Thomas Pikkety’ tome, Capital in the Twenty First Century, is on top of best seller lists and is flying off book-shelves. His thesis, supported by voluminous facts, explains how inequalities are increasing with labor earnings rising much more slowly than returns to capital. Other economists have pointed out that value capture in global supply chains is following a U-shaped curve, which is becoming deeper. Value capture at the back end of the chain, in product design and patents, is very high and rising. Incomes at the front end, in branding and marketing are also high. While incomes for employees in factories that produce the stuff, and sit in the middle of the chain, are lowest. The factories, in global supply chains, are in low wage countries, whereas designing, branding, and marketing is mostly done in richer countries. Now add a third data point to this global picture. According to a McKinsey study, shortages of highly skilled workers, at the front and back ends of supply chains, and their wages, are increasing in all countries—the developed ones and the developing ones too. Whereas there is a glut of unskilled workers and a much lower increase in their wages in all countries.
Leaving aside moral and political questions of inequality between capital and labor, let us turn to a practical question. With this global reality, what will be a winning strategy for India’s manufacturers? A winning strategy must be based on using more of the resource that is abundant (and less costly), and less of scarce and more expensive resources. Napoleon used masses of motivated citizen-soldiers in his armies to defeat opposing armies of better paid professionals. Similarly guerilla warriors can defeat armies with more sophisticated and expensive weapons. The lesson is: make the most of what you have more of.
India has the world’s largest pool of young persons seeking jobs. Human beings are a trainable resource. Manufacturing enterprises in India, wanting to compete with enterprises in other countries should design their manufacturing systems to use more human beings and less capital. A manufacturing enterprise in India that has the ability to improve employee skills can count on a continuing supply of trainable people, and thus have a sustainable competitive advantage over enterprises elsewhere.
Economists who wish India well would want manufacturers in India to employ more people and pay them better too. More employment and more earnings will give a boost to economic growth. However, this win-win solution is not being realized because owners of enterprises are facing problems with employees. Employees do not have the requisite skills, they say. When employees are dissatisfied they can create industrial relations problems. Present laws make it difficult for employers to fire them. Therefore the general response of employers, with a few notable exceptions, is either, use machines instead of people if they can afford them (the cost of capital is high in India, and SMEs cannot raise it easily). Or, hire more temporary/contract workers.
Such tactical maneuvers are diametrically opposed to the strategy to make India a globally competitive manufacturing hub. There is little incentive to train temporary/contract workers, so skill development is constrained when India is crying for more skill development. Moreover, contract workers are paid much less than others, leading to industrial relations disputes. Thus employers’ relationships with people in their enterprises are becoming fraught. With this trend, manufacturing may be in a downward spiral, at a time when, for improvement in competitiveness of India manufacturing enterprises, people (and more of them) must be at the heart of enterprises’ strategies.
To build a globally competitive manufacturing sector, India must expand the scope of its vocational skills program. More technically skilled workers are required of course. Even more than that perhaps, entrepreneurs in the garments and other labor-intensive sectors say they need good supervisors who can manage work and people well. Productivity improvements and skill development happen on the shop floor, and good supervisors are critical for these.
Above all, the country needs very good managers who can improve competitiveness of manufacturing enterprises by managing the interplay of the many systems that interact to create faster learning enterprises. These systems include material flows, information flows, processes for quality and productivity improvement, and very importantly, the human side of the enterprise. The only ‘appreciating asset’ in a manufacturing system, whose value can appreciate over time, is the human asset. Whereas the value of all other assets—machines, buildings, materials—will depreciate with time.
Motivated employees can improve the productivity of machines too. It is not surprising that countries such as Germany and Japan, who have maintained (and even increased) the competitiveness of their manufacturing sectors, even as wages increased and their currencies became stronger, have a long term orientation towards human assets. In these countries, there is much greater commitment to the continuity of employees in service. To them, ‘flexibility’ in employment is the ability of employees, supported by employers to learn new capabilities, rather than the flexibility of employers to quickly dispense with employees’ services.
To conclude, to create 100 million jobs in manufacturing which India must, (and to relieve the increasing tension between capital and labor that Pikkety explains), owners and managers of manufacturing enterprises in India must treat human beings as their core asset and not a problem to be avoided.