous sectors".

The above observations of the Chairman of Maruti-Suzuki, who had been with the Company as its Managing Director since 1981 and steered its affairs, including transition from a JV to a Japanese entity from 1983, are troubling. The hypothesis of higher prosperity and greater work force youthfulness leading to greater unionism and higher unrest is both enigmatic and disturbing. The essence of superior management, and everyone agrees that the Japanese Management is top class, is that it should result in greater prosperity for the company and its stakeholders. Clearly, it is regressive to accept a situation where prosperity breeds unrest. We need to understand the efficacy of management system in a national perspective. As India seeks to become a global economic superpower, India needs more than technology and management, probably an entire national ecosystem to achieve its potential and aspiration. The following narration in this blog post is independent of Maruti-Suzuki and does not purport to be of any judgment on the company. Rather it postulates certain essential ingredients of a national strategy to achieve true integration of Japanese Management as a national ecosystem.

Japan, a phenomenon

So much has been written about Japanese management that there is hardly any topic or facet that remains to be identified. A few essentials are, however, spoken about more than the others. These are workplace efficiency (5 S), visual management (kanban), inventory minimization (just-in-time, lean management (Toyota Production System) and continuous improvement (kaizen). The management practices are sharpened by an educational and research system that enables conceptual analysis, scientific advancements and technological inventions. These are well supported by a national work ethic of sacrifice, discipline, fortitude, and orderliness which condition the Japanese to place the society's interest before self. Clearly Japanese management is not merely a set of practices but a total national eco system. This has been tellingly demonstrated in the manner in which the nation responded to the Fukushima nuclear tragedy.

As India moves to become a global manufacturing hub, the country has to reinvent itself completely to inject a degree of sustainability in the global competitiveness. India's intelligentsia, politicians and bureaucrats must recognize that sustainable excellence cannot be achieved in anyone sector in isolation of similar excellence in other sectors. Any outsourcing that occurs to India only on cost arbitrage is unlikely to be sustainable (when a strategic time horizon of two decades or more is considered) unless it is reinforced by value differentiation. If cost competitiveness itself is affected by industrial strife or by hurdles to productivity prognosis could be suspect. That said, it would be insufficient even if R&D outsourcing gets added to manufacturing outsourcing, unless massive systemic upgrades take place in social, educational and economic infrastructure. It would be incorrect, for the same reason, to assume that economic liberalization can by itself be a sustainable engine of transformation.

People at the core

Amongst all countries of the world, India would have the largest proportion of people aged 35 years and below over several decades going forward. This generation, unlike the Japanese society, has two extremes to look at: one, a hugely transformed consumerist affluent HNI (high net worth individual) model and the other, an utterly unchanged impoverished BPL (below the poverty line) model. The largest sections of India's youth will be positioned in between the two models, in quest of an appropriate model to avoid the poverty vortex and attain the affluence peak. While industrial and economic development could provide quick fix, as already demonstrated in China and to some extent in India, sustainable and equitable prosperity requires a distinctive model designed for Indian demographics. The appropriate model would have culture and competency serving as the twin foundations, and aspiration and achievement constituting the twin pillars of socio-economic transformation.

Each of the four factors comprises in turn several impactful dimensions. A positive social culture emerges from equality, equity, integrity and empathy. A positive competency set comprises knowledge, application, improvement and innovation. Aspiration is more than a dream; it has awareness, competitiveness, mission and passion. Achievement has, in addition to result, reward, recognition, and growth. An intellectual and egalitarian society with a strong work ethic, more often than not, has all the above elements. The Japanese society comes closest to the above model, which probably explains why Japanese management has become so successful in that particular society. While Individual enterprises that embraced Japanese technology and management have been shining examples of individual success with some collective positive impact on the local industry and economy, in countries as different as India and America, they have not been nationally transformative. That is because the people factor still needed to be addressed in totality.

Education and experience

Japanese management has arisen out of the traumatic experiences of a war ravaged nation seeking survival, reconstruction and competitiveness. As the aftermath of World War II posed stark pressures the Japanese society complemented its work ethic with innovative edge to become globally competitive in just two decades. This suggests that people missions forced by experience often succeed in the face of adversity. Sustainability, however, accrues only through right education and research. During the very same period, Japan overhauled all of its educational and research systems to focus on science and technology, and research and innovation. As a result, a competitive and profitable industry got the right base of human resources to invent new products and efficient processes to place Japan in the top spot. Decades of economic stagnation may have raised questions about Japanese economy but the continuance of Japanese competitiveness despite the very same economic adversities reflects the sustainability of its ecosystem.

India needs teachings of both experience and education to ensure sustainable global competitiveness. Experience teaches that outsourcing services based on insourcing of factor inputs is not a hugely sustainable paradigm. For example, India is far more competitive in trucks where it has achieved high indigenization than in cars where it has high import dependence. Wherever people advantage is supplemented by domestic equipment and material supplies and indigenous process technologies, India could achieve the highest levels of competitiveness globally; bulk drugs and formulations are examples. The implication is clear; India needs a revitalization of its capital goods, raw materials and component industries to achieve sustainable competitiveness. Similarly, the advanced Japanese, Korean, American and European educational teaching and research systems teach us that cutting edge research is the basis of new start-up technologies. While the Indian Institutes of Technology (IITs) are famed globally, it is the student stock than the intellectual property base that has received global recognition. IITs have had centers of excellence in certain disciplines such as microwave engineering, ocean engineering, biotechnology, mainframe computing, artificial engineering, and more recently, nanotechnology. The emergence of new sciences and technologies is tied to exploitation of such infrastructure.

Creating a new ecosystem

Creating a new ecosystem that achieves an optimal combination of culture, competency, aspiration and achievement is not the sole responsibility of the Indian educational system; nor is it within its means. It is a combined responsibility of all the institutions, educational, industrial and governmental institutions and the social, economic and political systems. At one level, the task would appear too massive to even think of attempting it. On the other hand, the mammoth task can be broken up into several manageable sub-tasks such as driving an Indian cultural renaissance through the educational system, enhancing the institutes of higher learning for cutting edge research, campaigning socio-politically for high national achievements and providing multiple avenues for recognizing performance.

A novel way to address this fundamental and overarching requirement could be through institutionalization of power and responsibility to drive such a transformation. Expert agencies could be created for drawing up of curriculums of Indian culture with all the wisdom of centuries updated with requisite modernity. Educational institutions could modernize the syllabi each year to incorporate modern developments on a real time basis. Industries can aim at developing new capabilities in import substitution. Individuals can be encouraged by family elders and institutional leaders to inculcate positive aspirations from the beginning. And finally, growth and development need to be expressed in more tangible metrics in shorter time frames to motivate the society that India can transform itself.

From management to ecosystem

If Maruti-Suzuki and other new car and component companies, with their Japanese technologies and management practices, could transform a dilapidated automotive industrial structure of India into a globally scaled and technologically vibrant industry, there is no reason why a larger adoption of a total national ecosystem concept cannot have a more impactful and more expansive transformation on the Indian industry and economy. Fundamental changes have to be engineered at the social and educational levels in parallel to industrial and economic initiatives to achieve a total transformation towards a Japanese style ecosystem with Indian ethos.

Posted by Dr CB Rao on October 24, 2011

India’s Economic Independence: Minimal Imports and Maximal Exports

I feel privileged to script this post on India’s Economic Independence, coinciding with India’s sixty fourth anniversary of its historic independence on August 15, 1947. This also happens to be my one hundredth post in my strategy blog titled “Strategy Musings”. Starting on October 22, 2008 with my first ever blog post titled “Infrastructure Strategy: Key to Economic Revival” it has been a highly compelling and satisfying journey of a hundred serious essays on corporate strategy, competitive strategy, strategic management, leadership strategy, organizational behavior, economic strategy, general management, leadership tributes, corporate governance, entrepreneurship, ethics and values, operational excellence and several other domains of interest in strategy and economy. Each of the blog posts has sought to acknowledge and review some of the greatest prior art on each subject while adding a substantial new body of knowledge through my original thinking. As a result, in a relatively short span of less than thirty five months, the 100 strategy essay portfolio of around 3.5 million words has been created with diligence and dedication to develop and institutionalize multidisciplinary knowledge in the field of strategy. I would like to believe that this level and intensity of serious essay writing in the field of strategy, in the relatively short span of time is probably unparalleled in the sphere of digital blogging or physical publishing.  

The current blog post is not merely thematically appropriate in the context of India’s celebration of the country’s Independence Day but also strategically essential, even more so, for imbuing the true meaning of independence for the Indian society. After over six decades of independence and nearly two decades of economic realization India has come into global reckoning for its competitive capabilities in a wide range of domains, not limited to information technology; and more significantly is being positioned as the third largest economy by 2035. It would, however, appear that much of the proposition is based on the near doubling of growth rate in the gross domestic product (GDP), and not based on the ability of the Indian economy to grow without foreign direct investments or import of foreign technologies, and with organically generated trade surpluses, savings, capital formation and indigenous technologies. India, as an economy, and its stock markets as a barometer of industrial health have been acutely dependent on foreign investments whether in primary industrial activities or secondary stock markets. The key question is whether the broader economic fundamentals of India are truly robust and whether the industrial parameters are genuinely self-sufficient. This blog post argues that India’s independence has true meaning with only economic independence and identifies the essential route to achieving it with positive trade balance.

Macroeconomics of India’s growth

India’s growth story rests on its vigorous GDP growth rates. The world first took note when India posted a record GDP growth rate of 9.6 percent in 2006-07, and followed it up with a similar growth rate of 9.3 percent in 2007-08. Even in the highly turbulent period of global meltdown, the Indian economy continued to post high growth rates of 6.8 percent in 2008-09 and 8.0 percent in 2009-10. However, there is concern that the growth is now projected to hover around the same levels at 8.5 percent in 2010-11 and at 8.2 percent in 2011-12, despite the relative easing of global liquidity and the global recognition of India’s global potential. In the context of the concerns of sovereign debt globally, India’s public debt as a percentage of GDP has been 56 percent, well below the level of even advanced nations but certainly needs to be improved further. India’s external debt as a percentage of GDP has hovered at around 18 percent and this also needs improvement. Accelerated inflation, decelerated investment and slowed down reforms have contributed to the slowdown in GDP growth rates over the last two years. Inflation ought to be lower than 6 percent while it has been in excess of 10 percent. Fixed investment rate has to be more than 33 percent of the GDP while it has been lower than 30 percent. Domestic savings rate of more than 40 percent of the GDP is desired while the recent rate has been less than 34 percent. The combination of the target rates in the three structural parameters would have resulted in GDP growth rates in excess of 9 percent while the actual rates have fetched lower GDP rates of around 8 percent.  

The key sectors of the Indian economy comprise agriculture, mining, manufacturing, energy, construction, financial services and non-financial services, each with allied activities in the respective folds. Amongst all the sectors, agriculture has been a laggard in growth rates, with volatility related to high or low rainfalls, relative to the other sectors. A simple econometric model suggests that if the various sectors of the Indian economy achieve simultaneously the individual sector peak rates achieved in any of the last five years, such as 6.5 percent in agriculture, 7.5 percent in mining, 14.5 percent in manufacturing, 9.5 percent in energy and water, 11.0 percent in construction and 14 percent in financial and non-financial services each, the overall GDP growth rate of the Indian economy would be in excess of 12.0 percent per annum. Simultaneously, central and state finances have to be managed such that social sector investments and subsidies are appropriately cross-managed, oil sector charge on the economy is minimized, public debt is kept under check, and revenue leaks and expenditure spillages are avoided. A robust macro-economic framework which maximizes sector growth rates, maintains inflation at moderate levels, spurs domestic savings and enhances gross fixed investment is essential to keep the economy on the high growth path.

Need for microeconomic strengths

Macroeconomic strengths of a nation are a resultant of its microeconomic vitality. While macroeconomic policies do have an impact on the microeconomic fundamentals, be it industrial output, consumption patterns, savings and expenditure profiles and foreign trade balance, microeconomic fundamentals have a unique input mix and output profile. At the core of microeconomic vitality is the level of intrinsic industrial competitiveness. Microeconomic vitality is reflected in terms of positive trade balance. The higher the positive trade balance, the higher is the microeconomic strength. India’s liberalization model which is based on large bouts of foreign direct investment for primary industrialization and high levels of foreign institutional investments for market capitalization of industries does not necessarily lead to intrinsic microeconomic strength. Despite high economic growth rates, India has been having continued trade deficits over the years. Though in July 2011, India’s exports registered a steep 81.8 percent growth to touch USD 29.3 billion, the imports also increased by a hefty 51.5 percent to USD 40.4 billion, resulting in a net negative trade balance, or trade deficit, of USD 11.1 billion. Cumulatively too, in the period April-July 2011, exports grew by 54 percent to USD 108.3 billion and imports grew by 40 percent to USD 151 billion, resulting in a cumulative trade deficit of USD 42.7 billion.

Much of the recent growth in exports has been derived from a sterling performance of sectors such as engineering, petrochemical products and gems and jewellery as well as greater channeling of exports to Africa and South America. The model of FDI triggered industrial development has its own contribution to microeconomic sub-optimization. Many times FDI is accompanied by massive imports of technologies, equipment and key input materials as well as repatriation of profits leaving the net capital retention in the country at a minimal level, possibly limited to the low levels of value addition in the country and meager profit levels. This has been well demonstrated in a host of import dependent industries from automobiles to oil exploration. This, of course, is not in any way inimical to the national interests per se, and is actually positive for the number of new jobs such FDI creates for the economy and the society. However, the several multiplier impacts of greater generation of local value addition through indigenous technologies, equipment and materials would be unquestionably higher. Low operational cost curves based on greater indigenous inputs would lead to greater industrial competitiveness, and positive trade balance. Macroeconomic policy should go beyond gross growth rates and identify ways and means by which microeconomic fundamentals of the economy and industry can be strengthened.

Competitiveness handicaps

India’s competitiveness handicaps follow the initial post-independence strengths. While the socialistic policies set by India’s first prime minister Pandit Jawaharlal Nehru have been criticized by many a liberalization expert, there is no doubt that the early policies were indeed instrumental in creating the basic industries of steel, engineering, machine tools and aerospace in the public sector. Where the policies erred were in terms of severe capacity regulations, bureaucratic controls on every aspect of industry and business, denial of similar opportunities for the private sector, and the shared diffidence of both the industry and the government towards fundamental innovation, high precision, quality and reliability and pricing to enable continuous reinvestment. Another two major gaps were in terms of ignorance of the need to create a similar base in the electronics, telecommunications and computer hardware on one hand and non-application of modern preservation, mining and extraction technologies to utilize the country’s abundant onshore and offshore natural resources for self-sufficiency and competitiveness. As a result, India’s competitiveness became to be dependent on import of technologies, equipment and quality materials. This dependency cycle does not seem to have been broken despite the two decades of liberalization. For example, while the Indian automobile industry now appears to be scale-optimal and self-sufficient, each new generation of vehicles in the premium sector comes with high import content.

Today, the policy makers and strategists must seriously debate if the continued import dependence is still a function of scale, matter of user mindset or simply lack of dedication to development of world-class technologies and equipment which result in high quality and rigorous precision. Several Indian industries today, from automobiles to pharmaceuticals, from construction to transportation and distribution to retailing have aggregate scales of operation ranking among the top 5 to 10 rankings in the world, in physical volume or unit terms. It is time that the basic producers and the end-users, whether of materials or equipment, collaborated to localize technologies, equipment and materials in advance to support new generation products. This would also require a move away from a total reliance on cost to a reasonable positioning for value; for technology also demands its price to innovate and manufacture to high standards. In a more perfectly globalized world, which would occur when the BRICS countries achieve the developed nation status, competitiveness would not be solely on the basis of manufacturing commoditized products for the current developed nations at low costs. Rather, it would be in terms of having alternate innovator products, developed, manufactured and marketed, simultaneously in a larger basket of nations, just as it currently occurs amongst US, EU and Japan. To be illustrative, if a new generation of iPad were to be made five or ten years later there would be a very good possibility of such a breakthrough product being designed and manufactured, through respective innovative technologies, in each of the BRICS countries as much as in US, EU or Japan.    

Minimal imports, maximal exports

If India needs to be strong on both macroeconomic and microeconomic fundamentals, the government and the industry would need to pursue a strategy of minimal imports and maximal exports. For example, the entire import basket needs to be scrutinized to classify the products in terms of scale of demand and feasibility of import substitution. In the liberalized economy a whole lot of goods are being lavishly imported to meet the needs of a consumption oriented economy. From furniture to fixtures and from tiles to textiles, importation has become a lifestyle trend. India has in it all the capabilities to reverse such trends and become actually a net exporter of such items through higher emphasis on design and manufacture for precision, quality, and finishes. As India grows, several sectors such as infrastructure and transportation would be upgraded with overseas participation. Due care must be taken to provide a level playing field to Indian companies to participate in this development space. Similarly, in the precision equipment space, Indian industry must be prepared to make the necessary investments to develop and produce precision machine tools and other equipment as well as dies and tooling, and jigs and fixtures. Indian industry must not only embrace newer materials but also introduce modern material casting, forming and machining technologies to reinforce the edge in electrical, electronic and mechanical industries.

Similarly, the entire industrial basket needs to be reviewed to maximize exports. The experience of Japan and Korea suggests the need for an export oriented industry in India which derives at least 50 percent of its total output from direct exports or distributed production in several host countries. The biggest challenge in a new export paradigm for India would be the strengthening of small, medium, large and mega enterprises with clearly differentiated strengths and responsibilities. Today’s environment encourages the small and large enterprises in India to compete with each other in the same market space, the former only on price and the latter only on features. For example, it is not uncommon to see the largest integrated national pharmaceutical firm and the smallest formulator of medicines to compete in state tenders for medicines. In the bus body building, roadside garage builders and technology-intensive bus makers compete for the same space of transport operators. The current mindlessly fragmented and competitive industry structures of India need to be redefined with mega and large corporations utilizing medium and small enterprises for provision of systems and components. By this system, components and systems of low overhead small and medium enterprises would remain cost-competitive and get integrated within the global manufacturing and marketing capabilities of large and mega corporations for a win-win global export impact. For example, in this system the large scale textile firms such as Raymonds, Digjams and Reliances on one hand and the small scale apparel makers of Tirupur, Coimbatore and Ahmedabad on the other hand would not compete with each other in the same global markets; instead the latter would form a part of an integrated export value chain that provides greater competitiveness for the larger firms.   

Trade surplus as a comparative advantage

Michael Porter proposed that just as firms seek and possess competitive advantage, nations are often endowed with and possess comparative advantage as a national phenomenon. For example, Brazil and Colombia may possess comparative advantage in coffee while China and India may possess similar comparative advantage in tea. If India needs to be successful in its quest for global economic dominance despite similar competitive aspirations from other countries the governmental policies and industrial strategies must target generation of trade surplus in each industry not merely as an industrial or corporate competitive advantage, but more as a national comparative advantage. Though export-import balance may seem like an industry or firm level competitive capability, it has a larger macroeconomic advantage. Sustained and continuous trade surplus enables the nation and industry to generate the surpluses needed to reinvest in product innovation and facility upgrades without dependence on external aid or overseas investment which invariably come with tie-in imports. Cumulative trade surplus, accumulated at the rate of say just USD 15  billion per month (as opposed to current trade deficit of USD 10 billion per month) would lead to current foreign exchange reserve level of USD 317 billion in less than two years even without any FDI inflow at all.

More than the macroeconomic numbers, the industrial strength and vitality that gets established through a trade surplus situation provide a virtuous cycle of innovation and manufacturing for global marketing advantage for India. It is possible that an export oriented economy will be sought to be equalized in the global foreign exchange scenario through an appreciating Rupee; however, the benefits of continuing trade surplus far overweigh the risks. For example, trade surpluses coupled with FDI could lead to high gross investment levels of over 50 percent of GDP, as opposed current 30 percent odd levels. Competitive and expanding industrialization would lead to greater urbanization, and spread of urban lifestyles into rural areas as is happening in China, leading to greater number of jobs and increased incomes and consumption profiles. A strategy of minimal imports with maximal exports requires all-round improvement in infrastructure - educational, residential, medical, transport, energy and telecommunications - based essentially on indigenous equipment as much as possible. This would help the nation be not only more productive but also enlarge the price-cost gap for the benefit of infrastructure operators, and enhance the trade surplus for the benefit of the nation.

India’s tryst with destiny

Pandit Jawaharlal Nehru, India’s first Prime Minister, in his speech to the members of the Constituent Assembly at the midnight of August 14, 1947 spoke of India’s tryst with destiny. Nehru’s speech that night ranks as his best speech ever, full of passion and dedication, with continuing relevance, as some extracts reproduced below show.  

Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom. A moment comes, which comes but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance. It is fitting that at this solemn moment we take the pledge of dedication to the service of India and her people and to the still larger cause of humanity. At the dawn of history India started on her unending quest, and trackless centuries are filled with her striving and the grandeur of her success and her failures. Through good and ill fortune alike she has never lost sight of that quest or forgotten the ideals which gave her strength. We end today a period of ill fortune and India discovers herself again.

That future is not one of ease or resting but of incessant striving so that we may fulfill the pledges we have so often taken and the one we shall take today. The service of India means the service of the millions who suffer. It means the ending of poverty and ignorance and disease and inequality of opportunity. The ambition of the greatest man of our generation has been to wipe every tear from every eye. That may be beyond us, but as long as there are tears and suffering, so long our work will not be over. And so we have to labour and to work, and work hard, to give reality to our dreams. Those dreams are for India, but they are also for the world, for all the nations and peoples are too closely knit together today for anyone of them to imagine that it can live apart. Peace has been said to be indivisible; so is freedom, so is prosperity now, and so also is disaster in this one world that can no longer be split into isolated fragments.

The future beckons to us. Whither do we go and what shall be our endeavour? To bring freedom and opportunity to the common man, to the peasants and workers of India; to fight and end poverty and ignorance and disease; to build up a prosperous, democratic and progressive nation, and to create social, economic and political institutions which will ensure justice and fullness of life to every man and woman. We have hard work ahead. There is no resting for any one of us till we redeem our pledge in full, till we make all the people of India what destiny intended them to be. We are citizens of a great country, on the verge of bold advance, and we have to live up to that high standard. All of us, to whatever religion we may belong, are equally the children of India with equal rights, privileges and obligations. We cannot encourage communalism or narrow-mindedness, for no nation can be great whose people are narrow in thought or in action. To the nations and peoples of the world we send greetings and pledge ourselves to cooperate with them in furthering peace, freedom and democracy. And to India, our much-loved motherland, the ancient, the eternal and the ever-new, we pay our reverent homage and we bind ourselves afresh to her service. Jai Hind [Victory to India].

As India completes sixty four years of independence and enters the sixty fifth year, it is evident that the great role for India, envisaged by Mahatma Gandhi, the Father of the Nation and Jawaharlal Nehru, the architect of the modern India, is getting to be fulfilled. There is still substantial work to do. Indian independence can fulfill its full potential only with economic independence, marked by a disease-free, strife-free and happy nation. Some thoughts of this blog post, scripted with best wishes for a happy, independent India, that focus on innovation in design and manufacture to achieve global competitiveness through precision, quality and finishes, should make India economically independent, and provide real fulfillment for the dreams and aspirations underlying in the Indian independence.

Posted by Dr CB Rao on August 14, 2011  

      

Cementing the BRICS : Strategy, Structure and Execution

The world's five largest emerging economies, Brazil, Russia, India, China, and, for the first time, South Africa came together in the week of April 11 in Sanya, Southern China to form an expanded five-member bloc known as the BRICS. The heads of state and government of BRICS, Brazilian President Dilma Rousseff, Russian President Dmitry Medvedev, Indian Prime Minister Dr Manmohan Singh , Chinese President Hu Jintao, and South African President Jacob Zuma gathered for what definitely has been a watershed moment in the quest of the five nations for a bigger say in the global economic and financial architecture, and delivered the Sanya Declaration of BRICS partnership. Political and economic analysts have placed significant emphasis on the new grouping that is set to emerge, despite the cultural, geographic, political and economic differences the countries have. They see the growth of the BRICS as an important attempt to create new centers of influence and prevent domination of the world economic order by one or two major players.
The five countries are loosely joined by their common status as major fast-growing economies that have been traditionally underrepresented in world economic bodies, such as the IMF and the World Bank. With the G-20 group of major economies, dominated by the current most developed nations, seeking to remake parts of the global financial architecture to stabilize their own skewed economic systems, it is time for the BRICS group to test whether they can overcome internal differences and act as a bloc pursuing common interests. Though largely an ad-hoc grouping at present, BRICS has the potential to emerge as a new force in world affairs on the back of the massive share of the block in global population and economic growth. With the inclusion of South Africa, the group accounts for 40 percent of the world's people, 18 percent of global trade and about 45 percent of current growth, giving BRICS formidable heft when dealing with the developed economies. The success of this endeavor would, however, depend on the strategy-structure-execution mechanisms that can reinforce the strengths, overcome the differences and create synergy.

Differences and commonalities

Each nation of the BRICS block has its own geographic uniqueness, cultural ethos, political systems, economic profiles and social moorings with great diversity caused by centuries of independent and colonial evolution. All the countries broadly support free trade and oppose protectionism, although China in particular has been accused of erecting barriers to foreign competition. In foreign affairs, they tend toward nonintervention and oppose the use of force: Of the five, only South Africa voted in favor of the Libyan no-fly zone. While the economies of Brazil, Russia and South Africa are driven largely by raw material exports, India - poised to be the world’s third largest economy - and China - already the world's second-largest economy - are oriented more toward manufacturing and services. Brazil and India are also concerned over large trade deficits with China that critics say are supported by a deliberately undervalued Yuan. Politically, Brazil, India and South Africa are functioning democracies, while China, and to a lesser extent, Russia, are authoritarian states characterized by heavy government control over the economy and civil society.

In today’s world, however, resource capability, economic policy and social aspirations have emerged as the major factors of comparative advantage circumventing the other differences. BRICS nations view the subtle and not so subtle campaigns of excessive consumption against their development efforts by the developed nations as palpably unfair. The very lack of a common cultural, political or geographical identity positions BRICS as a new type of grouping forged by nontraditional concerns such as trade barriers and monetary policy. A key concern for BRICS now will be stemming inflation and pushing back against debt-fueled expansionary monetary policies being pursued by developed nations that now suffer from negative or anemic growth. With about 40 percent of world reserves, led by China with USD 2 trillion, and the relatively recent unfolding of manufacturing and economic power by India and Brazil, the BRICS countries share a concern over exchange rate volatility and macroeconomic instability in the developed world. Other priorities include reducing economic imbalances and volatility in commodity prices, pushing for even greater influence in the United Nations, World Bank, IMF and other international bodies, and gaining a say in the potential introduction of new reserve currencies, possibly including the Chinese Yuan in the near term, and presumably the Indian Rupee in the medium term.

Development profiles

The BRICS countries vary significantly in their economic profiles (data courtesy World Fact Book). China leads the pack with GDP (PPP) of USD 10 trillion, with India following at USD 4 trillion, Brazil and Russia at USD 2.2 trillion each, and South Africa at USD 0.5 trillion. There is, therefore a 20X factor between the different ends. In global rankings of GDP, China ranks high at 3, Russia at 7, India at 12, Brazil at 18, and South Africa at 123. In population too, China leads at 1,336 million, followed by India at 1,210 million, Brazil at 203 million, Russia 139 million and South Africa at 49 million. In terms of per capita GDP (PPP), however, Russia leads the BRICS block at USD 15,900 followed by Brazil at USD 10,900, South Africa at USD 10,700, China at USD 7,400 and India at USD 3,400, reflecting the different levels of income inequities that exist within the block and in each country (and also, therefore, the growth potential of India in particular). It is, however, forecast that India would not only overtake China in population by 2025 to become the most populous country of the world but also overtake several other counties to become the third largest economy by 2035, behind only the USA and China. The only threat could be a high rate of inflation in India which hovers around a recent average of 12 percent, compared to 5 to 7 percent of other countries.

The demographic advantage favors the larger BRICS countries. China leads the world with a labor force of 780 million, followed by India at 478 million while Brazil, Russia and South Africa have labor forces of 104, 76 and 17 million respectively. The biggest demographic advantage, however, lies with India with the claim to having the world’s youngest population base. India leads the world with the highest percentage of population below 15 years of 30 percent, followed by South Africa at 28, Brazil at 26, China at 18 and Russia at 15 percent. The median ages of these countries are 26, 25, 29, 36 and 39 respectively. Clearly, there is a significant potential in each of the BRICS economies to power economic growth with greater production and consumption capabilities of population. China with the highest gross fixed investment of 48 percent of GDP has demonstrated how investments in infrastructure can boost economic growth. India follows at 32 percent while the other three countries are around 19 percent. In fact, it is considered that China’s investment and liquidity policies in the global meltdown of 2008 and 2009 stabilized the world financial and trade systems to an extent. India also stayed strong with prudent fiscal and liquidity policies. Yet, the high level of public debt (as a percentage of GDP) could be a spoiler for India and Brazil at 56 and 61 percent respectively while Russia, China, and South Africa fare better at 10, 18 and 33 percent respectively. There is no doubt in the overall that BRICS countries not only weathered the economic crisis that originated in the developed world and spread contagiously but also led the global recovery with their economic growth.

Resource endowments

The BRICS countries represent a significant land mass and natural resource bank. The aggregate land area of BRICS is 39.72 million square kilometers, with Russia leading the block at 17.10 million square kilometers, followed by China at 9.60, Brazil at 8.51, India at 3.29 and 1.22 million square kilometers respectively. The natural resources that are discovered and utilized in the huge land mass of BRICS is perhaps insignificant compared to the intrinsic, and latent availability. BRICS countries enjoy relatively complementary resource profiles, which paves the way for even more cooperation. Russia is verily the world's energy reservoir with rich oil and gas resources. Brazil is probably the world's largest raw material base abounding in agricultural commodities and select metals, led by iron ore. China is not merely the world's workshop with a strong manufacturing sector but also has rich coal and rare earth resources. India is billed as the world's back office for its highly professional employees in IT and service sectors but is now developing into a major manufacturing base backed by agricultural, mineral, metal and energy resources, which are getting to be known for their development potential only now. South Africa is most well known for its platinum, gold, diamond and chromium resources but has several other mineral and metal resources. The BRICS countries are also famous for their respective major hotspots of biodiversity.

Traditionally, resource rich economies have built economies around agriculture and mining. This has posed its own challenges in terms of adverse environmental impact and narrow definition of economic activity. The natural resources are strategic resources and need to be exploited for economic development but also need to be renewed for environmental sustainability. It is but natural for each country of the BRICS block to try to reverse such trends and diversify the economic base, including by forward integration or backward integration as applicable. Some such trends are already visible. China, for example, has imposed controls on export of its rare earths and is possibly seeking to build value through own manufacture of electronic and other sophisticated products incorporating rare earths. South Africa has deemphasized gold mining rather than apply technology to develop the resources further in a people and environment friendly manner. India is keenly attempting industrial expansion through access to, and exploitation of energy resources. Brazil has also built its industrial base around its natural resources rather than other externally available inputs. China has been an exception with massive export-oriented and outsourcing-driven manufacturing operations for the entire globe.

Battling inflation, reigning deficit

The liberal monetary policy adopted by the world's major economies during the financial crisis has largely increased global liquidity, leading to asset bubbles, budget deficits and imported inflation. BRICS countries have been no expansion with their expansive monetary and fiscal policies which have also pushed up inflation and fiscal deficit. The latest political unrest in Middle East and North Africa as well as Japan's earthquake and the subsequent nuclear crisis have also pushed the prices of large commodities such as oil to high levels. To avoid hard-landing of the economy, the BRICS countries are gradually withdrawing from their stimulus policies and starting to take measures to curb inflation and reduce fiscal deficit. The global financial crisis has also triggered widespread reflection on the former economic development mode not only in developed countries, but also among BRICS countries. BRICS countries probably now realize the non-sustainability of the past development paths, and have started to restructure their economies. China for instance, is entering a new phase in its development: a structural shift from an export- and investment-led economy to one driven by domestic consumption. Property tightening measures, healthcare reforms, low-cost housing programs and continued transportation spending are key to the government's efforts. In addition, weak global demand and rising wage demands are pushing the country to move away from the export-driven model that features low added value.

In Russia, heavy reliance on energy and raw material exports makes its economy vulnerable to outside risks. The Russian government is speeding up structural reforms and investing heavily on high-tech and innovative programs such as energy-saving, aerospace, nuclear energy and medicine to cultivate new industries to drive economic growth. India benefits from the flourishing IT and service sectors, yet poor hardware and infrastructure hamper its further development. The wide rich-poor gap and erosion of resources are also the government's pressing concerns. The Indian government has been introducing a series of supportive measures to make better use of its demographic dividend to further develop manufacturing, and is planning to introduce more favorable polices for foreign investment in a wide range of sectors, including infrastructure. Brazil's economy has been relying heavily on bulk commodities, but now it is trying to shift its focus on exports of commodities and services with high added value. The government is pushing the speeding-up of industrial technological innovation, opening up the market, encouraging competition, and improving infrastructure. South Africa puts manufacturing, infrastructure and clean energy as the focus of development, and expects to increase employment through a more equal and reasonable growth. In addition, all the BRICS countries are taking policy measures to reduce inflation and tone down budget deficits. These measures, though are welcome and appropriate in each country context, may not fully optimize the potential of the BRICS block as a whole. The Sanya Summit of the BRICS leaders hopefully has been the first step in that direction.

BRICS, strategy and structure for execution

BRICS as a block needs to go beyond conventional country-specific economic strategies. The fundamental premise should be to take advantage of complementary strengths and overcome individual country weaknesses. The foundation for such a strategy would be in terms of developing a complete inventory of natural resources in each of the BRICS countries. This should be followed by, or even simultaneous with, a perspective plan for the use of resources within the BRICS block based on a strategic industrialization plan. Once the industrial development cum resource consumption plan is finalized, the countries should implement exchange of technologies and people to fully optimize the mutual capabilities in natural resource development and utilization. Complementary resource strategy should be accompanied by a dovetailed industrial strategy whereby each country would supplement each other’s strengths instead of using them as competitive weapons against each other. It is appropriate, for example, for any BRICS country other than India and China not to develop and manufacture pharmaceuticals, and instead rely on India and China for the entire needs of pharmaceuticals for BRICS. Within that framework, China may choose to rely on India for pharmaceutical formulations and India may choose to rely on China for biopharmaceutical APIs. India may help Brazil and South Africa in building local automobile industries in a more cost-effective manner than the developed world would do. China could help India and other countries with bullet trains and other infrastructure projects. Russia could make available its vast oil and gas reserves to BRICS countries and also help the others in oil and gas exploration. Civilian uses for the Russian defense technologies could be another area of great relevance. South Africa could provide its mining and food processing capabilities to other nations. In essence, each country should offer its national comparative advantage to the other countries in the BRICS block.

An elevated strategy such as this would need a permanent administrative structure and robust execution methodology to succeed. While leadership summits are important, they are not sufficient. A standing BRICS strategic council with its own administrative secretariat needs to be created. The strategic council should have a virtual location (with summits taking place in all countries) while the administrative secretariat should have a central location with regional headquarters. The strategic council should have senior ministerial representation (including prime ministers and presidents) from all the countries while the secretariat must have administrative and business leaders from all the countries. Like the top-ranking international bodies, the councils should have charters, budgets and full complement of employees from the BRICS block. The principal objectives of the secretariat and council should be to draw up charters, strategies and plans, develop enabling policies and monitor implementation. Supplemental institutions such as an economic policy institute, an intellectual property council, an apex financial institution and an integrated trade body for BRICS would provide the needed institutional support. The economic policy institute could determine appropriate inter-linkages in economic policies within BRICS, including setting of central bank rates and exchange rate mechanisms. Exchange programs in science, technology and education under the aegis of intellectual property council could accelerate research and education. An apex financial institution could start with a corpus and direct the available liquidity within the BRICS countries, and from outside to facilitate infrastructure projects in the needy BRICS countries. The integrated trade body could help duty-free or duty-balanced movement of raw materials, components and finished goods within the BRICS block to ensure competitive manufacture for domestic as well as international consumption. It could also enable intra-BRICS technology transfer arrangements.

BRICS, a new paradigm of high potential

Rarely, a configuration of countries has been formed which is not bound together by geographical proximity or economic vintage or even by considerations of hegemony. It is remarkable that the BRICS country-comity platform has mirrored the economic growth potential of the five of the leading emerging market economies of the world, namely China, India, Russia, Brazil and South Africa. With appropriate strategy, structure and execution mechanisms as outlined in this blog post, each constituent country of the BRICKS block and BRICS as a block would be well poised to exceed the growth potential that they have, both individually and collectively.

Posted by Dr CB Rao on April 17, 2011