India has been a leader in manufacturing for years, thanks to a large, potentially competitive workforce, low costs, and multiple sectors such as textiles, steel, electronics, and consumer goods. However, despite this real potential, many Indian manufacturers appear to be caught in a self-destructive cycle of price undercutting. While price competition may allow them to capture customers temporarily, the dent it places on profitability, innovation, and long-term sustainability is growing and will hollow out sectors.

Getting to the Bottom

Price competition has increasingly become the default state of many Indian manufacturers. Instead of competing with respect to quality, technology or customer service, competitors are forced to cut their margins so as to maintain any relevance, at times disregarding any growth whatsoever. This trend leads to a race to the bottom, where survival of a business is favored over growth.

For example, in the steel, textiles and consumer products industries, firms have resorted to continual price cutting in order to capture bulk orders, especially from exporters/distributors. Ultimately, although price competition can temporarily increase sales, firms are weakened with less ability to reinvest in technology, product development, and training new talent. Over time, this weakens the entire ecosystem and the ability for that ecosystem to compete globally.

Erosion of Profitability

The most immediate effect of ongoing price wars is reducing profit margins. Manufacturers are already feeling squeezed by increasing raw material costs, energy prices, and regulatory compliance. When businesses drop their prices for products rather than differentiating the product offering, they effectively enter the decreasing market value, which means damaging their own survival fund. This use of their survival fund doesn’t leave much margin for new product innovation or scaling product or processes.

Moreover, global buyers usually sense this vulnerability and begin to demand even lower prices, trusting that Indian suppliers will fight each other. Indian manufacturers are competing against each other so much that they frequently end up making far less money than overseas manufacturers producing similar products.

Declining Quality and Innovation

Once the margins reduce, companies start to cut back on other aspects of the business. Often quality is the first aspect to take a bite. To remain competitive with costs, manufacturers can use a lower raw material standard, cut corners in production processes, or exclude quality checks altogether. This doesn’t negatively affect only individual brand reputations but entire industries, as customers start seeing “Made in India” as cheap instead of world-class.

Investment in innovation or research and development also suffers. In a truly competitive market all businesses innovate and draw attention to a unique offering. However, when competition in the market exists because of price, the need for survival overwhelms any planned investment in innovation, new spending on product development, investment in technology, or efficiency.

Gireesh Sharma

Director, Manufacturing Industry

 //andrespenabad.com