Manufacturing at a Crossroads: Adapt or Perish

Momentum in India's manufacturing sector saw a modest decline for the third consecutive month in September 2024. Demand and output weakened marginally, causing overall business confidence to decline to an eight-month low, its lowest since April 2023. Around 23% of Indian manufacturers estimated growth in the next year, while the remainder expecting no change.

The Manufacturing Purchasing Managers' Index (PMI) fell to 56.5 from 59.1 in April, implying less production, and a slowdown in exports which decreased at their slowest rate in 18 months. Despite this slowdown, the manufacturing sector continued to grow with PMI remaining above the 50-point threshold, indicating growth. This is the 39th consecutive month of growth since July 2021.

India’s Manufacturing Renaissance: A Strategic Perspective

The Reserve Bank of India’s (RBI's) Monetary Policy Committee retained the benchmark rate at 6.5% during its August meeting, despite analysts were predicting a possible repo rate decrease in the following months. Retail inflation rose to 3.65% in August from 3.6% in July, owing mostly to stubborn food prices. However, inflation was within two percentage points of the RBI’s medium-term target of 4%.

Successful advertising and favourable client interest were the main drivers of sales growth, but fierce competition curbed positive demand trends, resulting in a significant upturn that was weakest in 2024 so far. According to an HSBC survey, fresh export momentum was notably poor in both the consumer and capital goods segments, while intermediate goods production remained stable. Manufacturers faced higher input costs, especially for chemicals, plastics, and metals, reducing profit margins. Consequently, manufacturers cautiously passed on these costs to consumers, leading to lower profit margins.

Employment growth also slowed, with fewer part-time and temporary hires, but several business added staff for upcoming projects. Despite this loss of growth momentum, net employment and purchasing quantities of rose, while business confidence remained broadly consistent with its long-run average.

The manufacturing sector expanded somewhat after a robust performance in the summer months. Rising input costs during this slower economic phase, along with weaker demand and lower billing prices despite rising input cost inflation, particularly in export business are seriously affecting business confidence and hiring ahead. The combination of lower profit growth and slower new business development constrained manufacturer’s ability to generate jobs. New orders, a crucial indicator of demand, grew at the slowest rate since December, but remained robust, while output fell to an eight-month low. International demand took a bigger hit with export growth slowing to a level not seen in a year-and-a-half. Only 6% of manufacturers reported an increase in overseas orders. Although input cost inflation increased since August, inflation in prices charged was at a five-month low, suggesting not all price increases were passed on to customers despite weaker demand.

The slowing factory production growth is expected to have a further impact on Asia’s third-largest economy’s expansion rate in last quarter, after a 6.7% gross domestic product (GDP) growth rate from April to June. Business confidence dropped slightly, while the future output sub-index, which measures optimism for the following year, fell to its lowest level since April 2023. Employment growth also slowed to a six-month low. The RBI has increased its FY25 GDP growth forecast from 7% to 7.2% owing to better rural and urban demand projections.

Manufacturing at a Crossroads

The Indian manufacturing sector is at the crossroads of opportunity and calamity, grappling with dire confluence of challenges. According to the most recent survey data, Indian manufacturing activity has decreased to its lowest level in eight months, with business confidence progressively deteriorating. While the sector grows, chilling undercurrents exist, such as shrinking margins, eroding competitiveness, and mounting uncertainties. This is more than just an economic dip; manufacturing is confronting a deep systemic threat that if ignored unaddressed, would systematically undermine its entire nature. The sector is currently confronting several risks, including skill deficits, technology obsolescence, and market volatility. Consequently, these risks are causing poor performance, efficiency, and competitiveness, which must be mitigated.

1. Traditional revenue bastions are unreliable owing to market volatility, unpredictable demand, and declining margins. Changing consumer preferences, fierce competition, and price volatility are rapidly shrinking margins at an alarming rate. With slow growth and reducing exports hitting an 18-month low, manufacturers must delicately balance between survival and closure.
2. Manufacturers are struggling to find and afford the skilled talent necessary to efficiently operate their business. But labour scarcity, combined with spiralling wage demands, is crippling their production capabilities.
3. The rapid pace of technological advancements is leaving traditional manufacturing systems in the dust, struggling to keep up with the technological revolution. Companies clinging to outdated methods find themselves at the mercy of more agile, tech-savvy competitors. Companies that do not embrace cutting-edge technologies and data-driven processes risk becoming obsolete.
4. Geopolitical tensions are causing severe disruptions, turning diplomacy into a tinderbox.
5. The manufacturing sector is under tremendous pressure from all sides, from obtaining critical raw materials to coping with soaring logistical costs, and no clear solutions in sight.
6. The increasing responsibility of climate change is imposing onerous regulatory compliance costs on manufacturers, substantially squeezing margins. What was once a manageable burden is gradually morphing into a labyrinth of legal and operational risks that could bury ill-prepared companies.

The signs glaringly signal that manufacturers across most segments are on the verge of faltering, presaging what lies ahead if prompt actions are not implemented. Several firms have already succumbed to shrinking margins, bleeding profits as they struggle to adapt to rapidly changing realities. Take, for instance, the once-thriving switchgear segment that, after years of robust exports, is witnessing export orders plummet due to supply chain instability while the input costs continue to escalate. Unable to balance rising labour and material expenses, the segment is enduring into hasty restructuring. They are not alone, manufacturers across all segments are reeling from similar pressures that threaten to overwhelm them if they fail to strategically counter them. The ultimatum is clear, evolve or be swept aside. There is no room for compromise in this high-stakes quandary.

Resilience

Despite the bleak outlook, there remains hope, but only for those who are prepared to embrace transformative strategies. Here are the essential strategies that manufacturers must use to thrive and excel amid these challenges.

1. The traditional dependence on manual processes and obsolete systems is no longer viable. Companies must commit to investing in cutting-edge technologies and the highly specialised expertise required to run them. Intelligence and real-time data analytics will differentiate success and failure, because they can overcome skill deficits and simplify operations.
2. Adaptability is critical to capitalise on dynamic demands that are frantically changing in the blink of an eye. Manufacturers must swiftly respond to evolving demands, adapt their systems with agility, efficiently manage inventory, and seize new opportunities as they emerge.
3. A dedicated source supply strategy is akin to building a house of cards. Manufacturers must diversify their supply chains significantly to mitigate the risks posed by uncertainties. Building relationships with multiple suppliers across different regions is essential to maintaining stability and mitigating disruptions.
4. Regulatory compliance is no longer an option but a fundamental obligation for manufacturers to operate successfully in the current business landscape. However, beyond basic compliance, sustainability offers manufacturers an opportunity to create a brand identity and appeal to an increasingly conscious client base. Embracing sustainability is more than simply cutting costs it is also about ensuring long-term relevance.

Game-Changing

While the future may appear bleak, the truth is that only those with the unique combination of strategic insight, technical acumen, and industry foresight can lead manufacturing businesses through these challenging times by being prudent, technologically astute, and preemptive to realities in the market. Only a few with the necessary depth can thrive; and even fewer have the experience to implement sustainable and profitable solutions, this is where I come in. With extensive experience spanning over three decades in driving transformations within the manufacturing sector, my expertise is at the forefront of enabling businesses to evolve and emerge resilient. I have been integrating advanced technologies, restructuring operations for agility, and mitigating value chain risks, which has consistently delivered results. I have succeeded even in the most challenging circumstances, and I am here to replicate this success for all my prospects.

Manufacturing sector is at a critical juncture, and only well-informed and timely decisions will determine its success or failure. Achieving sustained growth and profitability requires informed decision-making, which is achievable through thoughtful strategic engagement and foresight. Reach out now, and let us create a future-proof strategy that secures your business’s success amidst the challenges ahead.