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OCTOBER 18, 2004
The Factories Are Humming In India Indian manufacturing is surprisingly strong-and fueling an export boom Ask any global investors for their quick take on India, and you'll get the usual answer: Software and outsourcing are all that count. Manufacturing -- hobbled by strict labor laws, red tape, and a lack of critical mass -- is just not a field where India can excel. That's the conventional wisdom. But contrary to expectations, Indian manufacturing is proving surprisingly robust. So robust, in fact, that India's gross domestic product grew a healthy 7.4% in the second quarter, beating expectations by a long shot. The consensus is that manufacturing -- now growing almost as fast as India's vital services sector -- is what provided the extra kick. India's 25% surge in exports got a boost from manufacturing as well. Foreign and domestic investors have bid up shares of corporations such as tractor maker Mahindra & Mahindra and auto-parts biggie Bharat Forge. India certainly has a ways to go before it turns into the next China, which has accumulated hundreds of billions in foreign investment in manufacturing during the past decade. Indian roads and ports still don't hold a candle to China's, and the mass production base already installed in China is still building up in India. "Global [companies] want to source $50 million to $100 million at a time, but often, in India, that's the size of the entire company," says Nagi Palle, a principal at consultant A.T. Kearney in India, adding that India doesn't yet have the scale to be a world-class manufacturer. Yet powerful trends are giving manufacturing a lift. The ruling Congress Party coalition, under Prime Minister Manmohan Singh, wants to add billions more to the $177 billion in infrastructure spending already planned. Big-ticket projects include a $14.5 billion cross-country highway system, as well as the expansion of ports, airports, and railroads. Even India's maligned power sector is turning: About 12 new private power projects worth $2.6 billion have been approved by the government. HOT STEEL And the private sector? Indian companies are planning about $105 billion worth of capital expenditures. Tata Steel, for instance, will spend $3.2 billion to make overseas acquisitions and expand capacity in India from 3 million tons to 7.5 million. In all, about $440 billion will be spent in public and private projects over the next five years, according to Bombay researcher Projects Today. "The kind of investment we're seeing now, we haven't seen for years," says Arindam Bhattacharya, director and expert in manufacturing, Boston Consulting Group, India. Companies such as Tata, Birla, Sterlite, and Gujarat Ambuja are rushing to meet the demand of ever-higher exports of steel to China and cement to the Middle East and Asia. But it's not just commodities that are flourishing. A hefty part of the capital expansion is going into autos, auto components, machine engineering, textiles, and pharmaceuticals. According to Projects Today, investment in these sectors grew 8.2% this year, compared with a decline of 3.6% last year. These industries have spent the past decade restructuring, battling with government to implement better economic policies, and preparing for global competition. The result has been a surge in productivity for the best companies. Take Tata Motors: In 1999, it made 129,000 cars with 35,000 workers. Today it makes more than 300,000 -- with 40% fewer factory hands. EXPORTS TO EUROPE Demand is brisk, too: Domestic car sales have soared by 25% in the past year, to more than 1 million vehicles, while parts exported worldwide have seen 30% growth. Tata and Mahindra are exporting, while Hyundai Motor Co. is using India as a manufacturing and export base for its compacts to Europe. Toyota Motor Co. (TM ) has just started exporting 150,000 transmissions to other Toyota plants in Southeast Asia. Indian forging and castings companies such as Bharat Forge Ltd. are exporting 40% of production to clients like DaimlerChrysler and Cummins Engine Co. Indian executives hope they'll get even bigger boosts from special incentives the government is providing. India's first private China-style special economic zone (SEZ) has started up in Madras, and the 1,500-acre SEZ -- which is free from strangulating labor and tax laws -- has attracted the dynamic exporters: auto parts, apparel, and info tech. Other companies are launching complex projects without the help of special incentives. In Hyderabad, a South Korean company will soon build India's first semiconductor plant. Korea's LG is investing $150 million in a new factory to make and export televisions and refrigerators. Finland's Elcoteq Network, which makes cell phones for companies such as Nokia (NOK ), will begin assembling handsets in Bangalore this year, while India's high-technology skills have attracted Ericsson (ERICY ) to manufacture radio transmitters and receivers for cell phones in Jaipur. India will move in the opposite direction from China, says Anand Mahindra, managing director of tractor maker Mahindra & Mahindra. "We will design and create value in products first; then the factories will follow. India will move from niche to mass manufacturing," he says. Not the textbook route, but with luck it's the one that will work for India.  By Manjeet Kripalani in Bombay
BW MALL
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