The Rise of India Depends on China

Bruce Rayner, Contributing Editor, Enterprise Efficiency OEM | 2/15/2012 | 10 comments

Bruce Rayner
When it comes to manufacturing, the world's attention is usually on China. For over a decade now, the People's Republic has been at the top of every international OEM's list as the preferred outsourcing destination.

There was a time when Wall Street analysts would downgrade a company if its CEO didn't have a China strategy. And for good reason: China had low-cost labor, a burgeoning manufacturing infrastructure, and favorable government policies and incentives.

But times change and China's attraction may not be quite as strong as it was 10 years ago. Perhaps its era as a manufacturing magnet is coming to an end.

There are a few reasons why this may happen. First, the growing contentious relationship between the US and China over trade issues and IP protection may lead to some form of bi-lateral protectionism.

Then there's the fact that China's manufacturing sector is maturing, labor costs are rising, and many technology companies are shifting their focus to product design and away from manufacturing services.

This week, China's Vice President Xi Jinping, the heir apparent to Premier Hu Jintao, is in the US, on a visit that may set the tone of relations between China and the West in the coming months. Indeed, the testiness of the relationship was reflected in comments made by Vice President Biden today that cooperation will only be mutually beneficial "if the game is fair."

There are other signs that China's role as the world's premier manufacturer may be challenged. A recent study published by Ernst & Young paints a picture of another emerging economy on the cusp of maybe becoming a manufacturing powerhouse: India.

"India is transitioning into the next phase of the growth cycle. Manufacturing will likely play a leading role in this growth trajectory," according to the E&Y report.

As Europe muddles through its sovereign debt crisis and US growth remains anemic, global OEMs are turning their attention to India because of its huge domestic consumer market and its low-cost and technically sophisticated workforce. A quarter of the 382 international executives E&Y surveyed believe that by 2020, India will be one of the top three destinations for manufacturing behind the US and China, displacing the UK.

Despite sluggish GDP growth last year, foreign direct investments in India increased 25 percent during the first 11 months of 2011 to $50.81 billion. Just over half of that came from the US, Germany, France, and the UK. Manufacturing accounted for 78 percent of the 864 investment projects and 61 percent of the 216,739 jobs created, according to E&Y. Almost 70 percent of respondents at companies that have a presence in India said they plan to increase or maintain their operations in 2012.

Within the manufacturing sector, the investments are concentrated in the industrial machinery, equipment and tools, and automotive sectors. In 2011, India's automotive sector alone created 40,000 jobs.

Over the long haul, though, investors are split as to whether India has what it takes to become a manufacturing innovation center where new products are developed. Besides software, India is not known for world-class technology.

Investors surveyed complained that the country's labs and research institutions need improving and are not well aligned with corporate product development departments. Adding to the challenges, India has a woefully inadequate infrastructure; domestic transportation and logistics management can be a nightmare, according to supply chain managers in the trenches. To top it off, the country has crippling government corruption and a lack of transparency that are roadblocks to the flow of capital in the future.

Some sectors such as automotive are confident these issues can be overcome, and India will become a center of innovation. Take, for example, Volkswagen. The company has aspirations to become the largest automaker in the world by 2018 and considers India a part of its world domination strategy. VW is investing $380 million in Indian operations by 2013 to ramp up capacity, launch new models, and invest in research.

Sure, India has a lot of work to do to attract investment and convince the world it has what it takes to become a center of innovation. But part of India's appeal depends on the impression that Xi Jinping makes during his visit and the changes he initiates when he takes the reins of power in China.

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Umair Ahmed   The Rise of India Depends on China   2/29/2012 6:16:50 AM
Demand & Supply
China also provides the big consumer & business market. Therefore, main or perhaps the only reason for the shift is the increasing wages. If the major manufacturers shift from China, this would be the poor indicator for the Chinese labor market & wages will become either stable or begin to fall, simple 'Demand & Supply rule'.  In that case, what the OEMs would do? Will they shift back to China again or struggle with the poor infrastructure in other destination? 
Bruce Rayner   The Rise of India Depends on China   2/18/2012 11:18:20 AM
Re: India: Poised to Gain More Tech Markets
@Tectnocrat - yes India has a long way to go. But rewind the tape to the mid-1980s. Back then India had very close ties with the Soviet Union and didn't allow foreign companies to own more than 49% of businesses located in India. Fast forward 25 years and visit Bangalore - it's like a mini-Silicon Valley. 

If China makes a mis-step or fails to make progress in the rule of law, etc., then it will play to India advantage and we could well see the pace of change in India accelerating. 
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Bruce Rayner   The Rise of India Depends on China   2/18/2012 11:12:28 AM
Re: india on the rise
@Pedro - keep in mind that India's population is 1.2 billion. It's middle-class is larger than totla population of the US. So in addition to seeking out low-cost manufacturing locations in India, companies are also looking to penetrate the domestic consumer and business market. 
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Technocrat   The Rise of India Depends on China   2/18/2012 3:23:00 AM
India: Poised to Gain More Tech Markets

Very interesting look at the shifting wind of power on the tech world stage.  I do agree China will start to experience the same kinds of pains most successful nations face and this shift towards the cheapest resources just might mean India. 

India has a long way to go from an infrastructure standpoint, but with the financial assistance of VW and other foreign investors, this might not be such an impossible task. 

India is poised to take a large segment of the technical landscape and it remains to be seen if they will be able to pull it off with the realities that exist.

Pedro Gonzales   The Rise of India Depends on China   2/16/2012 10:27:26 PM
india on the rise
I have read many article that India is becoming a power house for diffirent kinds of business, I agree with everyone that a large pool of proffesionals, low wages are very attractive to foreign investment.  I would like to know how come those compannies don't stay at home in the United States, so is it inavetable that all companies will always look for different countries in order to cut cost at their business.
sohaibmasood   The Rise of India Depends on China   2/16/2012 10:41:14 AM
Re: didn't china start out this way too?
@Gigi: True, the FDI's will pave the way for the future of India. I hope that in the next couple of decades India will be amongst the manufacturing leaders. And like you said the huge consumer base in India will have an important role to play. 
Companies like VW have taken an initiative and ventured into India in due time some others will follow suit. Thereby, creating more jobs and eventually paving way for manufacturing concerns to broaden the manufacturing sector. 
Gigi   The Rise of India Depends on China   2/15/2012 11:23:34 PM
Re: didn't china start out this way too?
Bruce and David, So far India played a good role in IT sector because of better internet connectivity, good pool of technical manpower and better connectivity with outside. But when it comes for manufacturing sector, they are poor in infrastructure facilities and common amenities like road connectivity, power supply issues, water etc: but they are improving very much in a rapid way for attracting foreign investments.

In my opinion countries large consumer base may be added advantages for the manufacturing sector.

India is one of the biggest Democratic countries and hence I don't think any miracle can happen in a day, buy it's possible in a slow and steady manner.
David Wagner   The Rise of India Depends on China   2/15/2012 10:30:22 PM
Re: didn't china start out this way too?
Frankly, i've never understood why we didnt do more in India to begin with rather than China. When the outsourcing started, much of the same things we could say about the two countries relative political stability and relationships with the our government would have been true then as well.

I do think, however, that India has the same problems China has to overcome-- a growing middle class looking for increased wages, higher shipping costs to the US and Europe than near shoring destinations, and working conditions that will make some developed economies squeemish.

While I'm a huge fan of India and wish them well, I think OEMs really ought to consider near shoring as an option.
Bruce Rayner   The Rise of India Depends on China   2/15/2012 3:07:38 PM
Re: didn't china start out this way too?
Good question Sara - and its impossible to do an apples-to-apples comparison as they are so different in so many ways. A decade ago, both were developing rapidly but taking different paths.  China was focusing on manufacturing and India on software. You don't need as sophisticated a logistics and transportation system for software as you do  for manufactured goods. Politically, India was (and is) a vibrant democracy, which China is still in the process of politcal transformaton - witness the trip this week of VP Xi. But when it comes to attracting foreign manufacturing, as far as infrastructure and services, sources I talk to say that China a decade ago is probably similar to India is today.


I'd like to get some other comments from E2 readers who live in or frequently travel to both country. 

Was China a decade ago like India is today with regard to attracting foreign manufacturing?
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Sara Peters   The Rise of India Depends on China   2/15/2012 2:37:48 PM
didn't china start out this way too?
Bruce obviously there are some weaknesses in India right now, but was China much better off when OEMs/manufacturers started moving their business there? I'm asking: I don't know the answer.

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