How outsourcing has the power to make “MADE IN USA” a success again

By Arnab Bannerjee Jun 29, 2019
How outsourcing has the power to make MADE IN USA a success again

During his election campaign, President Trump had promised to focus on making MADE IN USA a success again. That jobs have been lost to offshoring is pretty well established. Once the industrial nerve center of the world, the American Midwest, is today a withering shadow of its former glory, with semi abandoned towns and rusting factories dotting the landscape. While reshoring initiatives have happened in the recent past, they are at best a few bucketful against the veritable torrent that has consistently flowed out, mostly to China and South East Asia. And this will continue to happen. Why? Because, the difference in manufacturing costs for any product is massive and the combined cost of manufacturing a product in China, transporting them to the US and warehousing the stock in US depots is significantly lower to the cost of running a current manufacturing unit of the same product the US. If MADE IN USA needs to be a thing, it must explore markets other than the US, because in an already saturated market, consumer goods manufacturers have very small margins to play with, and it will be difficult for them to even entertain the idea of reshoring in this current climate. It should now be accepted by all and sundry that a majority of the common everyday items and products targeting the American middle class and below, things that one generally finds on the shelves of supermarket chains like Walmart will not be manufactured in the US any time soon. The American supermarkets will continue stocking items that will bear the legends “Made in China” or “Made in Taiwan”.

So, what remains? What remains is the top 20-25% of the American consumers and a burgeoning, aspirational and increasingly affluent middle class in India, fuelled by a continuing IT boom, which owes its existence largely to outsourcing.

India in the yore

Every nation has a few moments in its history which can be called truly seminal. These moments signal tectonic shifts in the direction of nations, ensuring a future which will always pick “the moment” to both validate and critic it’s recent history and present. For India, one such moment was 24th July 1991, when the government of the day declared in its annual budget that a hitherto protectionist Indian economy was “open for business”. In the almost three decades that has followed “the” moment, India has undergone a transformation so radical, that apart from China, no country comes even close to replicating it. Apart from making the Indian economy amongst the largest in the world, liberalization in India also created extreme income inequalities. The resultant effect is that you have both the world’s most expensive private residence and the world’s largest slum cluster in the same city of Mumbai, almost next to each other. In a country where the majority still subsists on less than a dollar a day, some of the world’s most expensive real estate is also present. This is the dichotomy called India and within such contradictions lies an opportunity, an opportunity that American consumer goods manufacturers must not miss.

Thirty years ago, the Indian upper class was a privileged and select group, while the middle class consisted primarily of office going blue collar workers, with secure but limited incomes which made this group rather conservative consumers. Indian consumer products hence mirrored the mindset of the middle class Indian- sturdy, practical, uniform and cheap. The Indian society was also socially conservative, and Spartan lifestyles were idealized. The upper crust of the society almost exclusively splurged abroad, initially in the UK and the US and then in places like Dubai and Hong Kong.

The new Indian middle class- Made by USA in India

Today however, the average Indian is highly aspirational and consumerism is rife amongst the current Indian middle class. Incomes have increased manifold, of what it used to be. While a nation like China grew due to a huge spurt in the manufacturing sector thanks to offshoring from the West, primarily from the US, India took a path which is both very similar to that of China and yet vastly different. Thanks to a huge English speaking population, India ended up cornering more than half of the world’s service related outsourced jobs; but very little of the manufacturing jobs outsourced from the US and the rest of developed world ended up in India. Now at casual glance, it might seem pretty similar, with the world’s two sleeping giants each cornering their own share of the outsourcing pie. It is, but as time has proved, the sociological impact that outsourcing had on these two countries was very different. Both India and China managed to lift millions out of poverty and a new, vibrant middle class was created in both countries. However, in China, the social thrust as directed by the Communist Party there was towards creating a value within China around the “Made in China” brand, because it was crucial for the economy. In India, which is a more politically liberal and democratic society, the social impact was more organic and unplanned. Sure, successive pre-liberalization Indian governments had sought to build “Brand India” amongst its citizens, as is wont from most young nations (India might be an old country, but was a rather young nation, as stated by Indian PM Rajiv Gandhi in his address to a joint session of the US Senate and House of Representatives). However, quite a few of the government aided manufacturing initiatives had failed and as post liberalized India suddenly woke up to a reality that foreign manufactured goods, which were out of reach till yesterday, were suddenly readily available everywhere, it’s people suddenly realized that they kind of preferred these new and better goods over anything that was being manufactured locally in India.

Off course, not every Indian could afford these foreign goods streaming into India. There was a huge section of the population which stuck to, albeit inferior, but cheaper products. Those who could however, shifted, and shifted en masse. Within a decade, consumer goods in India had two distinct divisions with very different target audiences. The lower half of the socio economic pyramid is catered to by locally manufactured products, products which once popular across the socio economic spectrum, but now cater exclusively to the lower middle class and below. Gradually these products also changed their marketing tack to suit the new reality and are now hardly visible or even remembered in the social consciousness. Brands selling detergents, soaps and other household items, which till the 90’s roped in big Bollywood stars and the best ad gurus to market their brands, are today entirely absent or at best sporadically appear in middle class homes. You won’t find these products in the swanky malls and departmental stores across Indian cities. These products exist though, in make shift mom and pop stores in slums and in the local grocer’s shelf in the village. For the middle class and above, these products are off course still essential; it’s just that the brands are different.

The Indian and Chinese growth stories diverge precisely here. Manufacturing did not require and hence did not discriminate against the less educated when it came to getting jobs. So Chinese across the social hierarchy were able to stake claim to the nation’s future. In India’s case however, that did not happen. Education, especially English education was a prerequisite to take advantage of any outsourced jobs to India, since the opportunities were in the service sector. Hence the people who were able to lift themselves out of economic despondency were not very despondent in the first place. India’s long established social hierarchies had meant that while a “dream of Billions” was considered impractical in pre-90’s India, education was given high value amongst socially advantaged groups which created a huge pool of very educated people with limited scope or opportunities. When finance minister Man Mohan Singh read out his historic budget, he simply freed up hitherto throttled potential. And the first wave landed on India’s shores to utilize this untapped potential was American. And the trend has since continued. The new Indian middle class that has been created isn’t much different from the old one in terms of social composition; it’s just that they have more money. The line dividing the two distinct socio economic groups blurred quite a lot socially, but economically, the division has never been starker! This was the new Indian middle class- roughly 15 % of the Indian population and a group which almost entirely owes its existence to the United States of America and the West, or rather the jobs that were created due to outsourcing to India.

The emergence of a market

So, we see a new India emerge, thanks in large part to the blue collar outsourcing industry. An India where there are two distinct socio economic groups, an India of stark dichotomies and an India which presents an incredible opportunity for the West. An opportunity because this largely new urban middle class thinks very differently and there exists a few interesting contradictions within this group, contradictions that create a possible market for premium goods manufactured in the West, especially the US.

Unlike the Chinese new middle class which has grown on a steady diet of nationalism fed through official channels by the ruling Communist Party, the growth of Indian nationalism has been more a result of an Indian middle class looking to assert themselves on the world stage, and quickly. Hence we have seen a spurt in big ticket projects in India, projects that while catering to a very select few and having come in for criticism from some quarters as being too exclusive, but projects that has the staunch support of the Indian middle class. While India contributes significantly to many IT projects globally, its contribution is mostly silent and unseen, resulting in the Indian population feeling unappreciated and unheard. There is also an increased desire to be seen at par with the best in the world, which right now is China. Hence one sees the support for projects like building a high speed line between two Indian commercial centers, constructing the world’s tallest statue (of one of India’s founding fathers) etc. Now, such projects have been undertaken by China too. However with India however, the difference lies in the execution. Both projects are foreign made (China made the statue while Japan is constructing the high speed line). The Indian upper and middle class does not mind, as long they can possess the biggest and best. And this is where US manufacturers must focus.

India’s moneyed class doesn’t mind purchasing foreign made goods. Most electronic items are made in China anyways. However, China does not have a great reputation when it comes to quality and generally, the MADE IN CHINA tag is associated with something cheap and of poor quality. India’s testy terms with China don’t help that reputation either. We have seen that a desire to possess the best in the world and be exclusive dominate the top 20% of India. Enter, Brand USA! US manufactured products are held in high regard not just in the US, but globally. The prohibitive expense deters most average buyers from purchasing US made products globally. But what if that price tag itself is a brand’s biggest value proposition? Stunning as it may sound, especially in the Indian context, brand USA has a distinct edge over both brand China and Brand India amongst India’s urban middle class, which while being not as well to do as that of the US, is very capable and willing to indulge in American or European manufactured goods. And that is not just for quality, but for a much stronger motivation- prestige!

The current generation has seen the older generation of well to do Indians splurging abroad. As the last millennium gave way to the current one, this generation was just starting to enter the work force- young boys and girls who albeit being just a generation younger than their parents, were radically different. This was India’s first aspirational generation, a generation which had seen none of the struggles that a newly independent nation faced and had been brought up in relative security of a middle class upbringing. This was also the first generation of Indians where knowledge of English was the norm and not the revered exception. This was also the first generation that was exposed to Western cultures and ideals not through books but through television. Young middle class India in the late 90’s and early 2000’s got to know USA not through the books of Sidney Sheldon or Jeffery Archer, but through Sitcoms like Friends. This was also the first generation who were not expected to land a government clerical job and instead aim for a private IT firm. That generation is today the backbone of the affluent, aspirational, extremely consumerist urban middle class. And this class wants to lay claim to luxuries that their previous generation had been denied and stand apart. To many, exclusivity should be their just reward for coming out on the right side of a very tough race, since the scene in India has always been super competitive, to the top.

There is evidence that the Indian middle class would pick exclusivity over price. A very little known but extremely intriguing example is how the American watch brand Fossil became one of the most popular brands in India, so much so that it is today giving stiff competition to India’s largest watchmaker, Titan which is itself one of the largest watch manufacturers globally. More young, middle class Indians are preferring to wear brands like Fossil, Swatch, Seiko and TAG than Indian brands, whose premium products too are comparable to the very best globally. However, since most established Indian brands cater to all sections of the market, the exclusive nature of ownership is absent. Hence, Indian shopping malls play host to almost all globally top watch brands.

The size and growth of the market

The Indian outsourcing industry has been growing at a phenomenal rate of 7%. There is plenty of scope to grow, since the outsourcing phenomenon has barely scrapped the top layer of a very deep resource pool. India has half a billion strong work force, and the number of people directly employed by outsourcing is less than five million. While half a billion is an insanely large number to target or even expect, merely a tenth of that number opens up a potential market of fifty million people. Fifty million, which would mean that just the workforce employed in outsourcing and related industries would amount to being larger than the population of roughly 170 countries in this world! On an average of four people per family, the size of the market available for Western products will be around 200 million! However, at closer look, it becomes apparent that the math isn’t that simple, since the modern Indian urban middle class generally consists of working parents, who in most cases are both employed by the IT/ITES sector. So the figure will be significantly lower, though comfortably large enough to be larger than most countries on this planet.

Now, this is pure conjecture based on the way things have shaped up in the last decade and looking at the promise that outsourcing holds. If however, things slow down due to whatever reason, the opportunity to create a market for its products will also be lost to the West. If Western, especially American manufacturing needs to find traction again, it must ensure that its partnership with Indian IT firms endures and thrives.

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