Take a poll among commentators and talking heads and you will find that most have the simplistic view that China will be the manufacturing superpower while India will at best be a supercompetitive services provider with little impact on global manufacturing.
India’s manufacturers are beginning to show just how wrong this view is. Why is this happening? The country’s emergence as a manufacturing hub is driven by two powerful forces: improvements in top-down policy and vigorous efforts by corporate India to re-engineer itself in the face of growing competition.
Indian policymakers have realized just how badly poor policy and horrendous infrastructure have handicapped India’s exporters and defeated government ambitions to provide jobs and raise living standards. Consequently, governments have started removing or diluting self-defeating restrictions on Indian manufacturers such as limitations on industrial scale to protect small-scale producers or excessive protection for workers. Huge infrastructure schemes are under way and the efficiency gains have been remarkable.
Take the massive highway program now coming onstream as an example. Transportation costs are tumbling as the drive time from Delhi to Jaipur has been cut to about three and a half hours from more than six hours before. Port capacity and operating efficiency also have improved markedly in recent years. These improvements have boosted cost efficiency. With large investments now being made in more and better roads, ports, airports and power systems, those cost improvements will continue. With this year’s budget promising even more liberalization of industrial and labor market rules, such gains in competitiveness will multiply.
But the real story is how corporate India has risen to the challenge of global competition. As governments reduced trade protection, Indian producers of all kinds of goods€¦quot;from pharmaceuticals to auto components€¦quot;have restructured. They have cut bloated work forces, upgraded factories, adopted new technologies and become more focused in their product range. For instance, in 1999 Tata Motors made 129,000 cars with 35,000 workers. Today, it makes more than 300,000 with 40 percent fewer workers.
The result is that Indian manufacturing companies are emerging as globally competitive producers, posing a challenge to existing players and showing that they will be a force to be reckoned with along with the Chinese. Bharat Forge now has almost half of the U.S. market for car axles, from very little only a few years ago. Today, it is the second-largest forging company in the world and is making acquisitions to grow further. Tata Iron and Steel Co., or TISCO, is today one of the most efficient producers of steel products€¦quot;even more than Chinese and Korean producers. It is not only large companies showing signs of global excellence. Jubilant Organosys has in recent years grown from being a small producer of sugar-related products to a maker of pharmaceuticals.
Indian pharma companies, in particular, are already having a global impact, with many now developing their own intellectual property: Ranbaxy developed a once-daily antibiotic; Matrix Laboratories developed a process for manufacturing a key ingredient of the antidepressant drug Cipramil.
Foreign multinationals are beginning to invest in Indian manufacturing. Over the past year, substantial foreign investment has poured into the automobile and auto components industries. Now, foreign investors, particularly Koreans, are extending to other areas. POSCO is reportedly planning to invest $8.4 billion over 15 years in a steel plant. LG Electronics is investing $150 million in India in a second home appliances plant and a mobile phone plant. Hyundai has shifted global production of its Santro compact car to India. Unilever India produces toothpaste for export to Europe because India is among the cheapest places to make personal-care products.
Foreign investors will help add depth to Indian industry, providing scale and helping to spread new management processes and technologies. In some cases, they will compete head-on with existing Indian companies, forcing them to improve even further. The revolution in Indian manufacturing has only just begun.
Manu Bhaskaran heads economic research for the Centennial Group in Singapore.