WorldoutofWhack

By Vikram Mansharamani, PhD, Founder, Kelan Capital, LLC [Edited Excerpt FROM BOOMBUSTOLOGY, 2nd EDITION]

As part of his high-profile efforts to promote an ambitious development program labeled “Make in India,” Indian Prime Minister Narendra Modi met with politicians and local executives at a showcase in Germany in 2016. The “Make in India” campaign is his signature undertaking to make India a global manufacturing hub, and it has received disproportionate attention from Modi and his team since his election. It’s one of the hallmarks of his economic reform program, one in which he expects to create 100 million new manufacturing jobs by 2020, six years after he first announced it. These jobs are critical to his effort to develop a middle class that will power the Indian economy for the foreseeable future.

This 2016 event was notable for one particular attendee Modi met there. It was not the CEO of a powerful multinational, the prime minister of a major European country, or even an accomplished development economist. It was a robot.

Modi met YuMi, “a collaborative, dual arm, small parts assembly robot solution that includes flexible hands, parts feeding systems, camera-based part location and state-of-the-art robot control.” Robots like YuMi are the future of manufacturing and, in an ironic twist of fate, may prevent Modi from achieving his “Make in India” objectives.

Of course, robots of a sort have been in manufacturing for more than a century. Consider the story of Henry Ford II, who, on a tour of a partially automated factory with United Auto Workers chief Walter Reuther, smugly asked, “How are you going to get these robots to pay your dues?” Without missing a beat, the story goes, the UAW boss responded, “How are you going to get them to buy your cars?”

The story is telling because of the essential need for workers to have incomes adequate to buy the very goods their efforts create. It also makes clear the sometimes-conflicting dynamic between production and labor: labor costs to a manufacturer aren’t just costs, they are the very source of future revenues as workers spend their money on goods they make. And when you’re trying to create a million jobs per month, a productivity boost may be precisely the opposite of what is useful. Strictly speaking, productivity is the ability to produce more with the same or fewer inputs. In this sense, productivity and technological substitution of labor are the exact opposite of what India needs.

Modi’s vision of India as a manufacturing powerhouse producing goods that global markets seek is inspirational. It has motivated lots of bullish articles and strong investor interest in the country. By taking farmers to the factories, the theory goes, Modi will drive exponential growth in the middle class that will make Indian consumers a globally powerful force, driving economic activity. His aspiration is to replicate the Chinese success story.
I’m not convinced. Robots like YuMi are the main reason. It may very well be that technological advancements like YuMi have now made it impossible to create a middle class through manufacturing methods. China may have been the last country to do so through a manufacturing-based approach. The window to modernize through industrialization is rapidly closing; India has likely missed its chance.

There’s a joke that India’s prospects look brighter the farther away you are. Certainly, from the perspective of a Westerner, India appears a more logical candidate for a sustained boom than China. It’s a democracy in which most Indians seem to have a good under- standing of Western institutions. The former British colony has lots of educated English speakers. It’s also younger and has a cosmopolitan leader in Modi, a reform- and markets-minded head of state who has been actively encouraging foreign nations to invest in India (in direct contrast to India’s historical preference as inward looking).

The Boombustology framework paints a different picture, one in which the chance that India emerges to be the next great growth market is extremely low, and the lofty expectations of it being the next economic superpower are misguided… Expectations of a booming middle class are likely to be left unfulfilled, and many an investor will be disappointed.

India is not the next China.

Many argue that India won’t be the next China because India is going to be bigger than China as an investment story—India’s population is younger than China’s, India has a desperate need for infrastructure and doesn’t risk over- capacity, and India’s democracy makes it more vibrant than China’s one-party state. Let’s consider some evidence…

Starbucks is often seen as an informal economic indicator, given its ubiquity and the “affordable luxury” nature of its product. The better the economy is performing for the middle class, the more Starbucks locations are opened, and the more venti coffees it sells. The opposite is true, as well: during the financial meltdown of 2008, Starbucks shut more than 900 stores in the United States.

The coffee purveyor has been heavily focused on international markets as the source of its future growth. The company opened its first shop in China in 1999, expanding its operations in India 13 years later. It’s not a fair comparison, therefore, to look at store count; but looking at Starbucks’s growth metrics in each nation shows that India’s economy continues to lack a jolt. According to an internal 2014 Starbucks story on its India and China operations, in early 2014, Starbucks had 40 locations in India and planned to double that number in a year. At the same time, Starbucks planned to have 1,500 stores in China in 2015. In China, Starbucks ended up overshooting that estimate by a third, with 2,000 locations by the end of 2015. Efforts in India fell short, how- ever, with just 74 outlets a year later.

Even as we would expect the pace of store openings to slow in China, they have in fact accelerated. In 2018, Starbucks stepped up its pace of openings in China to one store every 15
hours! That will give the Seattle company 6,000 stores in China by the end of 2022. In contrast, Starbucks’s rate of openings in India has gotten slower. The company just opened the doors of its 100th India store in autumn 2017 and opened three more stores through mid-2018, all in Kolkata. Over the course of Starbucks’s presence in India, that’s a pace of one store every 23 days. “We believe that one day India will be one of the top five markets. I won’t put a time frame to it. It’s over the long haul,” Starbucks International President John Culver told BloombergQuint in 2017. At the present pace, it wouldn’t surpass current number five, South Korea, for more than 63 years. Given current trajectories, that means the champagne for Starbucks India passing Starbucks Korea won’t be popped until 2081.

So much for a booming middle class