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Global
manufacturers test Indian waters
By Indrajit Basu
KOLKATA - A Korean car made in India. Odd as it may sound, it is soon going to
be a reality. The close to US$1 billion revenue Hyundai Motor India, subsidiary
of the Korean car giant, has decided to make India its global export hub for
its compact car segment.
"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, president of Hyundai Motor India. According to Subbu,
Hyundai's just-launched small car model in India, called Xing, will replace its
existing small car models sold in Europe.
"We aim to be among the top five auto companies in the world," said Subbu.
"We'll have to sell around 5 million vehicles per year. Our current sales are
over 3 million. We expect the remaining 2 million to come from three places
outside Korea - the US, Europe and India. While the US and Europe will be the
hubs for large and mid-sized cars, respectively, we see India as our global hub
for small cars."
But Hyundai is not the only premier company with this idea. Ford India,
subsidiary of the US-based car giant, is already exporting - primarily to
Mexico - one of its mid-sized models made fully in India, and earning more
money than what the model earns in India.
Replicating Ford and Hyundai's strategy are a slew of multinationals that
include names like American power company GE, Knoll Pharma, Pfizer, Proctor and
Gamble from US, to Volvo, Motor Minelli Cadbury Schweppes, Nokia, Renault from
Europe, Toyota, Koyo Steering, Kawasaki Motors of Japan and Hyosung Motors of
Korea, which are all lining up to make India their global manufacturing
outsourcing hub, either for a whole product or for one or more critical
components.
And for India, all this interest is suddenly resulting in a whole new
multi-billion manufactured products outsourcing opportunity. As the January
2005 deadline for removing tariff barriers draws near, cost pressures are
driving them to low-cost destinations for producing at the lowest possible
cost, say multinationals. 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 the country offers.
But before getting ahead, what is manufacturing outsourcing and how does it
differ from regular exports? Outsourcing essentially involves any work done or
goods produced specifically for an original equipment manufacturer, which the
latter sells as its own product. It could be a fully-assembled car like Xing
manufactured by Hyundai India for Hyundai Motor Corporation, Korea, or parts
like Tyco Electronics India does (by supplying 15 product families of wiring
harnesses and connectors) to Tyco Electronics, USA.
Outsourcing provides a bigger opportunity than normal exports because it
carries a long term contract and doesn't need huge marketing spends for
building a brand. Due to cost pressures, original equipment manufacturers in
developed countries are increasingly looking at offshore bases or partners.
Most started by flocking to China, but in the past four years a few have made
forays into India as well.
Industry lobby Confederation of Indian Industry (CII) estimates that
manufactured product outsourcing could be as big as $10 billion by 2007 and $50
billion by 2015. In the past 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 four years.
Although cost cutting is the primary driver, multinationals say that it is not
the only 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 multinationals are leveraging this to take advantage of the
country. This capability also allows multinationals manufacturers to enter into
a new product very early in its cycle. However, the CII adds, the fact that a
vast majority of the outsourcing contracts are still below the $10 million mark
shows that multinationals are just testing waters now.
Multinationals say that many still find the going tough in India. "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." Multinationals thus have to work hard with suppliers to get
flawless quality. Ford for instance, had to intervene in Tata Auto Plastics
Systems', a company that supplies a component for its cars, internal quality
control system 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 P S
Satish, 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 multinationals. "While talking to European
distributors for our India-made car, I had to tackle the issue of a 15 percent
discount they wanted on the car," said Hyundai India's executive director B G
Lee. "Eventually I had to invite them to the Indian plant to convince them of
the quality."
But still, most that are exploring the India opportunity hope that they will
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.
Manufacturing in India thus, is clearly slated to be back in business.
(Copyright 2003 Asia Times Online Co, Ltd. All rights reserved. Please contact
content@atimes.com for information on our
sales and syndication policies.)
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