Hyundai Motor's car factory in India, set amid palm-studded marshes on the outskirts of Madras, is a gleaming example of what could be the future of India's economy. Built for $1 billion, its high-tech robots and monstrous steel-pressing machines will churn out 300,000 Accent sedans and other vehicles this year, at world-class quality levels. Hyundai has been shifting production of its smallest cars to India to take advantage of low costs, thereby keeping the business profitable. One-third of its cars produced in India are exported to Germany, Peru, South Africa and elsewhere. Opened in 1998, the plant was operating long before Hyundai opened factories in China or the U.S.and the South Korean carmaker is already building a second, $1 billion facility next door. Why "We are going to use India as an export hub, and the domestic market is also growing very fast," says Lheem Heung Soo, managing director of Hyundai in India. "Right now the only difficulty is how to produce more cars."
Until recently, Hyundai has been an exception in India. The general consensus among multinational manufacturers had been that Indiawith its miserable highways and airports, hostile bureaucracy and militant labor unionswas no place for a factory. While companies happily tapped India for its well-trained and low-cost IT-engineering talent, they've placed their bets on China as a manufacturing center. Although exports of manufactured goods from India grew 20% to approximately $70 billion in its last fiscal year, that's just one-tenth of the $700 billion China exported in 2005. Manufacturing accounts for only about 16% of India's GDP. In China, its share is more than twice as large.
Now more companies are coming around to Lheem's thinking. Near Hyundai's plant, Nokia opened the first phase of a $150 million mobile-phone factory in March. In the state of Orissa on India's east coast, South Korean steel giant Posco plans to construct a $12 billion mill. SemIndia, a company formed by chip-industry executives, will break ground in June on a $3 billion semiconductor factory in the southern state of Andhra Pradesh. Others are coming around, too. Dell Computer recently announced its intention to build a factory in India, joining those it already has in China and Malaysia. In fact, the Indian manufacturing sector expanded 9% last year, a key reason why the country posted economic growth of 8.4%. A 2004 report by consulting firm McKinsey & Co. and the Confederation of Indian Industry says that manufactured exports from India can potentially increase to $300 billion by 2015. "'Made in India' could become the next big manufacturing exports story," the report said.
Too optimistic Maybe so, given India's stop-and-start efforts to open up its once-socialist economy, where for decades domestic manufacturers were so sheltered from competition by tariffs and a restrictive licensing regime that one of the best-selling cars was the Ambassador, a rattletrap sedan first manufactured by Hindustan Motors in 1957 and still sold today. Due to years of underinvestment, much of India's manufacturing base is just as outmoded as the Ambassador, and many of the problems that have kept investors at bayred tape, corruption, outmoded transport links and unreliable electrical powerremain.
But with the pace of reform accelerating, India is beginning to change in ways similar to those that helped China attract foreign investment in manufacturing. India's rising middle class means companies now see the country as an important source of consumer demand. India has joined China as one of Nokia's five largest markets. According to tech-consulting firm Gartner, mobile-phone sales in India grew 42% in 2005 to nearly 30 million units, and sales are expected to quadruple by 2009. With so much potential, Nokia decided India was the best option for a new factory. "We became eager to get closer and closer to India," says Jukka Lehtela, director of Nokia's operations there.
Then there's the China factoror rather, the anywhere-but-China factor. Korean giant LG Electronics exports to the Middle East from appliance and consumer-electronics factories near Pune and New Delhi because it's faster to ship to those markets from India than from China. The company recently opened another Pune plant to make optical-disk drives for Europe. "We didn't want to depend on the Chinese for everything," says Kim Kwang Ro, managing director of LG Electronics in India. "Our company decided to diversify."
India's manufacturing sector isn't being driven exclusively by multinational cash and expertise. The country has a base of homegrown companies, like the Tata group, that are developing quickly, some of them with burgeoning international operations of their own. (See Tata story.) "Many Indian companies are dreaming of being world class," says Sanjiv Bajaj, executive director of Pune-based scootermaker Bajaj Auto. They're eliminating redundant staff, streamlining management and investing in modern production lines. A decade ago, Bajaj made one million two- and three-wheeled vehicles with 24,000 employees; today, it churns out 2.2 million with 10,000. "It is possible to deliver Japanese quality at Indian prices," says Pradeep Shrivastava, a vice president for engineering.
Not all Indian companies have improved, and decrepit infrastructure adds about 2% to 5% onto the costs of doing business in India compared to China, estimates Deloitte Touche Tohmatsu. Much of India's clothing and textile industry, for example, remains a patchwork of smaller producers that can't match the scale of Chinese companies. A McKinsey study found that Indian apparel makers are half as productive as Chinese firms due to poor management and a lack of training and technology. McKinsey figures that a man's shirt costs about 23% more to produce in India than it does in China. At the same time, companies in India suffer a power outage almost every other day, according to a 2004 study conducted by the World Bank. Susheil Joshi, an India-based manager for clothing retailer The Children's Place, says that bad roads and crowded ports force factories to send their products a week to 10 days ahead of when a cargo ship is set to sail. In China, half that time is needed.
The Indian government estimates that the nation needs $200 billion of new ports, roads and other infrastructure. In December, the shipping ministry announced a $22 billion program to double the capacity of the country's ports by 2012; India has also embarked on a $50 billion program to add or modernize 40,000 km of highways over the next several years. The government is facing stiff opposition to another major reformof the country's onerous labor lawsfrom labor unions and leftist politicians, but it is trying, at least, to get the process started. It is championing special economic zones with 10-year tax holidays, duty-free imports and the possibility of less restrictive labor laws.
Initiatives like that are encouraging. "Add infrastructure and a flexible labor policy and boom! We'll have so much foreign exchange coming in we won't know what to do with it," says Rahul Bajaj, chairman of Bajaj Auto. But the country has made false starts on the road to modernization before. Is this time different "I don't think this party can be spoiled," says Shirish Sankhe, a partner at McKinsey in Bombay. "No one wants to stay out of India." We'll see.
|