Sucheta Dalal :In India 'next great' industrial story
Sucheta Dalal

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In India, 'next great' industrial story  

April 18, 2006

India "Made in China" may be getting a new rival.

In India, 'next great' industrial story

By Anand Giridharadas International Herald Tribune

MONDAY, APRIL 17, 2006


As global manufacturers seek new places to plant their flags, India - where factories have long been conspicuous for their relative absence - is seeing early stirrings of an industrial renaissance. The effects could be profound for India's vast number of poor people, and for the international sourcing of goods from cars to bras.


For decades, manufacturing in India has been hobbled by antiquated labor laws, creaking infrastructure and paperwork. The new economy of call centers and software campuses arrived to buoy the relatively privileged, but for many of the three-quarters of Indians with less than middle-school education, few factories meant few jobs.


Across India, total exports - mostly manufactured goods - are rising at a 26 percent annual clip, the Commerce Ministry reported recently. The manufacturing sector is growing at 9.4 percent annually, compared with 6 percent a year from 1991 to 2004, according to the Finance Ministry.


Special economic zones - the same enclaves of relative economic freedom that spearheaded China's export-led industrialization - are now spreading here, providing tax holidays, more control over infrastructure like water and power and less regulation. At least 75 zones are in the works, with more than a dozen already operating.


This kind of pilot-project recalls how China once tested new policies and created an appetite for them nationwide, said Li Kui-wai, an economist at Hong Kong University.


Here in Tamil Nadu state, where the changes are briskest, global corporations are already taking advantage of a shift the world has scarcely noticed.


Victoria's Secret already buys 6.5 million bras a year in this city, roughly one-tenth of its global total, from a factory its parent company, Limited Brands, invested in. Nokia just erected a high-volume factory here that it says will produce more than 30 million phones a year and account for at least one-tenth of its global output.


Hyundai Motor, which produces a new car in Tamil Nadu every minute, has made India its global hub for the Santro hatchback; it plans to ship 100,000 India-made cars to 60 nations this year, and 300,000 within two years.


"Geographically, it's close to the market, and the second thing is the very highly educated people in India," said Heung Soo Lheem, chief of India operations for Hyundai, explaining why his company had invested in the country. Thirdly, he said, "the suppliers are here - I do not say better than China, but maybe the same. And the labor costs are less than China."


In a gold rush that evokes the start of China's factory boom, multinationals like Bayerische Motoren Werke, General Motors and Intel are locking down real estate in Tamil Nadu, as are scores of little-known companies from South Korea to Italy. Outside Madras, also known as Chennai, barren grazing land that cost $1,000 an acre, or $2,500 a hectare, 20 years ago sells for up to 65 times as much today.


"After China, the next great manufacturing story is India - and companies are buying it, because otherwise they wouldn't be buying property," said B.G. Menon, who has sold property to BMW and others as chief operating officer of Mahindra World City, a special economic zone outside Madras.


No one knows how many jobs the boom has spawned. But recent government statistics show that auto plants and associated industries alone employ more than 10 million people - exceeding the entire worker population of Indian factories in the 1990s.


India's emergence as manufacturing hub comes as multinationals look for alternatives to China. A talent shortage is lifting wages there, which could make Chinese goods costlier and cancel out one major advantage over India: world- class infrastructure that reduces the cost of production.


Meanwhile, Western governments are threatening to choke China's exports by imposing anti-dumping duties, and some multinationals are worried, said Ng Buck Seng, head of Asia research at Manufacturing Insights, a consultancy that advises foreign manufacturers.


"Increasingly, what we're seeing is that multinational manufacturers have a lot more interest in India," Ng said, "and that's because of the risk they encounter when they have only China as a low-cost base."


Still, India is not the only country gunning for new factories. Southeast Asian nations, including Thailand, Vietnam and Cambodia, are also expected to see a spurt in manufacturing. India lags those countries in infrastructure, but has one big advantage: a home market of more than one billion people.


Indian wages are also relatively low, beginning at about $2 a day for factory jobs. That compares with a minimum of $3.50 to $4.50 a day in Thailand, depending on the area, and the $4 to $8 that some Chinese workers are beginning to command as labor shortages spread.


China is not in any immediate danger of falling behind, however. Its exports exceed India's by several multiples, and the gap keeps widening. In 2005, India's exports were worth about $8 billion a month, and China's, $63 billion, with manufactured goods the bulk of both countries' exports.


Experts say the two countries will occupy different positions in the vast market for offshore manufacturing. The first wave of low-cost manufacturing to be sent overseas - the making of toys, electric kettles and television sets, among other wares - will remain out of India's reach because of the difficulty of running Indian factories as large as Chinese ones. Official paperwork and regulation is still sticky here, and power still costs about twice as much.


But a vast middle segment of factory- made goods relies on a mixture of technical skill and low-cost labor, and here Indian manufacturing can be a supplement to China, experts contend. Not toys, but cellphones. Not hangers, but bras. Not patio furniture, but car parts. Not synthetic shoes, but leather ones.


Consider the formula of Muhammad Yavar Dhala, chief of Forward Shoes in Madras, which made one million pairs of leather shoes last year for European brands like Clarks. Below $60: leave it to China. Above $240: leave it to European cobblers.


Orchestrating China's industrial boom was the hand of government. In India's boom, the government is more of a cheerleader than a driving force.


Tamil Nadu leaders are credited with nudging the state a few years ahead of the Indian mainstream on infrastructure. The Madras seaport was recently privatized, trimming turnaround times, and electricity is reliable. The government has focused on microchanges that avert political backlash while still lubricating trade - approving the special zones, for example, and allowing companies to calculate their own customs.


The other principal weakness of Indian factories is the frequency of strikes. Many multinationals still say they cannot produce here until the most restrictive labor laws are repealed.


Yet a new wave of companies works around those laws, hiring those unlikely to join a union and nurturing them. Companies seek out villagers with scant opportunity or experience, often women. They build temples in their villages and invite their families for company prayers. And they coddle them to an extent perhaps unnecessary in less worker-friendly countries.


At the Victoria's Secret factory, 2,600 workers, mostly women, are picked up near their homes by 78 company buses instead of having to live in dormitories or commute by foot and bus. There are other expensive perks: a daycare center, a morning energy drink, an air-conditioned factory floor and meals tasty enough that the factory boss eats them. The workers are sold bras at a discount.


Chittabrata Majumdar, a top-ranking official at the Center of Indian Trade Unions accused India's "new factories" of union-busting.


"When the workers want to form their unions," he said, "they are being sacked from their jobs," adding that some are required to sign pledges not to join a union upon hiring hired.


But Majumdar admitted that lack of worker interest was an equally important factor behind the difficulties union organizers now face in India, as many workers are pleased to have modest wages and benefits after years of unemployment.


Within the special zones, foreign managers say, whatever fettered earlier producers is gone. "I don't know why people say it was impossible earlier," said Jukka Lehtela, the Finnish operations manager at Nokia, which operates its own special zone. "I can prove that they are wrong."


As workers nearby planted microscopic components onto circuit boards, zapped them with ion guns and snapped together $60 phones, Lehtela added: "I don't really see anything that can stop volume production here."



-- Sucheta Dalal