Firing Up India's Factories

For big manufacturers, the subcontinent is becoming an alternative to China

By Manjeet Kripalani

For years, Sriperumbudur was known primarily as the town where Rajiv Gandhi was assassinated by a Sri Lankan suicide bomber in 1991. But these days, the city 25 miles west of Chennai is earning a far less grisly reputation. Alongside well-paved roads flanked by freshly planted trees, scores of glistening factories have popped up, bearing the names of global heavyweights such as cell-phone producers Nokia (NOK ) and Motorola (MOT ) and automaker Hyundai—which now builds some 350,000 cars a year in India. All around Chennai, other industrial parks are filled with the plants of auto-parts manufacturers, leather and textile exporters, and even German über-carmaker BMW.

India and IT, yes. But India and manufacturing? In the past two years manufacturing has emerged as the country's new rising star. Industrial production jumped by 12.5% in the year ended in March, the highest rate in years. With its huge market, productive workers, and—finally—a government that is starting to help rather than hinder investment, India is becoming an attractive alternative to China for making everything from sneakers to SUVs. Manufacturing "is where India's future lies; this is the real economy," says Ravi Uppal, president for global markets at Swiss engineering giant ABB Group, which is in the midst of a $200 million expansion in India.

Manufacturing's moment has been a long time coming. Nearly five decades of stifling restrictions left Indian industry rusty and outdated. While the dynamic software-services sector has picked up some of the slack, it employs just 2 million people—a speck in a country where 14 million new job seekers enter the market every year. India generates fewer than 1 million new manufacturing jobs annually, but needs to create at least five times that. And to really lift hundreds of millions of people out of poverty, India, like China, must build up labor-intensive export industries such as textiles, toys, and electronics. Many of the new plants are intended to serve India's growing market, but they're also targeting sales overseas. "As India gets better at manufacturing, it will start to export in larger volumes," says Raju Bhinge, chief executive of consultancy Tata Strategic Management Group.

Whiletechnology giants build vast outsourcing operations in India, manufacturing investment far outweighs theirs. In the verdant hills near Mumbai, India's commercial capital, Volkswagen (VLKAY ), Hyundai Motor, General Motors (GM ), and a joint venture of Fiat (FIA ) and local automaker Tata are all building new factories, for a total investment of $4 billion. Korean steelmaker Posco is planning a $12 billion plant in the eastern state of Orissa, while Luxembourg-based ArcelorMittal (MT ) plans to invest $20 billion in two steel mills in Orissa and neighboring Jharkhand. In March, Hewlett-Packard Co. (HPQ ) opened a factory near Delhi, its second Indian operation. And bathtub, sink, and toilet maker Kohler Co. is planning a $200 million plant in Gujarat. All told, 40% of 340 multinationals surveyed by consultant Capgemini plan to establish manufacturing operations in India by 2012. The companies say they're put off by rising costs in China, and have found that "the Indian government is being more proactive," says Capgemini Vice-President Roy Lendern.


That doesn't mean there are no more roadblocks. India's infrastructure is improving, but slowly. Power supplies are iffy, so companies typically need their own generators. Ports, though partly privatized, are still overcrowded. A shortage of vocational training, restrictive labor codes, and a hodgepodge of state and local regulations all continue to give business leaders headaches. "Our policies are archaic and not in tune with the realities of modern India," says V. Krishnamurthy, chairman of the National Manufacturing Competitiveness Council, which has been lobbying hard for lower taxes and more business-friendly labor laws.

But in many respects, the government is coming around to the realization that manufacturing is important, and is doing its part to woo investment. India's Commerce Ministry two years ago announced a policy encouraging special economic zones like the one China established in Shenzhen, the city near Hong Kong that has become home to thousands of factories. India's zones offer reliable power and water supplies and good roads—a relief from the otherwise crumbling infrastructure—as well as expedited clearance for exports and imports and minimal interference from bureaucrats. As states compete fiercely for foreign investment, some 300 SEZs have sprung up across India, the bulk of them near Chennai, Mumbai, and New Delhi. "We don't have to worry about the roads, power, water, access to ports; that is all taken care of here," says Stefan Hulsenberg, chief executive of BMW India. The company in February started producing 3 and 5 Series sedans (to be sold in India) at its 22-acre assembly plant in an SEZ south of Chennai.

Like China, India is also developing tightly knit networks of suppliers, which help establish particular industries. In autos, for instance, Japan's Suzuki Motor Corp. came to India in 1981 in a joint venture to make a "people's car for India." It brought components makers such as Asahi Glass Co., which soon allied with local companies. Since then they've been followed by the likes of Delphi (DPHIQ ) and NipponDenso. And locals such as Sundaram Clayton have stepped up their game—creating a strong supplier base for the auto industry and attracting other players like Hyundai and Honda (HMC ).

The same thing is happening with cell-phone makers. India is the fastest-growing major mobile-phone market in the world, and the industry's leaders have all launched operations there. Nokia set up shop in March, 2006, bringing along Salcomp, a Finnish company that makes chargers. They were followed by plastic-component maker Perlos, contract manufacturer Foxconn, and others. Today, seven companies supply Nokia in India, and many of those buy smaller components from locals as well. "Everything is made here, right from the printing on the circuit boards," says Sachin Saxena, operations director for Nokia in Sriperumbudur. Now, Nokia's suppliers also sell to Motorola, which a year ago started making phones just two miles up the road and in November plans to open a sparkling new facility.

India is even starting to see investment from a place that was a key driver of China's growth: Taiwan. In addition to electronics makers such as Foxconn, other, lower-tech outfits are starting to show up. Taiwanese shoemaker Feng Tay Enterprises, which sells shoes to Nike, is setting up a factory in an SEZ near Chennai, and rival Apache Footwear, a Reebok supplier, is planning similar operations in Hyderabad. Feng Tay has already hired 5,000 Indians, while Apache and two other operations in the works in Hyderabad will employ an additional 20,000. The owners plan to build dormitories for employees in order to attract migrant laborers—a fundamental part of China's equation for success. "We want to encourage more companies to come to India, because they don't want to put all their eggs into the China basket," says Thomas Chang, director of Taiwan's trade promotion organization Taitra. "India is a good option."

Corrections and Clarifications In "Firing up India's factories" (Global Business, Oct. 15) the name of a Capgemini vice-president was misspelled. The correct spelling is Roy Lenders.

Kripalani is BusinessWeek's Bombay bureau chief

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