Author: Indrajit Basu
Publication: The Washington Times
Date: June 11, 2003
URL: http://washingtontimes.com/upi-breaking/20030611-124441-5008r.htm
Early this year, executive director
J. B. Lee of Hyundai Motor India, the Indian subsidiary of the Korean car
giant wrote to his 70-strong suppliers urging them to add a new clause
on "product liability" in the supplier agreement. This clause was meant
to make suppliers liable for any product recalls that Hyundai might have
to make anywhere in the world as a result of a faulty component supplied
by them.
For most suppliers to Hyundai India,
that letter from Lee came as a major surprise. After all, Hyundai India
was selling almost entirely in India -- exporting just a fraction of its
production -- and defective cars, or anything for that matter, are never
recalled here. But they agreed willingly to please the second largest car
seller in the country with revenues close to a billion dollars.
However, an announcement from the
company in early June added more meaning to Lee's letter to suppliers.
B. V. R. Subbu, president of Hyundai India said that the company is going
to be the global manufacturing hub of Hyundai's small car.
"A European delegation visited our
plant in Delhi recently to check standards and we are likely to enter the
European market in the next couple of months," said B V R Subbu adding,
"We (Hyundai) aim to be among the top five auto companies in the world.
While the U.S. and Europe will be the hubs for large and mid-sized cars,
respectively, we see India as our global hub for small cars."
Hyundai India is not the only one
to have put its faith on India's manufacturing. Over last week three more
global manufacturing giants have made similar announcements. Ford Motor
Company said it is aiming to source $120-160 million worth of auto components
from Indian manufacturers over the next two years under its "India Sourcing
Program."
Global consumer electronics giant
Matsushita of Japan announced that the company for the first time has decided
to source Panasonic color television sets from India for its international
market. The first consignment has already left shores.
And, Thermax India, a large engineering
company announced that it has entered into an original equipment manufacturer
tie-up with GE, United States, to supply chillers for the latter's power
systems. It is also negotiating similar OEM arrangements with Detroit Technologies
(parent of companies like Pratt and Whitney) and Capstone Turbines in the
United States, and Wartsila in Europe.
That's not all. A slew of multinationals
that include names like American Power Company, Knoll Pharma, Pfizer, Proctor
and Gamble from U.S., to Volvo, Motor Minelli Cadbury Schweppes, Nokia,
Renault from Europe, and, Toyota, Koyo Steering, Kawasaki Motors of Japan,
and, Hyosung Motors of Korea, are queuing up to make India their global
manufacturing outsourcing hub, either for a whole product or for one or
more critical components.
Suddenly, India, which until two
years back was suffering from a shrinking manufacturing base, has emerged
as one of the most preferred destinations for MNCs to outsource their manufacturing
activities: and for India, a multi-billion dollar opportunity.
As the world drawns closer to the
January 2005 deadline -- schedulesd completion date for the Doha round
of world trade talks, providing a further opening to world free trade,
and for the abolition of the Multi-Fiber Agreement, which has restricted
world textile trade for decades -- cost pressures are driving them to low-cost
destinations for producing at lowest possible cost, say MNCs. Although
many have flocked to China, some, like those mentioned earlier are making
a cautious entry in India to take advantage of the democratic set-up that
India offers.
The industry lobby Confederation
of Indian Industry estimates manufactured product outsourcing could be
as big as $10 billion by 2007 and $50 billion by 2015. In the last few
years, outsourcing from India has been growing at around $1 billion a year.
Already, an estimated $5 billion worth of engineering goods, auto components,
pharmaceutical products and textiles products have been outsourced from
India over the past 4 years.
Although cost cutting is the primary
driver, MNCs say it not just the only one advantage luring global manufacturers
to India. "India doesn't have a universal cost advantage like China," says
David Friedman, managing director of Ford India. "But India does have a
clear advantage in engineering including forgings and castings. I am amazed
at the kind of engines and the number of engines that are made in India."
According to CII director, Dilip
Chenoy, mechanical engineering is India's strength and most MNCs are leveraging
this to take advantage of the country. This capability also allows MNCs
manufacturers to enter into a new product very early in its cycle. However,
CII adds, the fact that a vast majority of the outsourcing contracts are
still below the $10 million-mark shows that MNCs have just been testing
the waters until now.
Many MNCs say that they find outsourcing
in India tough. "The biggest challenge is getting them (outsourcing suppliers)
to maintain quality standards," says J Manohar of Mico Corp, a global auto
component maker. "While samples always meet quality standards, the supplies
are almost always inconsistent." MNCs thus have to work hard with suppliers
to get flawless quality. Ford for instance, had to intervene with Tata
Auto Plastics Systems, a company that supplies a component for its cars,
to make it capable of delivering products with zero-defects.
The other problem they face is delivery
on time. "We know for sure that India will be cheaper but the fear is logistics
and reliability of supply," says Satish PS, the India-based purchase manager
of Bosch, Germany.
But perhaps the biggest stumbling
block that India as a country faces is the negative perception about the
"made in India" tag. Getting past this image is proving to be tough for
many MNCs. "While talking to a European distributor for our India-made
car, we had to tackle the issue of a 15 percent discount they wanted on
the car," said Hyundai India's Lee. "Eventually we had to invite them to
the Indian plant to convince them of the quality."
Yet, most that are exploring the
India opportunity are optimistic. They hope that they would find the right
balance between the country's drawbacks and advantages. "Over the recent
years with the investment climate becoming friendlier, investing in India
to take advantage of its manufacturing potential has become an attractive
proposition," said Charles Wilhelm of Paris- based XY Europe, a consultancy
outfit that that specializes in identifying Indian companies to which European
companies may outsource manufacturing.
Two years back, skeptics predicted
doom for India's manufacturing, but the latest outsourcing interest of
global majors seems to be putting it back in business.
