By Jason Overdorf
March 7 issue - At a factory in greater Noida, an industrial suburb of Delhi, workers step through a series of ''air showers" that blast the grime of one of the world's most polluted cities off their clothes. Then they pull on white coveralls, white hoods and plastic sandals before passing through an air lock into the ''clean room" of Moser Baer, the world's third largest manufacturer of optical media, including CDs, VCDs and DVDs. Inside, rows of machines silently inject, coat, harden, finish, flip and label the shining disks, as a few white-suited workers adjust dials. Clean, quiet, heavily automated and nearly depopulated, this is the look of a nascent manufacturing revolution in India.
To anyone familiar with the Subcontinent, this picture comes as a surprise. Not so long ago even Indian consumers believed that Indian-made products were shoddy. Before the country began to liberalize its economy in 1991, the so-called license Raj stifled competition with red tape and nurtured inefficient makers of second-rate products. Even by the late '90s, as India began to emerge as a global power in information-technology services, the country remained a laggard in manufacturing. But lately India's manufactured exports have risen, from about $37 billion in 2002 to about $54 billion in 2004, and they could reach $300 billion by 2015, analysts say, as multinationals invest more heavily in India as a manufacturing base. Something similar happened in China, of course. But in India the early players are interested in the talent pool of chemists, designers and engineers, not low-skilled labor.
Look at headlines from the past 12 months: Nokia and LG Electronics unveiled plans to begin handset production in India. Hyundai, which has already exported about 50,000 cars from India, said it plans to make India its export hub for auto components. Toyota opened a factory that will make manual transmissions for vans, SUVs and small trucks produced in Thailand, the Philippines, South Africa and Latin America. Last month, Siemens announced plans to invest more than $500 million by 2009 in new and expanded factories in India.
Even picky German engineers are coming to associate India with quality. Jurgen Schubert, who heads Siemens's operations in the country, says that for years the company's quality testers in Germany stamped his Indian-made products "inferior," no matter how good they were. So in the late '90s, Schubert stuck made in germany on a shipment of Indian parts, and they passed inspection. ''After I pointed that out to them," he says, ''we no longer had any problems."
Multinationals have helped raise standards by encouraging Indian suppliers to modernize. When the big players entered the local auto market after liberalization in 1991, they assembled vehicles in India but imported many of the components. Now most of them are building cars using 70 to 90 percent local parts and materials. ''If you come and look at our factories today, most of the work is done by brainpower, with computer-aided drafting, lots of automation," says B. N. Kalyani, chairman of Bharat Forge, India's largest auto-parts maker. "The IT boom essentially brought out the story that Indian engineering skills are good and Indian engineers can adapt to whatever the needs of the market are. That gives India an advantage over China in technical, skilled manufacturing."
That may be overstating the case. Few Western industrialists rank India ahead of —China in any manufacturing category. Yet few doubt that India is carving out a big role, as skilled manufacturing shifts to developing nations. If New Delhi makes the right moves, says McKinsey & Co. consulting, India could raise its manufactured exports to $300 billion by 2015, increasing its share of global manufactured exports from 0.8 percent to 3.5 percent, and leapfrogging other low-cost countries to become one of the top two exporters (along with China) of products like apparel, pharmaceuticals, specialty chemicals and auto components. India could also become a big supplier of consumer electronics, computer hardware, and domestic appliances. "It's India and China, as opposed to either India or China," says Shirish Sankhe, a McKinsey partner in Mumbai. "Countries that may lose out are those where they have smaller domestic markets or less talent, like Thailand, Mexico, some countries in Eastern Europe and so on."
The likely losers also includes the United States. In auto parts, for example, customers increasingly expect longer life and higher technology at less cost. ''The result is that American parts manufacturing has become extremely unprofitable," says K. N. Subramaniam, managing director of Gabriel India Ltd., the flagship of the Anand Group, which expects auto-parts exports to rise from $36.8 million in 2004 to $56.3 million this year. India's domestic sales look likely to cross the million-car threshold in 2005, achieving a scale that will justify heavy investment in technology and capacity, further increasing India's global competitiveness.
To match China's recent growth, India will have to eliminate some ill-considered policies, experts say. In order to encourage consumption in its domestic market, New Delhi needs to cut taxes on manufactured goods down to the Chinese level, which means a cut from as high as 30 percent to 15 percent. It also needs to slash import duties; improve roads, railways, ports, and the power grid; and develop the type of Special Economic Zones that have created clusters of booming industries in China.
Indian businesses are already finding creative ways to dodge these hurdles. To avoid crippling power outages, Moser Baer has built its own power plant. ''We generate about 80 megawatts of power every year," says Ratul Puri, Moser Baer's executive director. ''We don't even have a grid connection." Bharat Forge is located in the state of Maharashtra and ships out of nearby Mumbai, but also from Chennai (formerly Madras), Kochi (formerly Cochin) and Gujarat, in case of strikes and bottlenecks in Mumbai.
The Indian government is also becoming more responsive to industry. It has removed barriers to the internal transport of goods destined for export and simplified import-export procedures. At the urging of Moser Baer, the government constructed a container depot in Greater Noida that operates 24 hours a day and now ships 80 percent of the company's output. ''The government is listening," says Puri. ''Five years ago you couldn't even have that discussion with the government." And as China shows, in nations where government works for industry, factories grow quickly.