The Promise of India

The Promise of India

Big, young, educated and ambitious. Can India become the next industrial superpower?

It may seem strange to talk about a nation with one-fifth of the world's population being under the radar, but many observers make that case for India. Long known as a powerhouse for IT outsourcing and engineering services, India is receiving increasing attention as a manufacturing destination. With a fast-growing economy, emergent domestic market, well-educated workforce and independent judiciary, India presents an attractive destination in the global marketplace.

Of course, the yardstick that India is always measured against is China. While the Chinese manufacturing sector dwarfs that of India and enjoys a much more advanced infrastructure, experts note that China's failure to solve some persistent problems is having an effect. "People are getting tired of China, and the issues with product quality failure, counterfeiting and IP problems," says Noha Tohamy, vice president of research for AMR Research. "It is human nature to start looking for the next best thing."

More companies are adapting a "China Plus" strategy, observes Dalip Raheja, president and CEO of the Mpower Group, where they produce in China but also make sure they are manufacturing elsewhere as a way to spread supply chain risk. "The bottom line is, there is a huge opportunity for companies to start manufacturing in India," he says.

The economic ties between the U.S. and India are considerable and likely to grow dramatically. India is the world's 12th- largest economy, and recently has experienced GDP growth of 8% to 9% annually. While its economy has slowed this year, observers still expect GDP growth in 2009 of approximately 5% to 6%. The U.S. is India's largest trading partner, with merchandise trade between the two countries of $41.6 billion in 2007.

Last year's nuclear cooperation agreement between the U.S. and India marked the beginning of a new era between the countries, according to a Confederation of Indian Industry (CII) report. Given the right conditions, said CII, merchandise trade could increase to $320 billion by 2018. The report notes that India intends to import 24 reactors in the next 11 to 15 years, and could create as many as 20,000 new jobs in the U.S. as a result of nuclear trade.

In June, Secretary of State Hillary Clinton encouraged a closer relationship between the two countries, referring to "U.S. -- India 3.0," a third era in the U.S.-India relationship where cooperation between their governments would "catch up with our people-to-people and economic ties."

Clinton observed that a "funny thing happened on the way" to this third era: "Our scientists and business people, our universities and movie studios, and vibrant Indian-American personal familial connections accepted the truth that cooperation between our counties can be a driver of progress long before our policymakers did."

INOX Air Products

Hundreds of major U.S. businesses, of course, know India well. Ten years ago, Air Products, the manufacturer of industrial gases, began a joint venture with INOX. Today, the company has 34 operations across India and 1,100 employees supplying bulk and packaged gases to industries including steel, pharmaceuticals and chemicals.

Air Products' Mark Binnig says the company tracks manufacturing growth rates for 96 countries. "India is second on that list. China is first." Binnig says sales growth for industrial gases generally tracks at 1½ to 2 times GDP growth and that has been the case in recent years with India, where Air Products' business has grown 15% a year. Despite that healthy growth, he says, the penetration of industrial gases into the Indian economy is still at a fairly early stage.

Sid Jain, a director with INOX Air Products, says that while infrastructure is a key challenge for manufacturers in India, it also represents a significant opportunity. "All the industries related to infrastructure -- steel, cement, glass, metal fabrication -- have huge potential for growth."

Other investments occurring in India also hold great potential for Air Products. Binnig notes that the Indian Oil Co. recently issued a tender for a sale-of-gas arrangement for a $100 million hydrogen facility at a new refinery. "We think there will be more of those kinds of investment because refining is a growing manufacturing area in India," he says. He points out that Reliance Petroleum recently built the world's single-largest refinery complex in Jamnagar, India. The refinery has an aggregate refining capacity of 1.24 million barrels of oil per day.

Demand for hydrogen will also be driven by the adoption of clean fuel standards. Air Products is supplying hydrogen fueling equipment for a hydrogen transportation demonstration project in New Delhi. Hydrogen will be used to power 15 three-wheeled vehicles that will transport visitors at the Pragati Maidan, an exhibition area. Project organizers hope the test project leads to the establishment of hydrogen refueling facilities and hydrogen vehicles across the country.

An INOX Air Products hydrogen fueling dispenser at the Indian Oil station in Faridabad.
India's decision to aggressively promote solar power also has caught Air Products' attention. The National Solar Mission calls for India to generate 20 GW of solar energy by 2020 and 100 GW by 2030. The government also plans to provide $100 billion in subsidies to utilities to promote use of solar power. As part of this plan, the Indian government is promoting creation of industrial parks dedicated to the production of photovoltaics. "Manufacturing photovoltaic cells requires a lot of specialty gases for which Air Products is the world's leading supplier," Jain noted.

Domestic and Export Markets

In its report "Made in India," CII-McKinsey posited that India could become the "next big manufacturing exports story." Though lagging in exports, the report said, India has advantages that could lead it to become one of the three largest exporters of manufactured goods -- low-wage rates, engineering skills, established raw-material bases, mature supply base and growing domestic demand.

Many U.S.-based companies are already following this scenario. Early next year, Ford India will begin producing a new small car at a facility in Chennai. Ford is investing $500 million to add a diesel engine assembly plant to an existing factory and construct a new engine manufacturing plant. Ford said it plans to produce 200,000 cars a year in India. The company said the increased production would allow it not only to "participate in the future growth of India's auto industry, but really to help drive it, both in terms of domestic sale and export potential."

United Technologies Corp.'s Hamilton Sunstrand aerospace systems, Pratt & Whitney aircraft engines, Otis Elevator, Carrier air conditioning and UTC Fire & Security subsidiaries employ some 4,000 people in India at more than 100 offices and factories in 50 cities. In June, United Technologies announced that its Sikorsky Aircraft unit, in conjunction with Tata Advanced Systems, would manufacture Sikorsky S-92 helicopter cabins at a new factory in Hyderabad. "India's aerospace market is poised for significant growth, and we are thrilled to have the opportunities to support that growth and to tap into the capabilities of India's highly skilled aerospace workforce," said Sikorsky President Jeffrey Pino.

In July, Deere & Co. announced that it was forming a joint venture with Ashok Leyland Ltd., part of the Hinduja Group. The unit initially will manufacture backhoes and four-wheel-drive loaders, and market those products, along with excavators, in India and other markets. Deere says it plans to provide a full line of construction equipment in future years.

LCD panel manufacturing is another industry expected to gear up manufacturing in India. Frost & Sullivan Research Analyst Santhosh Krishnamoorthy explains, "LCD product-line consumption, growth in the electronics industry despite temporary slackening and the expansion of manufacturing industries in India will be strong growth boosters for the Indian LCD panel markets in the next one to four years."

Quality of Youth

India is a youthful nation -- more than half the population is under the age of 30. Just over 3 million Indians graduate from college each year. This provides both a large pool of workforce talent and a driver for increased domestic consumption. For example, India adds 6 million mobile phone users per month.

Observers say that India needs to take the lessons learned from its IT outsourcing industry and contacts with multinational companies and apply them to manufacturing. Sanjay Jalona, vice president and head of manufacturing for U.S. Infosys Technologies, says both industry and the government are working very hard to improve manufacturing productivity. He says manufacturing must apply the latest productivity tools such as software solutions for supply chain visibility in order to raise its standards to world class.

On a recent trip to India, Robert Chalker, managing director of ASQ Global, met with educators who want to make sure that Indian students are being exposed to the latest strategies on design and manufacturing quality. Chalker said Indians have their sights set on high-value manufacturing.

"Companies who are focused on doing a good job in India, such as Tata and Mahindra & Mahindra, truly understand that what we are bringing doesn't just reduce cost. If it was just cost, they could throw bodies at it. It is more importantly a customer satisfaction issue," Chalker said. "Today, you can't make it wrong. You have to make it right from the beginning."

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