Indian manufacturing grows based on value-add reputation and can-do attitude

In 2006, a global who’s who of manufacturing giants—including Nokia, Motorola, Cisco, Diebold, and Siemens—moved to expand their presence in India.

Consider India and most people think first of IT outsourcing. In the coming years, however, manufacturing will be more important as manufacturers seek educated workers and a business-friendly environment at a reasonable cost.

India’s gross domestic product (GDP) grew 9.2 percent last year, just behind China, and most observers expect similar levels the next few years. The Indian finance ministry says growth in manufacturing will be 9.4 percent for 2006-07. By 2015, moreover, a report from New York-based McKinsey Global Institute and the Confederation of Indian Industry projects 30 million new manufacturing jobs in India and $300 billion in exports.

Where is the new investment coming from? In December, for example, Cisco Systems announced plans to invest $1.2 billion in India over the next three years, including $750 million in research. Nokia opened its first factory in India last spring and plans to have 10,000 workers there by 2010. These new entrants join DaimlerChrysler, Honeywell Automation, Toyota, and Rohm and Haas.

“While most companies still look to India for IT and R&D skills, we’re seeing an increased trend toward manufacturing, especially where a highly skilled workforce is required,” says Jane Barrett, a director with Boston-based AMR Research. “The background in R&D and the extremely well-educated, young, and English-speaking workforce give India a huge advantage in collaborating with other markets in the globalized economy.”

Several other factors are driving the boom—including economic reforms and government incentives for foreign investment, heightened consumer demand, and increased global confidence in Indian businesses.

“IT services really showed the way for manufacturing,” says M.R. Rangaswami, former executive with enterprise vendors Avalon and Baan, cofounder of San Francisco-based consulting and investment firm Sand Hill Group—and a long-time India watcher, “IT companies didn’t need local licenses to start up, and now a similar 'bureaucratic loosening’ is driving manufacturing growth.”

For The Timken Co.—a Canton, Ohio-based, $5.2-billion provider of engineered bearings and alloy steels—India represents an opportunity to serve local markets and expand Asian operations. Timken is building a $25-million plant in a special economic zone outside Chennai, India’s fourth-largest metropolitan city.

Timken has been in India since 1992. In addition to the new plant, it operates one in Jamshedpur, and an engineering center in Bangalore.

“Our new facility in India represents a significant expansion of our manufacturing presence in this important economy, and we will continue to look for strategic opportunities to build on our growing base in Asia,” says Mike Arnold, president of Timken’s Industrial Group.

Compared to China, Taiwan, or even Malaysia, manufacturing industries in India are still small, accounting for less than 20 percent of output, as opposed to about 40 percent for China.

More specifically, according to Dublin-based Research and Markets, the Indian electronics market was $11.5 billion in 2004, versus $271 billion for China. But India will grow faster than China in this sector, and should reach $40 billion by 2010. Solectron, Elcoteq, and Flextronics all have facilities there, mainly to serve the exploding domestic market, though they also export to slower-growing Middle East economies.

Prospects are nearly as bright in other high-profile sectors, including high-tech, automotive, pharmaceuticals, and specialty chemicals. The semiconductor market is expected to grow from $1.2 billion in 2005 to $3.1 billion by 2010, according to Scottsdale, Ariz.-based market research firm In-Stat. AMD and Intel have both announced huge investments, and the chips they make in these new plants will go into television sets, mobile phones, and other devices being snapped up by newly empowered Indian consumers. Consider that six million mobile-phone handsets are sold in a month in India.

“In the past, the Indian electronics and hardware ecosystem was dominated by design services and embedded software, but now full manufacturing takes place here,” says Mayank Jain, an India-based analyst with In-Stat. “With more sophisticated capabilities and an abundance of engineering talent, India is now in the reckoning among other semiconductor-manufacturing countries in Asia.”

Not all activity is coming from global giants. Small to midsize contract manufacturers also are fueling growth. El Segundo, Calif.-based market research firm iSuppli predicts revenue will triple in electronics contract manufacturing by 2010, reaching more than $21 billion.

A few things should be kept in mind for anyone seeking contract manufacturers in India, however. First, India makes the most sense for more complex manufacturing situations—not just cost reduction. “The India equation emphasizes value,” says Liano Sharon, president, Ki Technologies. “If you want cheap, go to China.”

Ki offers sourcing, procurement, engineering and design, and logistics services for Western companies seeking manufacturing partners in low-cost countries. With three offices in India—as well as locations in Malaysia and China—Ki maintains active relationships with more than 100 manufacturers.

Ki recently helped a large truck manufacturer facing a significant budget overrun find a lower-cost option for manufacture of an advanced door sensor. Ki surveyed sensor manufacturers the world over before settling on one in India with the necessary engineering expertise, avoiding a complete redesign of the door and the expense of tooling a new switch. Overall unit costs dropped without compromising a tight production time line.

“Engineering, quality, and purchasing had to work together,” Sharon says, underscoring a common theme for Indian manufacturing. “You can’t just turn over the specs to purchasing and have them go find the lowest-cost option.”

Threats and challenges to continued manufacturing expansion in India are well known: lack of infrastructure, an insufficient and unreliable power grid, and the reputation of a less-than-welcoming regulatory environment. The Indian government invested $24 billion in infrastructure projects last year—not nearly enough to sustain current growth rates. The government also has lagged behind in allocating land for special economic zones. The World Bank estimates manufacturers lose 8 percent of sales to power outages.

Jamie Friedman, senior analyst with Bala Cynwyd, Pa.-based Susquehanna Financial Group, thinks infrastructure concerns may be a bit overstated—at least from the perspective of IT outsourcers. “I’ve never known of a service-level agreement-related breach due to a power outage,” he says.

“Indians are pretty innovative in working around these issues,” points out Rangaswami. In fact, many companies set up their own generators when building out plants.

As for regulations, Friedman notes, “There is still plenty of bureaucracy, but India has made itself easier to do business with in terms of tax and accounting laws and real estate—perhaps easier than China.” Strict intellectual property laws also benefit manufacturers.

Still, infrastructure concerns are one reason industrial manufacturing has been slower to move to India. Its heavy products can overwhelm India’s shoddy roads and generally weak infrastructure. Of course, the massive drive to upgrade infrastructure represents a huge opportunity, particularly for manufacturers of heavy equipment and industrial machinery.

“Power plant, road, and dam construction projects could allow manufacturers to provide expanded services, like repair and maintenance support. and program management,” says AMR’s Barrett. “These projects will last several years, and some manufacturers may be able to evolve their business models in support of them.”

Despite the obstacles, India’s economic outlook remains among the world’s brightest. Author and academic C.K. Prahalad, whose “bottom of the pyramid” theory outlines the massive market potential represented by developing nations, doesn’t see any reason why India can’t grow at 13 percent—in which case manufacturing will have to make major contributions. “There’s a lot of optimism right now,” concludes Rangaswami.