Indian Manufacturing

[Anthony D'Costa <dcosta@xxxxxxxxxxxxxxxx>]

International Herald Tribune
In India, 'next great' industrial story
By Anand Giridharadas International Herald Tribune
MONDAY, APRIL 17, 2006
MADRAS, India "Made in China" may be getting a new rival.

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."



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Anthony P. D'Costa, Professor
Comparative International Development
University of Washington
1900 Commerce Street
Tacoma, WA 98402, USA
Phone: (253) 692-4462
Fax :  (253) 692-5718
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