Firing Up India's Factories

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

by Manjeet Kripalani

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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 Nearly five decades of stifling restrictions left Indian industry rusty and outdated.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.

While technology 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 Lenders.

SPECIAL ECONOMIC ZONES
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. "