Manufacturing Strategies for a Post-Covid-19 World

A look at the lessons learnt from the lockdown and the five things that are likely to change in manufacturing after the pandemic.

The lockdown will be over eventually even in states that have decided to extend it beyond May 3. The threat of Covid-19 will also recede over time as effective vaccines and drugs are found. But the lessons from the Coronavirus pandemic and lockdown will change Indian manufacturing quite substantially. (It will change life and work for all of us, but for the purpose of this article let me focus on Indian manufacturing alone.) It is a given that even after the lockdown is removed, we will see demand destruction in a range of products. Eventually, that demand will return though. But let us concentrate on the other half of the equation – the supply side. Initially at least, you can expect a supply shock for several good reasons.

One, post-lockdown for a very long period of time, factories will be operating at sub-optimal capacities because of the safety protocols they need to follow stringently as part of the permission to restart work. Most of the manufacturing units that have been allowed to open are functioning at no more than 25-30% capacities because of social distancing requirements and other safety protocols including regular sanitisation of facilities and daily or twice daily checking of temperatures of their workers.

The second reason is the disrupted raw material supply chains. Almost 95% of all Indian manufacturers are integrated to global supply chains. This ranges from the steel industry’s dependence on imported coking coal to the pharmaceutical industry’s addiction to API’s from China and the mobile handset manufacturing sector’s reliance on components from China, Taiwan and others. Practically every manufacturer in the country today is crucially dependent on cheap inputs from sources across the world. (Manufacturing globally is depended on smooth flow of goods from one country to another but India is particularly vulnerable because there is more assembly and little genuine manufacturing taking place bar in a couple of sectors).

The Coronavirus disrupted those supply chains by making it difficult to get cargo from abroad. For the sake of efficiencies, many manufacturers keep no more than 7-10 days of raw material inventory in their premises. In some industries, especially those where prices tend to fluctuate regularly, the big Indian manufacturer might buy and store extra raw materials when prices fall if he thinks that the cost of storing the inventory is cheaper than buying at spot prices. And even where manufacturers have built facilities close to raw material sources – for example, steel plants are typically built close to iron ore mines – a lot of the inputs come from distant places.

The third problem is, of course, finances. Except for a few, almost every country is going through a cash crunch. If a company at the top of its game like Hero Honda needs to suspend payments to suppliers, think of the plight of those weaker companies. Many of the small and medium enterprises are likely to shut shop no matter what kind of package the government unveils in their support. They simply do not have the endurance to ride through this storm. They have already been weakened by the shocks of demonetisation and a badly implemented GST and this is the last straw that will break their backs. Bigger companies will survive because of their stronger balance sheets, their ability to access finances at cheaper rates than SMEs, and their relationships and reputation built up over the years.

The fourth problem is labour availability and costs. In the post-Covid world, I expect many Indian manufactures will take a hard look at their labour issues – from availability of migrant labour to the fact that during the lockdown, they were expected to feed and provide shelter for all labour without any help coming from the government. Many companies did a fantastic job of supporting their labour during the lockdown. But a shortage of demand accompanied by the requirements of social distancing may well see them plan for production with a reduced workforce.

The final issue is location. A lot of Indian manufacturing is concentrated in dense population areas, in urban slums or in industrial clusters that can quickly become red zones if even a couple of cases of infection are found. This was what happened to Baddi in Himachal Pradesh, which was sealed off despite it being a pharma hub. Even the revised guidelines by the Home Ministry advised that first preference to opening up factories and units should be in rural areas, away from dense population concentrations.

So how should Indian manufacturers rework their strategies based on the lessons learnt from this pandemic? I would predict the following trends. The caveat: not all companies can follow all steps and not all steps will be suitable for every industry.

• More robotics and automation and less dependence on labour: This has been happening for some time now but I expect it to dramatically increase, depending on the ability of companies to invest. This is bad news of India’s working population but it is a given that any company that can afford to invest in buying robots will try and reduce manpower count. This will apply to both warehouses and production facilities.
• The return of the factory township or campus: Tata Steel built an entire township in Jamshedpur and managed it. Not all companies have similar resources or the scale and imagination to do so. A number of big public sector companies ranging from NTPC to BHEL still follow this policy. Over the years though, this was slowly beginning to fall out of favour as many manufacturing giants started depending on smaller contract manufacturers. In FMCG products, consumer durables, and pharmaceuticals, contract manufacturing is prevalent. Apart from a few giant plants, the idea of factory towns or entire habitats built within or around giant factories had started falling out of fashion. But in the post-Covid-19 world, I foresee factory plans being reworked to ensure that at least a certain amount of labour and management live within the factory complex, or at least nearby. This will also mean hiring more local workers and fewer migrants and that might not necessarily be good for Indian’s society and labour mobility but it could become the favoured strategy of many plants.
• Reworked supply chains and Inventory Levels: The trend in manufacturing was moving towards leaner raw material inventories (or the just-in-time philosophy) as well as overdependence on one or two giant and reliable suppliers. I would not be surprised if we do not see a big reversal in the near future. Most manufacturers would prefer to keep at least a few suppliers nearby even if they are not as reliable or efficient as the one in China. Some of the bigger OEMs might even help vendors scale up and become more capable. Simultaneously, factories might also weigh the cost-benefit equation between maintaining higher raw material inventories against disruptions caused in supply chain logistics.
• More vertical integration: This was a theory that was immensely popular at one time as big factories tried to control quality and price of everything by manufacturing every big of the finished product. In the old world, this would see giant automakers also buying up component firms and even investing in steel companies. Over a period of time, this turned out to be an inefficient way of doing business, apart from being costly and price uncompetitive. There are still a few companies that believe in this – Reliance Industries comes to mind. But while management gurus discredited this practice of high vertical integration as being inefficient (as against focusing on core competency), I would think that at least the biggest manufacturers in the country will evaluate this once again – if nothing else than to mitigate the risk of another big disruption leaving their factories crippled because supply of raw materials have been interrupted.