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 reasonabl...

By Cole Ollinger, senior contributing editor March 1, 2007

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.

Catching up to China

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.”

Contractual agreements

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.”

Challenges to growth

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.

The road to riches

The IT services sector is to the Indian economy today what manufacturing was—a few decades ago—to the American economy: an engine of national growth, and a ticket for workers to the middle class. In turn, established Indian IT services providers now view manufacturing as the key to continued growth.

The Indian economy is today 65 percent services-based—by far the highest rate in the developing world, and roughly on par with the U.S. Largely, that’s a function of the IT outsourcing market. According to the National Association of Software and Service Companies (NASSCOM), a trade group in India, revenues from IT and business operations outsourcing will be $50 billion by 2008.

Jamie Friedman, senior analyst with Bala Cynwyd, Pa.-based Susquehanna Financial Group , estimates 30 percent to 35 percent growth going forward for the major IT services vendors—including Tata Consulting Services (TCS); Infosys; and Satyam—with manufacturing playing a significant role. But Susquehanna research also indicates that of the 2,000 global companies outsourcing IT work to India, only 10 percent are manufacturers.

“Manufacturing is the least penetrated and therefore seen as having the most potential,” says Friedman. Kevin O’Marah of Boston-based AMR Research agrees, writing in a recent report, “Manufacturers and retailers are giving short shrift to Infosys and other Indian service providers.”

Infosys grew its manufacturing-industry business less than 10 percent last year—well below its overall growth rate. Manufacturing accounts for 14 percent of $3.1 billion in revenue.

But beyond relative lack of penetration to date, manufacturing also offers Indian IT organizations with an opportunity to move into higher-value services.

Infosys has broadened its portfolio for manufacturers. For one, it helped St. Louis-based Emerson Electronics reconstitute its customer experience by more effectively integrating front-end product configuration capabilities with back-end supply chain and manufacturing systems. And a warehouse management solution Infosys developed for Schaumburg, Ill.-based Motorola resulted in a 90-percent reduction in receiving cycle times and 70-percent gains in average shipment volumes.

These performance-driven initiatives are a part of the “logical evolution of Infosys,” says Romit Dey, associate VP and solutions head, discrete manufacturing. “The perception may have been that we had a pure technology emphasis in the past, but today we more commonly build up-front ROI models, provide statistical and business analysis to define operational metrics, and redesign processes.”

Triumph Composite Systems , a Spokane, Wash.-based maker of interior aircraft components, worked with Infosys to design and build composite floor panels for Airbus freighter aircraft. Infosys engineers defined design requirements and created workflow procedures, coordinated project sites in Germany and India, and provided infrastructure support and connectivity. Benefits for Triumph and Airbus were reduced costs and lighterweight panels delivered within tight design and manufacturing cycles. As a result, Triumph’s parent company entered into a Center of Excellence agreement with Infosys for a range of services.

Increasingly, this is the rule—Indian firms not just supporting complex robust product life-cycle environments or data centers, but providing engineering and design services.

While large-scale ERP implementations, upgrades, and support will remain a key part of Infosys’ business, Dey and 2,000 other sector-focused consultants also are developing multidimensional, industry-specific solutions—like supply network design and optimization and order management—that combine business operations design and configurable technology architectures with support services and actual execution responsibilities. Infosys also offers market-entry services for global manufacturers looking to expand operations in India.

Similar activities are taking place in automotive. For instance, Satyam developed an advanced dealer management system for a heavy equipment manufacturer. The large Indian IT services are touting their process and consulting expertise.

One Indian technology vendor taking a different approach is 3i Infotech . Based in Mumbai, with U.S. headquarters in Edison, N.J., 3i Infotech delivers ERP software to small and midsize manufacturers.

Privately held Backerhaus-Veit , Toronto, makes and distributes frozen artisan breads to high-end grocers and restaurants throughout North America. It chose 3i Infotech’s ORION package to provide the infrastructure it needed to manage a rapid expansion of operations.

The company had used legacy financial software for the baking industry, running on an IBM iSystem (often still referred to as the AS/400), along with spreadsheets—which had “mushroomed around the company”—to manage inventory, recipes, and reporting, according to CFO Farhad Pochkhanawala.

“As we moved from a storefront operation to a 30,000-square-foot facility, this approach didn’t give us the credibility or confidence in our numbers we needed,” he says.

After distributing a request-for-proposal with 1,600 questions and very specific script requirements, Backerhaus-Veit chose ORION. It first deployed back-office financial modules in 2004, and added advance planning and scheduling, quality assurance, plant maintenance, and warehouse management. Manufacturing and shop-floor data is captured in real time, and a secure Web interface provides access in line with business rules. As a result, the company has a more robust and full-featured infrastructure than other similar-size companies. Backerhaus-Veit has about 100 employees and has been in business 20 years.

“We now have much better control over recipes and costs, and more visibility into what’s happening on the plant floor,” Pochkhanawala says. Requirements for labeling and nutritional data mean accurate data is a must for Backerhaus-Veit.

Pochkhanawala credits the passion of CEO and company founder Sabine Veit for driving the investment in new systems. “We won’t compromise on product quality and our CEO saw how IT could help us deliver on our commitments,” he says.

3i Infotech first made its name supporting small and midsize companies in Africa and the Middle East with “microvertical solutions,” like formulation applications for process manufacturing, according to 3i Infotech VP Sharad Vajpayee.

“Manufacturers in emerging countries have complex needs and want to take advantage of global best practices,” he says. “Solutions have to be affordable and drive increased efficiency, but they also must support end-to-end supply chains and be able to scale rapidly.”

3i Infotech’s solutions are typically less than $1 million. In 2005, it was the fastest-growing Indian software firm with respect to global sales.

A looming talent shortage could hit the Indian IT services markets as early as 2010. In fact, costs have already risen. India’s labor cost advantage today is roughly four-to-one, down from eight-to-one just five years ago, estimates Susquehanna’s Friedman.

“If you ‘ve been outsourcing for three to five years, you’ve already noticed it, though newcomers may not,” he says.

India by the numbers

$40 billion : estimated size of the Indian electronics market by 2010 ( Research and Markets )

$25 billion : estimated size of the Indian automotive components market in 2015 ( McKinsey )

$15 billion : estimated size of the specialty chemicals market in India in 2015 ( McKinsey )

$5 billion : amount of foreign investment into India in 2006( AT Kearney )

$3.7 billion : collective liquidity of top five Indian IT services firms ( Susquehanna Financial Group )

6 million : number of mobile handsets sold per month in India

400,000 : number of engineers graduating annually from Indian universities ( McKinsey Global Institute )

50,000: number of IBM employees based in India, with 2010 target of 100,000 (AMR Research)

10,794 : number of new employees hired by Infosys in Q2 2006 ( AMR Research )

400 : number of major automotive components suppliers inIndia ( Deloitte )

80 percent : Indian automotive components suppliers with ISO 9000 certification ( McKinsey )

67 percent : population of India working in agriculture

47 percent : 2006 gains of India’s benchmark stock market index ( The Wall Street Journal )

9.2 percent : growth of Indian GDP in last year

6 : number of cars per 1,000 people in India ( Deloitte )