India Moves Beyond the Back Office

Boston Consulting's Sirkin and Bhattacharya say India has all the ingredients to emerge as a 21st Century manufacturing hub

by Harold Sirkin and Arindam Bhattacharya

In today's global economy, the division of labor between China and India couldn't be clearer: China makes things; India does things.

Beneath the surface, however, this has started to change. Driven by its vast domestic market and an abundance of relatively low-cost workers with advanced technical skills, India is becoming an important and potentially world-class manufacturing hub, according to a recent report by the Boston Consulting Group and Knowledge@Wharton.

It has several hurdles to overcome first, the most significant of which is the country's notoriously substandard infrastructure: shabby airports, potholed roads, clogged ports, and insufficient electric power.

Plagued by Power Shortages

This latter problem is especially acute. According to the Ministry of Power, peak demand during the fiscal year ended Mar. 31, 2006 exceeded supply by approximately 11.6%. Ravi Aron, a senior fellow at the Mack Center for Technological Innovation at the University of Pennsylvania's Wharton School, notes that overpriced and unreliable energy supplies have forced many Indian businesses to invest in their own generators. About three-fifths of all Indian manufacturing depends on such power, compared to less than a fourth in China. "This is an additional capital investment that shows up on the balance sheet," Aron notes. "Insulating yourself from India in India is an expensive business."

Acknowledging the problem, Indian Finance Minister P. Chidambaram told us last fall, during Boston Consulting Group's first-ever global partners meeting in that country, that India will have to spend an estimated $150 billion over the next seven to eight years to bring infrastructure up to par. The importance of this can't be overstated. If the efforts are successful, India should be able to boost its annual gross domestic product growth rate from the current 8% to 9% per year to a sustainable 9% to 10% per annum.

More and more multinationals are aware of India's vast potential and have been setting up operations in the country. Ford (F), Hyundai, and Suzuki all export significant numbers of cars manufactured in India. LG, Motorola (MOT), and Nokia (NOK) either manufacture handsets in India or have plans to start, with a sizable share of production being exported. ABB, Schneider Electric (SU), Honeywell (HON), and Siemens (SI) have Indian plants that manufacture electrical products for both the domestic and export markets.

Less Dependence on Home Economy

A number of globally competitive Indian companies also are making their mark. Over the past five or six years, many Indian firms have restructured their manufacturing operations and have implemented world-class practices. Moser Baer has established itself as a global manufacturer of CDs, DVDs, and other data-storage media. Indian pharmaceutical companies, many of which already meet demanding U.S. Food & Drug Administration manufacturing standards, are entering the global market in increasing numbers. And Indian auto parts manufacturers are becoming prominent institutions in the global supply chain.