Are Indian Investors Barriers To Visionary OEM Investment?

India stands at a critical juncture where its economic future hinges on strategic investments in Original Equipment Manufacturers (OEMs). 'Make in India' initiative was launched in September 2014 as a part of Government of India's renewed focus on manufacturing. The objective of the Initiative is "to promote India as the most preferred global manufacturing destination."

Despite the clear advantages of bolstering the manufacturing sector, Indian investors have often been hesitant to engage with OEMs. This reluctance is rooted in a lack of visionary thinking that fails to recognize the long-term benefits and strategic importance of manufacturing.

India’s economy, though growing, faces significant challenges, particularly in job creation. With millions of new entrants into the labour market each year, the pressure to generate employment is immense. The agricultural sector, which employs a large portion of the workforce, remains inefficient and unable to absorb the surplus labour effectively. Shifting this labour to manufacturing and services is crucial for economic stability and growth.

India's manufacturing prowess is pivotal for several reasons:

Job Creation: Manufacturing can absorb a large number of low-skilled workers, providing much-needed employment opportunities.

Economic Diversification: Relying solely on high-skilled services limits economic resilience. A robust manufacturing sector can buffer the economy against global market fluctuations.

Geopolitical Strategy: A strong manufacturing base enhances national security by reducing dependence on foreign goods and technologies.

Investor Hesitance

Indian investors' reluctance to invest in Original Equipment Manufacturer (OEM) startups, despite the Make in India initiative, can be attributed to several factors that create barriers to aligning with national objectives. Here’s an analysis of the key reasons:

Risk Aversion and Short-Term Focus

• Risk Perception: Indian investors often have a high level of risk aversion, especially in sectors requiring heavy capital investment and long gestation periods, like OEM manufacturing. The potential for lower or delayed returns compared to sectors like software or services makes OEM investments less attractive.
• Short-Term Profit Orientation: Many Indian investors prefer sectors that offer quick returns, such as IT services, fintech, and consumer goods. The long-term nature of OEM investments, where returns might not be realized for several years, does not align with this short-term profit orientation.

Lack of Expertise and Understanding

• Technical Complexity: OEMs often require specialized technical knowledge and a deep understanding of the manufacturing process. Many Indian investors may lack this expertise, leading to a reluctance to invest in something they don’t fully understand.
• Focus on Familiar Sectors: Indian investors tend to focus on industries where they have prior experience or see successful peers. The lack of successful Indian OEMs as case studies makes investors cautious.

Infrastructural Challenges

• Supply Chain Issues: Manufacturing OEMs in India often face infrastructural and supply chain challenges, including unreliable power supply, poor logistics, and inadequate local supplier ecosystems. Investors may see these as risks that can hamper the scalability and profitability of OEM startups.
• Regulatory Hurdles: The regulatory environment in India, though improving, is still complex and can be a deterrent. Delays in approvals, complex compliance requirements, and bureaucratic red tape add to the perception of risk.

Global Competition

• Competition from Established Global Players: Indian OEMs often have to compete with established global companies that benefit from economies of scale, advanced technology, and strong brand recognition. Investors may doubt the ability of Indian startups to compete effectively on the global stage.
• Trade Policies and Tariffs: Fluctuating trade policies and tariffs can affect the cost of raw materials and the competitiveness of Indian OEMs. Investors might be concerned about the impact of such external factors on their investments.

Funding Ecosystem and Exit Opportunities

• Limited Funding for Capital-Intensive Ventures: Indian venture capital and private equity firms tend to favor sectors with lower capital requirements and quicker exit opportunities. OEMs, requiring significant upfront capital, often struggle to secure funding.
• Uncertain Exit Options: Investors often look for clear exit strategies, such as acquisitions or IPOs. In the OEM space, these exit opportunities can be less predictable or lucrative, discouraging investment.

Cultural and Historical Factors

• Past Failures and Conservative Investment Culture: The Indian investment landscape has been shaped by past failures in the manufacturing sector, where large investments led to minimal returns. This historical context fosters a conservative investment culture that is cautious about capital-intensive sectors like OEMs.
• Preference for Service-Oriented Models: The success of India’s IT and service sectors has created a bias toward service-oriented business models, which are seen as less risky and more aligned with India’s comparative advantages.

National Policy Disconnect

• Misalignment with Policy Goals: While the Make in India initiative aims to boost manufacturing, the policy ecosystem has not fully addressed the underlying challenges that OEM startups face. Without a more integrated approach that includes financial incentives, investor education, and infrastructure development, the policy goals remain misaligned with investor interests.
• Lack of Visionary Leadership: Unlike DARPA (U.S. Defense Advanced Research Projects Agency) in the US, which has successfully incubated high-risk, high-reward technologies by taking a long-term, visionary approach, India lacks similar leadership in promoting OEMs. Investors may feel that there is insufficient government backing or support for these ventures.

Learning from DARPA: Energizing the Manufacturing Sector

The U.S. Defense Advanced Research Projects Agency (DARPA) provides a stellar example of how visionary investment can transform a sector. DARPA has been instrumental in funding and supporting various OEM startups and technological advancements.

DARPA (Defense Advanced Research Projects Agency), established in 1958 by President Eisenhower in response to the Soviet Union's technological advancements, was originally called ARPA. The agency's mission is to avoid and create technological surprises by funding and managing research across the military, private industry, and academia. Over its six decades, DARPA has played a crucial role in transformative innovations that have had global impacts, such as the development of the Internet (Arpanet), stealth aircraft, GPS miniaturization, unmanned aerial vehicles, flat-screen displays, and brain-computer interfaces.

DARPA has also acted as a catalyst for groundbreaking research in industry and academia. Here are some notable examples:

1. Human Universal Load Carrier (HULC): This exoskeleton, developed with DARPA funding, was designed to assist soldiers in carrying heavy loads, enhancing their endurance and operational capabilities. Although the initial application faced challenges, the technology has potential applications in medical and industrial fields.
2. Graphical User Interface (GUI): Developed in the 1960s, the GUI revolutionized computer interactions, laying the foundation for modern personal computing and smart devices. This technology was crucial in advancing the digital interface we use today.
3. Onion Routing and Tor Network: This technology, which began with DARPA funding, created a secure communication method that became the basis for the Tor network, enhancing privacy and security in online communications.
4. Siri: Apple’s virtual assistant originated from DARPA's CALO project, which focused on developing a cognitive assistant capable of learning and organizing information. Siri's development showcases how military research can lead to groundbreaking commercial technologies.

The Need for Visionary Investment

India can draw valuable lessons from the DARPA model. A concerted effort to fund and support OEM startups can create a ripple effect, energizing the manufacturing sector and positioning India as a global manufacturing powerhouse.

To overcome these challenges, Indian investors must adopt a more visionary approach. This involves:

1. Understanding Strategic Importance: Recognizing the long-term benefits of a strong manufacturing sector for national security and economic stability.
2. Government Incentives: Utilizing government schemes such as the Production Linked Incentive (PLI) to mitigate risks and enhance returns.
3. Collaborative Ventures: Engaging in joint ventures with foreign companies to leverage technical expertise and enhance domestic capabilities.

A Systems Breakthrough Approach

Achieving a manufacturing renaissance in India requires a systems breakthrough approach. Policymakers, businesses, investors, and strategic stakeholders must align their efforts towards a common goal.

This includes:

1. Policy Alignment: Crafting policies that incentivize long-term investments in manufacturing.
2. Public-Private Partnerships: Fostering collaborations between the government and private sector to share risks and rewards.
3. Strategic Stakeholder Engagement: Engaging with global players to bring in expertise, technology, and best practices.

The reluctance of Indian investors to embrace OEMs is a significant barrier to the country’s manufacturing growth. By shifting focus from short-term gains to long-term strategic benefits, and leveraging government incentives and international collaborations, Indian investors can play a crucial role in transforming the nation’s economic landscape. The time is ripe for a paradigm shift towards visionary investment in manufacturing, ensuring sustainable growth and economic resilience for India.

Indian investors, policymakers, and industry leaders must come together to foster a more conducive environment for OEM investment. By embracing a long-term vision and strategic approach, India can unlock the full potential of its manufacturing sector, creating jobs, enhancing national security, and driving economic growth.