The bad news - the industrialization of India - from NY Times

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The Next Industrial Giant Is ... India?

 

By KEITH BRADSHER

 

Published: August 31, 2006

 

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PUNE, India — India's economic advancement no longer rests on telephone call

centers and computer programmers.

========================================

 

Among villages with thatch-roofed huts and dirt roads on the outskirts of

this city in central India, John Deere and LG Electronics have recently

built modern factories turning out tractors and color television sets for

sale in India and for export to the United States.

 

In Hazira, in northwestern India, where some residents still rely on camels

to carry traders' goods, the Essar Group is making steel to be used for

ventilation shafts in Philadelphia, high-rise structural beams in Chicago

and car engine mountings in Detroit.

 

For decades, India had followed a route to economic development strikingly

different from that of countries like Japan, South Korea or China. While its

Asian rivals placed their bets on manufacturing and exports, India focused

on its domestic economy and grew more slowly with an emphasis on services.

But all that is starting to change.

 

India's annual growth in manufacturing output, at 9 percent and

accelerating, is close to catching growth in services, at 10 percent.

Exports of manufactured goods to the United States are now rising faster in

percentage terms than China's, although from a much smaller base. More than

two-thirds of foreign investment in the last year has gone into

manufacturing in India, not services.

 

"Saying we are a back office and China is a factory is a backhanded

compliment," said Kamal Nath, India's minister of commerce and industry.

"It's not really correct."

 

Indeed, in interviews at 18 Indian factories and other businesses in 10

cities and villages scattered across the length and breadth of the nation,

the picture that emerges is of a country that is being driven by advances in

manufacturing to a much brisker pace of economic growth.

 

A prime reason India is now developing into the world's next big industrial

power is that a number of global manufacturers are already looking ahead to

a serious demographic squeeze facing China. Because of China's "one child"

policy, family sizes have been shrinking there since the 1980's, so fewer

young people will be available soon for factory labor.

 

India is not expected to pass China in total population until 2030. But

India will have more young workers aged 20 to 24 by 2013; the International

Labor Organization predicts that by 2020, India will have 116 million

workers in this age bracket to China's 94 million.

 

India's young population will also make it a huge and growing market for

years to come, while the engineering skills and English skills of its

educated elite will make it competitive across a wide range of industries.

So even though India remains a difficult place to do business, several

multinationals have been placing big bets on India this year in hopes of

taking advantage of this shifting global dynamic.

 

General Motors and Motorola are preparing to build plants in western and

southern India. Posco of South Korea and Mittal Steel of the Netherlands

have each announced plans to erect giant steel mills in eastern India, where

Reliance of India will soon construct one of the world's largest coal-fired

power plants.

 

They are finding India's labor force well suited to their goals. When LG set

out to fill 458 assembly line jobs at its factory here last year at a

starting wage of $90 a month, it required that each applicant have at least

15 years of education usually high school plus a technical college.

Seeking a young work force, the company decided that no more than 1 percent

of the workers could have had any prior work experience. Despite the

limitation, 55,000 young people met its criteria for interviews.

 

"In the villages there is little income," said Siddu Matheapattu, 24, in

between applying sealant to refrigerator frames. "Here I can earn more."

By contrast, cities in export-oriented Guangdong province in southeastern

China raised monthly minimum wages this summer by 18 percent, to $70 to $100

a month, after factories reported that they had 1 million more jobs than

workers to fill them. Factories elsewhere in China face fewer labor

shortages, but they also are being forced to raise wages.

 

As India has deregulated its economy, output has gradually accelerated to a

growth rate of 8 percent a year, feeding a national euphoria and a few hopes

of someday even beating China's annual growth of more than 10 percent.

Plenty of obstacles remain, however, notably India's weak infrastructure.

China invests $7 on roads, ports, electricity and other backbones of a

modern economy for every dollar spent by India and it shows. Ports here are

struggling to handle rising exports, blackouts are frequent and dirt roads

are common even in Bangalore, the center of the country's sophisticated

computer programming industry.

 

Pervasive corruption has slowed many efforts to fix these problems. India's

labor laws, little changed since they were enacted just after independence

in 1947, also continue to discourage companies from hiring workers, by

making it very difficult to lay off employees even if a company's fortunes

sour or the economy slows.

 

Still, a new optimism prevails in India, bordering at times on euphoria.

"The Chinese are very good at copying things, but Indians believe in quality

work, we believe in meeting pollution norms," said S.S. Pathania, the

assistant general manager of the Hero Honda motorcycle factory in Gurgaon,

30 miles south of New Delhi. "I think India will pass China very soon."

 

An Unexpected Boom In Manufacturing

 

Sprawling across more than a square mile next to a gray tidal estuary, the

scale of Essar Group's complex in Hazira is already impressive. Essar has

its own port to bring in iron ore, its own large, gas-fired power plant for

electricity. At the steel mill, giant buckets pour 150 tons of molten metal

at a time to form slabs two yards wide and up to 10 yards long.

 

But the complex is just starting to grow. Essar is quintupling steel

production and pushing forward a sevenfold increase in power generation,

most of it for sale to a national grid desperately short of electricity.

Growth on that scale, especially in industries like steel and power but also

in areas like car parts and household appliances, is what India has long

lacked. Industrial production accounts for only a fifth of India's economic

output, compared to two-fifths of China's. But this ratio is starting to

rise in India as manufacturing, led by exports, grows faster than

agriculture and even some service industries.

 

Until recently, legislation effectively barred companies with more than 100

people from competing in many industries. The laws were intended to protect

tiny businesses in villages, often employing women and minorities; high

tariffs were placed on imports as well.

 

But the result was hundreds of thousands of businesses too small to be

competitive; India lags behind even impoverished Bangladesh next door in

exports of garments, a big creator of jobs for China. The Indian government

has responded by narrowing the list of protected industries to 326

categories of goods from 20,000 and has lowered tariffs.

 

Comparing factories in India to their competitors in China, many of the

Indian factories are smaller but some appear more efficient.

India's stronger financial system demands higher interest rates than China's

state-owned banks, making it costlier to hold the small mountains of

components awaiting assembly that are often seen in Chinese factories. The

Confederation of Indian Industry, a national trade group, has also been very

successful in pushing companies to adopt the latest Japanese lean

manufacturing techniques.

 

The drawback is that the nation's manufacturing boom, built on

higher-quality goods made under more modern conditions than in China, is not

likely to create as many factory jobs as India needs.

 

The Essar steel mill, for example, has been replacing old, labor-intensive

equipment with more modern gear. "We were having it all done manually, but

because the customers demand very high quality, we have to do it

automatically," yelled Rajesh Pandita, an Essar manager, over the roar of a

house-sized machine that was stretching a minivan-sized coil of steel back

and forth through large rollers until it was little thicker than plastic

kitchen wrap.

 

The Whirlpool factory in Pune uses machines, not people, to fold the steel

exteriors of refrigerators. It has some of the highest productivity per

worker of any Whirlpool factory in the world, with just 208 line workers

producing up to 33,000 refrigerators a month.

 

Meanwhile, labor laws discourage flexibility. They still ban companies from

allowing manufacturing workers to put in more than 54 hours of overtime in a

three-month period even if the workers want to earn extra money. Firing

workers is very difficult.

 

"Companies think twice, 10 times before they hire new people," said Sunil

Kant Munjal, the chairman of the Hero Group, one of the world's largest

manufacturers of inexpensive motorcycles.

 

Hero in Gurgaon, on the southern outskirts of New Delhi, and its archrival,

Lifan Group in Chongqing, a city in western China, produce comparable

motorcycles but the similarity ends there. Hero markets heavily to its

domestic market, protected from foreign competition by high import tariffs,

while Lifan emphasizes exports.

 

With scant ventilation, Lifan's factories are filled with diesel exhaust as

workers test engines and ride finished bikes at breakneck speed out the

doors, zigzagging past co-workers. Hero's factory in Gurgaon, where Honda

holds a minority stake, has far better safety standards and excellent

ventilation.

 

The Lifan factory pays less than $100 a month. The heavily unionized Hero

factory pays $150 a month plus bonuses of up to $370 a month; nearly half

the workers earn the top bonus, Mr. Pathania said.

 

Lifan's labor force is quiescent would-be organizers of independent labor

unions face long jail terms or worse in China. Hero's workers staged a

successful nonviolent protest last year to call for more contract workers to

be eligible for the bonuses as well.

 

Overcoming Many Obstacles To Infrastructure Growth

 

But the biggest question mark hanging over the rise of manufacturing in

India lies in whether the country has enough roads, ports and electricity

generating plants to move huge quantities of goods and power the factories

that make them.

 

Captain Abhay Srivastava, an operations manager at India's busiest port, was

on duty on a recent afternoon when a phone call suddenly came in from the

docks below. An enormous container ship from Qatar needed to slide 35 feet

backward along the privately managed dock at the Nhava Sheva port near

Mumbai to allow another large vessel to squeeze into the dock in front of

it.

 

Captain Srivastava grabbed his white hard hat and dashed for the elevator.

As soon as he reached the water's edge, a dozen laborers in orange jumpsuits

began straining to arrange a cat's cradle of heavy, five-inch-thick ropes

that would allow the ship to use its powerful winches to pull itself out of

the way.

 

"They are efficient people; they don't speak a lot," said Captain

Srivastava, who has visited most of the world's major ports either as a ship

captain or for port training exercises. "You go to some places and they just

stand around."

 

The efficiency of the Nhava Sheva port it approaches West Coast ports in the

United States in the number of containers moved per hour shows that India is

capable of producing world-class facilities.

 

But big as it is, Nhava Sheva is too small to handle the crush of traffic.

John Deere tractors already wait in a container at the dock for one to four

days before being loaded on a ship.

 

"If this pace of growth continues, we will see more congestion at the port,"

said Raj Kalathur, the managing director and chief executive of Deere's

operations in India.

 

Similar worries prevail in Chennai, formerly Madras. "Another four or five

years, we'll be choked," said M. Rafeeque Ahmed, the chairman of the Farida

Group, a 9,000-employee shoe manufacturer in Chennai that needs the port for

exports.

 

Infrastructure improvements are particularly important because manufacturing

companies are buying more and more components from far-flung suppliers.

Making sure all those parts arrive on time requires a reliable

transportation system.

 

"Manufacturing is no longer done all under one roof," said Victor Fung, the

chairman of Li & Fung Group, a large Hong Kong-based company that buys goods

from factories across Asia for sale to retailers and wholesalers in the

United States and Europe.

 

Indian officials are talking about expansion. Planning is under way for new

wharves at Nhava Sheva, but the years-long task of construction has not yet

started.

 

China has faced capacity problems, too. A surge in steel production in early

2004 overwhelmed Chinese bulk cargo ports. Inflation quintupled in a year,

to 5.3 percent, as bottlenecks at ports, highways, railroads and elsewhere

in the economy drove up companies' costs.

 

The Chinese response was swift and decisive. The pace of port investment

nearly tripled in six months. Work crews labored around the clock to erect

more cranes and expand wharves.

 

The Chinese economy grew at a breathtaking pace of 11.3 percent in the

second quarter of this year, but consumer prices were just 1 percent higher

in July than a year earlier.

 

By contrast, India is struggling with 8 percent inflation this summer as

bottlenecks have appeared after three years of 8 percent growth.

Belatedly, India's roads and ports are improving. Just four years ago, Sona

Koyo Steering Systems, an auto parts manufacturer, incurred hefty financing

costs to keep a month's inventory on hand in case deliveries were delayed.

Now the company's factory in Gurgaon makes six deliveries a day to a nearby

Maruti car assembly plant; the eight-mile drive takes an hour or more

because of constant traffic jams, but the deliveries get through.

"I'm not going to deny infrastructure is bad," said Surinder Kapur, Sona's

chairman and managing director. "But a lot of our vendors are around us, a

lot of our customers are close to us."

 

India is also starting to address chronic power shortages. But it is still a

serious problem in northern India, where Mr. Kapur's steering systems

factory is located. He receives electricity from the national grid just

seven or eight hours a day. So the factory has three enormous diesel

generators, one bigger than a typical Manhattan living room, operating at

four times what an industrial user in the United States usually pays.

Despite such obstacles, India's manufacturing sector appears poised for

further growth. In a country where the national symbol has shifted from

government bureaucrats at aging desks to call center operators in cubicles,

the next icon looks like it will be the laptop-toting engineer on a factory

floor.

 

"The old philosophy was, 'I should work in an office, come in at 10 and

leave at 4,'" said Nitin Kulkarni, 35, an engineer at the Hazira steel mill.

But in recent years, he added, "there has been a revolution."

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