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Entrepreneurship

Prof. Hemant Kombrabail

ANCILLIARY INDUSTRY DEVELOPMENT AND IDENTIFICATION OF OPPORTUNITIES FOR ANCILLARY INDUSTRIES


Ancillary Industries An ancillary industry is defined as A unit having investment in fixed assets in plant and machinery not exceeding Rs. 1 la!hs and engaged in the manufacture of parts" components" sub assemblies" loo!ing or intermediates or the rendering of services and supplying or proposing to supply # $ of their production to one or more percent units or 1 $ of their production to the large unit% Devel !"ent O# Ancillary Industries In India &n the post independence era" during the initial plan period" the main ob'ective of the industrial policy (as to develop heavy and machine building industry. As for example" the 1)*+ &ndustrial Policy Resolution had laid do(n that besides arms and ammunition" atomic energy and rail(ay transport (hich (ould be the monopoly of the ,entral -overnment" the state (ould be exclusively responsible for the establishment of ne( underta!ings in six basic industries. &n the early period of industriali.ation" most of the industries had to depend on imports or in house production of components re/uired for final product. &n short" in the immediate post0&ndependence period" the emphasis (as on the establishment of large industries (ithout simultaneous and due stress on the dispersal through small0scale industries. 1he 2tudy group appointed to examine (or!ing of the &ndustries 34evelopment and Regulation act5" 1)#1" observed that the actual implementation of the industrial policy had not been up to the expectations and declared ob'ectives of policy" and had created certain anomalies. 1he &ndustrial Policy 2tatement before the Parliament on 67016088 observed that the gro(th in per capita national income had been inade/uate (ith the increase in unemployment" (idening of rural0urban disparities" the stagnation in real investment and (idespread industrial9 sic!ness. 1he 1)88 industrial policy laid special attention on the development of the tiny sector. 1he salient features of the 1)88 industrial policy (ere the expansion of the list of items reserved for the small0scale sector 3from 1+ items to over # items5" the establishment of 4istrict &ndustries ,enters" creation of separate (ing in the &ndustrial development :an! of &ndia to deal exclusively (ith the credit re/uirements of small0scale" village and cottage industries 1he strategy for ancillary development (as originally outlined (ith the ob'ective of 1. 4evelopment of employment opportunities coupled (ith gro(th of entrepreneurship in different fields and in different parts of the country 6. 4ispersal of industrial activities in various regions bringing out the desired e/uitable distribution of economic po(er 7. &ncrease in productivity of the small0scale units *. -ro(th of a lo( cost economy through reduction in costs brought about by appropriate technology follo(ed by ancillary units #. 4evelopment of a single or multi discipline expertise in ; different fields to bring about economies of scale <. A some(hat special ob'ective of ancillary development is to provide an effective solution to the mar!eting problems of small enterprises in the initial period or before they reach the brea!0even point

Entrepreneurship

Prof. Hemant Kombrabail

1he development of ancillary industries has assumed added importance in the country li!e &ndia (ith large regional imbalances 1he ,ha!ravarty ,ommittee on :ac!(ard Areas 31)+15 classified 1"## districts as bac!(ard out of 76< districts= the ,ommittee too! up for analysis. 1he >ational ,ommittee on the 4evelopment :ac!(ard areas had recommended that the industrial dispersal policy for medium and large industrial units should be such as (ould lead the establishment of industrial units far a(ay from the present agglomeration since small units on their o(n cannot bear the cost of developing infra0 structure in the bac!(ard areas (ithout the support of large units. Already -overnment of &ndia has decided to locate at least one ma'or industry in each district i=" order to achieve the ob'ective of decentrali.ed industriali.ation of &ndia. &n &ndia" rich farmers and several others in rural areas have gathered substantial amount of investable sources but they are not finding suitable outlet 2mall industrial units are inade/uately profitable and highly ris!y as reflected in the magnitude of industrial sic!ness among small0scale units. 1he concept of 'oint sector should help in creating basic infrastructure in the bac!(ard areas and motivating local rich to invest enough resources to start industrial units in these areas. Ho(ever" for this development" the development of ancillary industries in necessary. 1he potential entrepreneurs in thousand of scattered villages in the country suffer from isolation paradox. &n isolation they dare not invest their funds in industrial activities" (hich involve some ris!" at least initially. 1he establishment of large and medium0scale industrial units (ould have catalytic effect. Rural potential entrepreneurs both financial resources and or (ith technical /ualification (ould come for(ard (ith their savings for investment in industrial pro'ects provided they are assured support by large and small0scale units through mar!eting support and technical guidance to produce /uality goods -enerally spea!ing" the /uality of entrepreneurship that is re/uired for managing an ancillary unit is different from that (hich is re/uired for managing a small0scale unit. &n an ancillary unit" the entrepreneurship can be transplanted or even in'ected into a technologist (ho can produce a fe( items to the exact specifications of the large0scale producer. &n fact" many entrepreneurs engaged in ancillary production are either related to the o(ners of large0scale unit or are experienced technologists (ho can fabricate a product as re/uired. 1he usual types of s!ill re/uired for a small0 scale industrialist" namely" ability to mar!et the products and raise finance for the purpose" are not so important in an ancillary producer (ho often receives help by (ay of detailed dra(ings and other specifications from the large0scale manufacturers and his main tas! is to turnout products according to these specifications. &t is true that the ancillary producer revives assistance from the large0scale producer either by (ay of advance payment or by the supply of scarce ra( materials and other goods A ma'or problem faced by ancillary units is their vulnerability to variations in demand. ?hen the large0scale manufacturer producing an end product faces slac!ness in demand" the ancillary unit supplying the components is hit hard and may" have to remain practically idle until the demand for the end product revives. 2ince the production apparatus in the ancillary units is highly speciali.ed and tailored to meet the re/uirements of a particular assembly" it is not possible to s(itch over to any other items (ithout incurring losses on account of machinery installed An ancillary unit" therefore" is a ;captive unit;" (ith no alternative outlet. &ts difficulties are often aggravated by delay in the payment of bills. 4uring times of financial stringency" there is a tendency on the part of the parent firms to s/uee.e the ancillary units by giving themselves the credit through non0 payment of bills%. A survey of industries in @apan revealed that only + per cent of the firms received payment (ithin < days and that the remaining )6 per cent received it after the lapse of <
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Entrepreneurship

Prof. Hemant Kombrabail

days to 1# days. &n this particular respect" therefore" ancillary units are in more vulnerable position than small0scale industrial units A small0scale industrial unit producing consumer items or other products (ill be able to ma!e /uic! ad'ustments in its production plan as (ell as product design in order to minimi.e the adverse impact of a fall in demand. &t may consider diversifying its activity (ith marginal additions to its machinery and A or e/uipment. &t may even supply its products to other mar!ets" if the traditional mar!ets fail. :ut ancillary units are tied to the ;9apron strings; of one or t(o specific large0scale units and often find it extremely difficult to ma!e such ad'ustments. As a result" they are very adversely affected ?hile ancillary units suffer from these disabilities" they are free from the usual (orries about the mar!eting of their products. An ancillary unit produces for a pre0determined mar!et because its production is effected against advance orders. &t may be provided (ith scarce ra( materials or even finance by the parent firm" depending upon the type of relationship bet(een the t(o. And during periods of rising demand and plentiful orders" the ancillary units can continue to operate (ith hardly a problem &n &ndia" unli!e other countries" the ancillaries sponsored by large units suffer from a ma'or handicap. 1hey lean too heavily on the large units. 1his dependence may be unavoidable in the initial stage of development= but the ancillary is able to stand on its o(n legs after a time" (hich (ould be possible only if the accent is placed on product improvement" cost reduction and the development of export outlets" especially (hen the ancillary product is able to meet the re/uirements" of the replacement mar!et abroad. Fact rs A##ectin$ Ancillari%ati n Recently" there has been a gro(ing trend to(ards ancillari.ation" than!s to the series of the rapid developments that have ta!en place in the industrial structure in this country. 1he si.e of the operations of several industrial units has increased enormously" (ith the result that they are compelled to sub0contract some of the items of production to ancillaries. 4uring the 1)# s" (hen these industrial units (ere set up the production of all the components so that the stipulated targets might be met in terms of the licenses granted to them. &n those days" there (ere fe( ancillary units ade/uately e/uipped to produce the components according to specifications. :ut during 1)< s" a large number of small0scale units" (hich (ere capable of producing a variety of items emerged" (ith the result that large0scale manufacturers developed enough confidence in them to assign the production of specific items to these units &t (as more convenient for large0scale manufacturers to get the ancillary units to produce certain items for them. ?ith the gro(ing complexity of management" the large0scale manufacturer can no( concentrate on the problems of organi.ation" mar!eting" finance etc rather than fritter a(ay his energies on finding ra( materials and framing production plans for the manufacture of the several minor items that go into the final assembly. Bor example" a bicycle manufacturer does not have to bother about buying and stoc!ing the rubber used in the production of pedals= he prefers to get this item supplied to him by an ancillary unit Carge0scale manufacturers can economi.e on transport costs" storage space etc by sub0contracting rather than by producing the same components themselves &t is economic to have some items manufactured by ancillary units because the cost of these items is higher (hen large0scale manufacturers fabricate them
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Entrepreneurship

Prof. Hemant Kombrabail

:y sub0contracting" a large0scale manufacturer is able to insulate himself against fluctuations in the prices of ra( materials over a period of time by entering into contracts for tl1e supply of these items. A more accurate assessment of the input cost as (ell as the returns on manufacture is possible if the components are available at fixed prices. All these facts underscore the point that the development of ancillaries and their gro(ing popularity have been (ell supported by economic and management considerations

Pr &le"s and Issues related t Ancillari%ati n &n the context of liberali.ation of our economy and resultant unleashing of mar!et forces" the future ancillari.ation both for Public 2ector and Private 2ector" (ill have to be based on mutual economic gains and need for technology up0gradation and moderni.ation" so that the 22& Dendor units are sufficiently competitive &n spite of the positive outloo! for subcontracting" ancillary A subcontracting units have been facing severe problems in dealing (ith large0scale units 2ome of the important ones" (hich need attention" are as follo(s 1. 4elay in Payments Payments by P2Es and Private 2ector Enits to the Dendors from 22& 2ector are often delayed. 2ome of the Private 2ector underta!ings and 2tate -ovt. ,orporation are reported to ta!e upto < months for settling their bills (ith 22& units. 22& Enits are unable to ta!e recourse to legal redressal in terms of 4elayed Payment Act as 1hat (ould spoil the relationship (ith the buyer 1hey have been compelled to agree to such delayed payment at the contract stage itself ,ivil suits are time consuming and laborious 1he Act needs to be modified to provide more teeth to it" at the same time promoting good business relationship bet(een buyer and supplier 6. Fbsolescence ?hen parent units revise the specifications" captive ancillary units are sometimes not given the expected support by the former for adapting to the higher need technology. &n certain cases they (ere not given sufficient time for effecting the necessary changes in their manufacturing set up. 7. Gultiplicity of suppliers 2plitting of the re/uirements to a number of vendors at times cause captive ancillary units to (or! belo( their :rea!0Even Point. Burther" the creation of such competition among the vendors from 22& sector forces them to supply the goods at unprofitable prices *. Earnest Goney 4eposits 1here (ere instances (hen P2Es insisted on Ernest Goney 4eposit and 2ecurity 4eposit from the 22& units even though they (ere enlisted (ith >2&,. 2uch practice as (ell as insisting on ban! guarantees" put to strain the feeble financial capacity of some of the 22& units #. HR4 and access to information 2&2&s and other &ndustrial 4evelopment agencies are already conducting a(areness programs and training programs for 22& Enits on 1HG" &2F ) . Ancillary 4evelopment" Goderni.ation"
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Entrepreneurship

Prof. Hemant Kombrabail

Export Promotion" etc. Ancillaries and 22& units feel the need for more such exposures and ne( training programs on Gethods and procedures for Dendor Rating and Registration being follo(ed by Carge 2cale Enderta!ings :ill rediscounting scheme of 2&4:& &nternational 2ubcontracting Exchange" etc Advanta$es O# Ancillari%ati n 315 2ub0,ontracting 1he si.e of the operation of several industrial units has increased enormously (ith the result that they are compelled to sub0contract some of the items of production to ancillaries 365 Economical 2mall0scale manufacturers can economi.e on transport cost" storage cost etc. by sub0contracting and it is also economical to have some items manufactured by ancillary units because the cost of these items is higher (hen they are fabricated by large0scale manufacturers 375 ,oncentration on &mportant problems ?ith the gro(ing complexity of management the large0scale manufacturer can no( concentrate on the problems of organi.ation" mar!eting finance etc. rather than (aste energies on finding ne( ra( materials 3*5 2upply of scarce ra( material 1he ancillary unit need not bother about the availability of ra( material. An ancillary unit is assured of regular supply of scarce ra( material from the present firm 3#5 Provision of finance 1he parent company assists the ancillary industry at the time of financial crisis. Eltimately the parent company is dependent on the ancillary unit for the supply of its spares" parts and components

Entrepreneurship

Prof. Hemant Kombrabail

3<5 Su&'C ntractin$ 2ub0contracting system is a mutually beneficial commercial relationship bet(een the t(o companies. 1his is !no(n as Ancillari.ation in &ndia and more generally as 2ub0 contracting. 2ub0contracting can be defined as IA sub0contracting relationship exists (hen a company 3called a sub0contractor5 places on order (ith another company 3called the sub0contractee5 for the production of parts" components" sub0assemblies or assemblies to be incorporated into a product sold by the sub0contractor. 2uch orders may include the processing" transformation or finishing of materials or parts by the sub0 contractor at the re/uest of the sub0contractorJ. &n practice" large0scale industries do not produce all goods on their o(n= instead they0rely on small0 scale enterprises called sub0contractors for a great deal of production. ?hen the (or! assigned to small enterprises involves manufacturing (or!s" it is called &ndustrial 2ub0contracting. &n the other cases" it is !no(n as commercial 2ub0,ontracting &t is not unusual for sub0contractors to (or! for more than one sub0contractor. Advanta$es 1. &t increases production in the fastest way (ithout ma!ing much effort 6. 1he sub0contractor can produce products (ithout investing in plant and machinery 7. 2ub0contracting is particularly suitable to manufacture goods temporarily *. &t enables the sub0contractor to ma!e use of technical and managerial abilities of the sub0 sub0 contractors #. 4espite leading to dependence" sub0contracting ensures existence of sub0contractors by providing them business <. Cast but no less the least= sub0contracting ma!es the core firms more flexible in their production Disadvanta$es a. &t does not ensure the regular and uninterrupted supply of goods to the core firms" i.e. sub0 contractors that adversely affect the functioning 0of the core firms b. -oods produced under sub0contracting system are often /ualitatively inferior c. 2ub0contracting also delimits the expansion and diversification of the core firms d. 4elays in payments" a common feature" by the sub0contractor to the sub0contractors endanger the very survival of the latter &n &ndia" sub0contracting in the form of ancillari.ation of ancillary units has been receiving -overnment support since sixties. An ancillary unit is one" (hich sells not less than # $ of its manufactures to one or more industrial units" presumably large units. 1he -overnment has been repeatedly advising public sector underta!ings to ensure that a large number of items are farmed out for manufacture by small0scale units. &n order to encourage sub0contracting system" an important development in this area has been the establishment of subcontracting exchanges at the 2mall &ndustries 2ervice &nstitutes 32&2&9s5 all over the country. 1hese exchanges maintain up0to0date information on the unutili.ed capacities of the small0scale enterprises and then match these (ith the re/uirements of the large0scale industries. 1hus" these exchanges ensure orders for the small0scale enterprises from the large units. &n 9,hina" the ancillary development is described as the 94ragon 4ance9 0 the head of the dragon symboli.ing the parent unit and tail representing the ancillary units &n &ndia" commercial sub0contracting and interdependence bet(een locali.ed communities of small enterprises is found in existence around speciali.ed industries. 1he diamond polishing and garments industries are such examples. &n both these industries" production is carried out in small firms or
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Entrepreneurship

Prof. Hemant Kombrabail

home0based putting0out systems" but the crucial functions such as supply of ra( materials and selling the products are performed by the large units. 1here are also a large number of clusters of small enterprises engaged in speciali.ed industries 0 (oolen garments" bicycles and parts" se(ing machines and parts in Cudhiana" sports goods in @allandhar" loc!s in Aligarh" leather goods in Agra and Kanpur" cotton hosiery in 4elhi and ,alcutta. 1hus" sub0contracting system ma!es possible to ta!e advantage of flexibility in production. At the same time" despite leading to dependence" it also ensures existence of small enterprises. &n the recent past" the concealed industrial sub0contracting has also risen substantially in &ndia. 1he pronounced rise in the employment share but not in income share of the unorgani.ed sector is an indicator of such phenomenon 1he ne( policy document for small enterprises titled 9Policy Geasures for 2trengthening" 2mall" 1iny and Dillage Enterprises" 1))19 also ma!es a special mention of industrial subcontracting and contains special measures to promote it through e/uity participation by others" presumably large" industrial units in small0scale enterprises not exceeding 6*$ of the shareholding. 1his measure is expected to boost ancillari.ation. Ho(ever" the product reservation policy and continuous support to tiny enterprises (ould continue to constrain ancillari.ation process in the country. Kes" the extent to (hich the reform regime in. &ndia is trying to create a competitive business environment augurs (ell for boosting sub0contracting system in the coming time in &ndia