As we have seen in pt. 1, the notion that India offers an endless pool of affordable labor is rapidly becoming outdated. Today's reality shows a critical scarcity of qualified blue-collar workforce affecting multiple industries - a situation that threatens to undermine the country's industrial development ambitions.

As anticipated in my previous articles, manufacturing has been hit particularly hard by this workforce crisis. Current data shows that manufacturing employment - which had already been experiencing workforce decline for half a decade - has hit a plateau in 2024, following the devastating impact of the pandemic. A troubling indicator of this crisis is the massive shift of the workforce back to agricultural activities - roughly 60 million workers have returned to farming, reversing nearly two decades of progress in labor market modernization. The Ultimate Kronos Group's industry survey highlights the financial implications: over three-quarters of manufacturers say worker shortages are hurting their bottom line, with more than a third reporting devastating impacts.

Moreover, the talent drain is intensifying as skilled workers explore international opportunities offering better pay packages. Simultaneously, the rise of e-commerce has introduced unexpected competition for blue-collar talent. A comparison of compensation packages reveals the challenge: manufacturing positions offer basic monthly salaries of around INR15,000 ($180) for entry-level work, while specialized roles like welding command roughly INR1000 ($12) per day. In contrast, food delivery services provide base compensation of INR25,000 ($300) monthly, with performance incentives potentially lifting earnings beyond INR35,000 ($420).

Manufacturers' efforts to address this challenge through temporary staffing agencies and migrant labor have fallen short. These stopgap measures result in high turnover, with workers typically departing after a few months. This creates an endless cycle of recruitment and training that depletes resources without solving the underlying problem. The core issue isn't solely a lack of potential workers - it's also an increasing disparity between what manufacturers are willing to pay and what workers expect to earn in today's evolving job market.

In Pt. 2, I argued that solving the skilled blue-collar shortage problem in India is a challenge that makes it an unlikely candidate for venture capital investment. So, is there an opportunity to build a generational company tackling the skilled blue-collar shortage problem, built in India for India? I think there is.

India has big dreams of becoming a manufacturing hub. But these dreams are being grounded by reality. Let's dive in.

When ambition meets constraint

India stands at a critical juncture in its manufacturing journey. With a robust manufacturing sector generating 17% of the country's GDP, India is eyeing an ambitious role as the world's next manufacturing powerhouse. Economic forecasts from IBEF paint an optimistic picture, with projected exports of $1 trillion by 2030. This optimism isn't unfounded, either: FY22 saw manufacturing exports reach $418 billion, marking an impressive 40% year-over-year growth.

Yet these encouraging statistics tell only part of the story. The real backbone of India's manufacturing is made up of about 600,000 small and medium-sized businesses. They're pumping out a third of manufacturing value and handling half of all exports. Unfortunately, these businesses also often struggle to grow, get loans, or upgrade their tech. Therefore, on paper, India looks ready to grab business from companies wanting to diversify beyond China, but dig a little deeper, and you'll find some real challenges: the sector's focus on assembly rather than end-to-end manufacturing, coupled with significant reliance on imported components, creates inherent vulnerabilities and limits domestic value addition.

Then there's the quality control headache, which is really holding India back in the global market. You've got old-school quality management, not enough modern testing equipment, and manufacturing processes that aren't consistent. Small and medium enterprises face particular difficulties here, as financial constraints typically prevent investment in contemporary quality control systems.

Ultimately, to position itself as a global manufacturing hub, India must ensure stringent quality norms for goods manufactured within the country for both domestic and international consumers, which is really hard when most of the manufacturing is carried out by low-wage workers. You have to take away the worker-to-worker variability to successfully serve international markets.

The solution to these challenges increasingly points toward automation and robotics: robotics and automation offer a path to standardization that could transform Indian manufacturing by eliminating human variability, ensuring consistent product quality that meets international standards, and potentially increasing output while maintaining quality standards.

But where does India stand in terms of robotics? And what is the venture-building opportunity, here?

Manufacturing giant, technology tortoise

India may be the world's fifth-largest manufacturing economy, but when it comes to automation, it's falling behind, and big time. The numbers tell the story: India ranks tenth globally in yearly robot installations, showing a big gap with other manufacturing powers. The world's top five markets - China, Japan, USA, South Korea, and Germany - account for 78% of all robot installations. China leads by a long shot, having dominated the market since 2013 and making up over half of global robot installations in 2021.

Looking at robot density (how many robots are used per 10,000 workers) the gap becomes even clearer. India has just 7 robots per 10,000 workers, way below the global average of 141. Right now, most of India's industrial robots (which make up 80-85% of all robots in the country) are used in car manufacturing, though the electronics industry is starting to show interest in using robots, too.

Multiple obstacles hinder India's automation progress, especially among smaller manufacturers. Financial considerations top the list, as substantial upfront costs and maintenance expenses pose significant challenges. A steep 26.85% import levy on robotic systems further inflates costs for potential buyers. Beyond the machinery itself, companies must invest heavily in safety infrastructure, including protective barriers, specialized sensors, and dedicated floor space - expenses that can exceed the cost of the robots themselves.

Then there's the expertise problem. Running modern industrial robots requires specialized technical skills, but India doesn't have enough trained programmers and operators. This means companies often have to rely on outside experts even for routine maintenance and adjustments, driving up costs even further.

Another challenge is how inflexible traditional industrial robots can be. Setting them up can take months, causing long production delays. Moving or reprogramming robots for different tasks requires extensive technical support - a particular headache for smaller manufacturers who need to be able to adapt quickly to changing demands.

Perhaps most critically, India lacks a robust partner ecosystem to support robotics adoption. Many manufacturing operations require customized solutions and modifications to existing setups - a challenge that becomes particularly acute for MSMEs who lack the internal capabilities to execute such projects. While system integrators could potentially bridge this gap, their limited presence and accessibility create another barrier to widespread robotics adoption.

China 2004, India 2024?

"History doesn't repeat itself but it often rhymes," and China's manufacturing evolution offers compelling insights into India's potential automation journey. For decades, China's manufacturing dominance was built on the foundation of abundant, low-cost labor - workers who sewed, welded, and soldered products for global markets. This narrative bears striking similarities to India's current position. However, China's story evolved as rising wages began squeezing manufacturer profits, compounded by an aging workforce - challenges that mirror India's current wage pressures and skilled labor shortages.

China's response to these challenges is particularly instructive. While some manufacturers relocated to western China or Southeast Asia in search of lower wages, many embraced automation as an alternative solution. Large manufacturers, in particular, found robotics to be a cost-effective alternative, delivering consistent production quality without human labor constraints. This transition was significantly aided by state investments in robotics implementation, creating a model of government-supported industrial modernization.

However, the most relevant parallel for India lies in China's SME sector. Despite China's position as a global leader in robotics adoption, its vast network of small and medium enterprises - over 29 million manufacturing SMEs that contribute 60% of industrial output and half of the country's exports - shows a more nuanced picture of automation adoption. Recent reports indicate that only about 30% of Chinese manufacturing SMEs have implemented some form of automation or robotics, held back by familiar barriers: high costs, limited technical expertise, and the prioritization of immediate operational needs over long-term strategic investments.

Is this pattern likely to replicate in India, where MSMEs face similar constraints and considerations? Perhaps. Like their Chinese counterparts, Indian SMEs will likely navigate a gradual path toward automation, balancing the imperative for technological advancement against practical limitations.

Ultimately, where does the opportunity lie?

Selling robots or selling products?

Given what has been said so far, there are two main ways to tap into this (robotics) opportunity: you can either become a tech company that helps others automate their factories, or build your own high-tech factories that serve (ideally, international) buyers. Both paths try to solve real problems, but they come with different risks and chances of success.

The first approach - becoming a tech-first system integrator or a robotics/deep tech company (if you mostly work on developing new robotics solutions) - sounds good on paper but faces some tricky timing issues, in my opinion. While small and medium manufacturers are the target market given their automation needs (larger manufacturers have already, albeit slowly, embraced automation of sorts) they're notoriously slow to adopt new technology. The track record of startups in this space isn't encouraging, either: without naming names, different VC-backed robotics companies in India have raised millions of $, and have yet to cross the $1m threshold in yearly revenues years after inception. The risk of this model is spending millions in R&D and going nowhere - it's a "timing the market" problem (leaving aside of much better you can be vs. comparable solutions in the market).

The second approach - building highly automated micro-factories in a vertically integrated approach - looks more promising in today's market. It tackles both the worker shortage and quality control issues head-on, while also fitting nicely with the tailwinds of companies looking to diversify away from China. By positioning as a reliable partner for international (and even national, for some specific industries) buyers, this model avoids the whole problem of trying to convince traditional manufacturers to change and adopt technology. This second model is just much better in riding current tailwinds, while tackling key problems.

Indeed, the second approach has significantly better PMF, in my opinion. You don't believe it? The story of Ethereal Machines seems to be giving me credit. The company, started in 2014, initially focused on producing three-axis CNC equipment before advancing to five-axis machinery development in 2018. Despite winning an industry award for their 5-axis machine, they struggled to gain significant traction in domestic markets and found international expansion challenging. Then, they recognized a greater potential in utilizing their own equipment to provide manufacturing services, and pivoted accordingly. Today, they are serving marquee international clients in the aerospace, defense, healthcare, and consumer electronics sectors, and have recently closed a $13m round led by Peak XV and Steadview Capital.

In a way, the second model perhaps also represents the antithesis of the managed B2B managed marketplace model.

Indeed, ultimately, only a subset of India’s entire manufacturers is export-ready (which, however, might still be large enough for a large managed B2B marketplace outcome, don't get me wrong). This could be the reason why previously asset-light marketplaces are now becoming asset-intensive and effectively building their own manufacturing capacity and becoming full-stack contract manufacturing partners to buyers. Or why some other cross-border B2B marketplaces in specific sectors are internalizing R&D activities that extend beyond products to production processes (how to improve/implement new production processes, etc.) into their workflows, while others plan to upskill manufacturers (e.g. through improved factory layouts, investment in more productive CAPEX) to make them export-ready. Simply matching buyers and sellers is not enough in the cross-border trade were quality is key.

The model

There are some nuances to the "vertically integrated micro-factory" model that are worth discussing.

First off, you are not an R&D company. You are not developing hardware, you are integrating hardware, which means you take the latest off-the-shelf proven hardware and develop the software stack that sits on top and integrates all workflows, simplifying processes and implementing automation where possible. There are multiple reasons why you don't want to develop your own proprietary hardware, but it ultimately boils down to the fact that the "market" for the robots you are going to develop would be limited to your own operations, so developing them is a "make vs buy" decision that can only be justified if it significantly reduces variable costs (order of magnitude better than off-the-shelf alternatives, which is extremely unlikely) and/or increases utilization drastically. Going in this direction would just de-focus your efforts, time, and resources from where they should be directed instead, and it puts an additional layer of risk and complexity you really don't want to have.

This brings me to the second point. The value creation is in developing a robust software layer to manage factory operations (task allocation, etc.), customer interfaces (quoting, placing orders, collecting specifications, etc.), inventory (inventory management, material requirement, etc.), and scheduling - basically, you are building a proprietary factory operating system. You want to build a true "CAD to CAM to delivery" journey, where customers can upload CAD files, receive quotes, place orders and have CNCs, 6-axis machines, etc. automatically programmed and execute those orders. That's how you build a vertically integrated, highly automated manufacturing factory. Again, there's a caveat. You don't have to automate everything, and you don't even have to strive for that. Automate what can easily be automated and let humans do the rest (particularly those tasks that humans can easily do), augmented and supported by software (important).

Third point: choice of vertical/product categories is important. I believe that the best choice is to go for "value-dense" products (e.g. high precision parts) which will allow you to operate at significantly high margins, and not to fall for product categories that have low "value density" and relatively low AOV (e.g. furniture). This choice will likely lead you to focus on industries such as aerospace, defense, medical devices components and/or energy - which are also experiencing a significant increase in demand in recent times (not just internationally, but even domestically!). However, it's best to focus on one industry first and nail the execution there before expanding into new others.

Ultimately, to your customers, you will simply be a more affordable, faster, and more consistent and reliable alternative to local manufacturers. Your competition is technologically low SMEs that you can out-compete on price and quality, and your margin structure is still significantly better than theirs (which is the whole point of building your tech), and allows you to re-invest in technology, creating a virtuous circle.

The model starts with you owning the factories, but it could later evolve into a “franchise” in the long run, once the model is proven (good unit economics, strong manufacturing capabilities): you will provide the technology (robots + software) and the leads (orders), while the franchisee partners invest in the CAPEX and manage the operations, and you earn on a profit-sharing agreement. This would allow rapid expansion without the need for proportional capital investment, potentially allowing you to capture market share more quickly and efficiently.

It's not an easy model to pull off by any means, but surely one with a generational flavor. Plus, I am not gonna hide it: there's also a question mark on whether the local VC ecosystem is ready to support this type of business model.

Conclusion

This article concludes a 3-part series on the (skilled) blue-collar space in India, its challenges and opportunities.

In Part 1, I discussed how this crucial sector is facing a challenge: an alarming shortage of skilled labor threatens to derail India's ambitious economic goals.

In Part 2, I shared how, despite India's massive blue-collar workforce, scalable labor solutions require fundamental infrastructure, not venture capital, and my thoughts around the fact that the opportunity lies in building cross-border employment systems connecting India's workforce with Europe's needs.

In this Part 3, we explored how robotics might be the solution to the problem, but the business model to succeed in the space is not by selling robots, but by building and operating highly automated factories and integrating systems of off-the-self hardware with proprietary software

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#Robotics #ManufacturingStartups #Manufacturing #Startups #StartupIndia #Industry4.0 #MadeInIndia #FutureofManufacturing