Firing Up India's Factories

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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."

Kripalani is BusinessWeek's India bureau chief .