B2B Marketplaces part 4 - Decrypting the indian manufacturing boom

Today on Matrix Moments, we address the recent manufacturing explosion - how much of it is real? what are the tailwinds contributing to this boom and why now? tune in to find out.

Salonie:

Hi. And welcome to Matrix Moments. This is Salonie. And we’re back with Sudipto who is principal and lead for the B2B sector at Matrix Partners india. Today we’re going to be talking about the recent boom in manufacturing in india. So, Sudipto, we’ve seen there’s obviously been a lot of buzz and talk around make in india and there’s obviously been the recent explosion of manufacturing in india. So how much of this is real, why now and what are the tailwinds that you’re seeing that are significantly contributing to this boom?

Sudipto:

Thank you, Salonie. i think manufacturing for any economy is a key pillar for the economy’s growth. And the great thing about india is that the time for indian manufacturing is finally here. First, let’s talk macro, right, what are the macro tailwinds for manufacturing. A, i think we’ve all spoken about GST, demonetization, UPi, which has sort of digitized indian manufacturing. So that’s a little bit on digitization. But any sector grows when there is significantly more demand.

Where is demand for india manufacturing coming from? So there are actually three areas, first, if you look at what has happened in the last two years we’ve seen Covid, we’ve seen most countries globally wanting a China plus one strategy. We have seen india focusing a lot more on Atmanirbhar Bharat which means you build indian products in india. And now with the Russia Ukraine crisis you can clearly see people realizing that for all sort of key products that the country needs energy as well as products and commodities the country should be self reliant.

Salonie:

Absolutely.

Sudipto:

And all of these things together has led to sort of two things, first india wants more and more manufacturing to happen in india and be less and less reliant for exports especially in finished goods. Where we don’t have the raw material, we have to anyways sort of import but for everywhere else we should not depend on exim we should not depend on imports we should actually build in india.

So first, focus on domestic production for goods that can be produced in india. Second, with China plus one strategy globally sort of all economies especially the West are looking for alternate countries from where they can source the same product or raw material. if you do China plus one and if you see which is the other English speaking sort of large country with a labor force, lot of raw materials, technology there are only 3, 4 countries and those are all in Southeast Asia and one of them being india.

So globally there’s a lot more focus on now importing from india which is india’s exports and their imports. And if you see now Foxconn has setup a factory, Apple factory in india for the first time. So globally people are focusing a lot on india manufacturing. And the third overall as the country’s GDP increases and the disposable income and the consumption power of indian citizens increased you will anyways have more domestic needs and demands.

So the combination of reducing imports and being dependent on india internally, globally people wanting more from india and indian exports increasing and third the indian GDP and consumer spend increasing. All three together is now leading to truly manufacturing in india exploding. So that’s the explosion in manufacturing and along with all the other digitization tailwinds this explosion is also coupled with digital manufacturing and the manufacturers trust in digital Marketplaces for the first time.

Salonie:

So i think while this sounds i mean this makes sense in theory but what would you say is like the real on ground impact that you’re seeing whether on a daily or if that’s too small or narrow on a monthly or quarterly basis?

Sudipto:

So let me give you an anecdote, right. i’ve been investing in B2B agri and supply chains for six years now. When i joined Matrix in 2016 i remember i used to go on field visits, so i love going on field visits with the founders and seeing factories and farms and learning a lot in the process.

So when i used to do it in ‘16-’17 we would go to a factory, the factory will have one sort of computer in the corner and when you go with the founder somebody will say arre yaar we have to show technology and they will say call this guy. Some guy will come running, open the desktop and say sir dekho yaha pe entry hoti hai and yaha pe tech use hota hai which was clearly that there’s a computer, there’s some tech but in reality nothing was happening.

Today when you go to field visits everybody is on their phone, they’re scanning products, they’re uploading those products which are getting sold on Marketplaces, a reconciliation is happening, GST is happening. Everybody is using tech, it’s not like there’s one designated computer and one guy across 5 factories who knows tech. So technology is clear. Second, see the results and the GMV growth of multiple different companies in manufacturing. Obviously we have OfBusiness and Bijnis which are our own portfolio company but there are a bunch of other really great companies which have come out in the india ecosystem in the last 3-4 years.

All of them have been growing, which is your second data point, right. Third, if you look at industries, for example take speciality chemicals obviously first their stocks are doing really, really well, part of the reason is boom in manufacturing as well as boom in exports. But also if you look at these companies, right, a lot of these companies are spending in Capex in advance of demand. So people are anticipating that more and more demand will come to india because of the geopolitical scenario and they’re putting factories today even before demand is coming.

So this is actually real, the more you go on the ground and meet with people it is very clear that manufacturing is booming and there’s more and more capital and focuses going into manufacturing in india.

Salonie:

Got it. What would you say are some of the opportunities or the areas that we as in Matrix and you are really looking to go deeper in terms of investments?

Sudipto:

Sure. So as with all B2B supply chains, right, you have a finished goods supply chain and you have a raw materials supply chain. What is finished goods, your clothes and shoes are finished goods, the yarn for that is raw material. Your soap is finished goods the chemical is the raw material. Your biscuit is the finished goods the raw material the grains and sort of sweeteners that you add in the biscuit is the raw material.

if you looked at finished goods supply chains and we recently did a perishable supply chain if you look at finished goods and what comes from manufacturing it is broadly all your lifestyle categories which is fashion, footwear, accessories, all electronic categories like smart phones, your desktops, laptops, and stuff like that. Then your pharma, you’ve FMCG and stuff like that. As we’ve discussed in earlier episodes we only like verticals where your supply is fragmented and unbranded. if you take that lens the categories where we would like to invest are lifestyle categories which is fashion, footwear, accessories and little bit of home décor.

Everywhere else for example if you take FMCG or electronics your supply is consolidated so those are not verticals we’re super interested in. So we’re obviously investors in Bijnis but would also love to make a few more investments in the home décor side of things. So that’s on finished goods. On raw material i think there are lot of opportunities, there are opportunities for example in raw material in chemicals. There is opportunity in raw material in yarn, so that is the second set of opportunity.

And third is obviously in exports, there have been a lot of companies in contract manufacturing but very few companies have actually built sort of export distribution businesses which is take products from india, create a private label, sell globally. And i think there are opportunities there as well. So categories, lifestyle, home décor, in finished goods, more chemicals, yarn kind of raw materials and obviously we would love to see more companies exporting out of india building their own private labels and brands and then selling to the world audience.

Salonie:

Got it. So can you tell us a little bit about Bijnis as well as OfBusiness and how both of these companies fit into the overall larger scheme of the manufacturing space?

Sudipto:

So spoken about Bijnis which is in finished goods OfBusiness is more in the raw materials and then they’re in raw material commodities. So they do for example for real estate and construction they will be doing steel and cement and bitumen, for agri they will be doing agri products, they also do bulk chemicals. So they’re more in the raw materials scheme of things. i think the key thing to learn again here is both these companies if you go and meet and if you see their org and DNA manufacturing is a very different business to build, you need manufacturers are people with a deep understanding of the manufacturing landscape to go and build it.

So they have always been and especially Bijnis been factory first, you focus on who is the manufacturer, who is the factory and it again goes back to supply, how can you solve and standardize supply. With OfBusiness understanding who is that SME, what is his or her credit underwriting needs, understanding that they’re price sensitive, building a very strong commercial business for them, right. And once you’ve gotten entry into one client providing multiple different solutions to them.

So i think the key learning for us and there are lot of open spaces in manufacturing is understand your customer really well and the customer here is the manufacturer. So go deep into their psyche, understand the customer, build your org who empathizes with the manufacturer, wants to spend time with them. And then there are enough number of magic opportunities lying for you in manufacturing.

Salonie:

So what are some of the emerging areas that you’re looking at and do you see more exciting opportunities within this space?

Sudipto:

So till now let’s quickly recap. We’ve said manufacturing is booming, people are putting in Capex, the factories are getting digitized and there are lot of vertical supply chains so value can be created, finished goods, raw material, exports. And if all of this becomes true and in the next 10-12 years there are so many factories becoming large and companies getting larger. What do you need, first you need technology for sort of factories and manufacturers to scale which means industry 4.0.

Can you have iOT devices that monitor machines, can you have operating systems to run the machines and factories. So the entire tech, tools, SaaS iOT for the manufacturer and the factory become super exciting for us. So that’s an area as manufacturing booms industry 4.0 and SaaS for manufacturing will boom. Second is logistics, your manufacturing is booming, you’re doing cross border, you’re essentially transporting goods from small towns to large cities, large cities to small towns. We have a very strong robust logistics and supply chain infrastructure for B2C but there’s a lot to be built in B2B especially if i think more rural logistics and i think of cross border international logistics.

So as B2B booms i think these two are very interesting areas where we can see a lot of value creation happening.

Salonie:

So we just spoke about exports and the China plus one strategy you mentioned that in one of your responses earlier. But how do you think that indian exporters can actually rise up to this challenge?

Sudipto:

Salonie, i think there’s an opportunity but obviously we have to grab the opportunity with both hands. i think if i’m looking from an importers lens, somebody as i think the US and West what they want the most more than even price from india is trust and quality. So they’re looking at whatever promise that they have in terms of the products that they’re seeing on the website or the sample that they’re seeing to same quality product comes to them.

So is quality great, a, does india have the capability to produce great quality products and b, is the quality consistent that they can trust and three whether that will be delivered on time. And then obviously there will also be considerations around regulations, regulations around say who are the people working in the factory, have all licenses been taken, is it ESG compliant etcetra, etcetra.

And some of this is an ecosystem as we mature will get solved more and more but the key is can india at scale produce the quality to compete with everyone else in the world. india anyways has a labor arbitrage and a cost arbitrage that helps us and in certain categories we also have raw materials given we’re a really large and vast country. But i think that’s the major problem and second is how do you communicate, can you build for example tools.

You’re an exporter you’re talking to somebody in the US, right, can you have a digital catalogue that showcases your products beautifully. What is your tendering and quotation process? Once you’ve taken your order what is the sort of monitoring process by which they can see whether the order is happening, not happening on time. Then one post delivery and dispatch how does the tracking and everything happen. So i think overall capability development, then ensuring consistent quality and building that trust, doing that on time and giving that visibility and professionalism that will appeal sort of the end customer to buy from india.

And we’ve invested in two companies in the export import space, not naming them because they’re not disclosed yet but both of them are solving some of these challenges very specifically.

Salonie:

Super interesting, Sudipto. Thanks a lot.