[Assam] A Younger India Is Flexing Its Industrial Brawn - NYT

[Ram Sarangapani]

PUNE, India<http://topics.nytimes.com/top/news/international/countriesandterritories/india/index.html?inline=nyt-geo>—
India's economic advancement no longer rests on telephone call centers
and
computer programmers.
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Audio
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An Industrial Base of Its
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<javascript:pop_me_up2('http://www.nytimes.com/imagepages/2006/09/01/business/01rupee.2.ready.html',
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Eells for The New York Times

The Essar mill in Hazira, which is quintupling steel production, has its own
port to bring in iron ore and its own large gas-fired power plant for
electricity.
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'01rupee_3_ready',
'width=720,height=600,scrollbars=yes,toolbars=no,resizable=yes')> Scott
Eells for The New York Times

The Whirlpool factory in Pune produces up to 33,000 refrigerators a month.
 The New York Times

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 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 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 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<http://topics.nytimes.com/top/reference/timestopics/organizations/i/international_labor_organization/index.html?inline=nyt-org>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 in hopes of taking
advantage of this shifting global dynamic.

General Motors<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=GM>and
Motorola<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=MEU>are
preparing to build plants in western and southern India. Posco of
South
Korea and Mittal
Steel<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=MT>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 in 2005 to fill 458 assembly line jobs at its factory here at a starting
wage of $90 a month, it required that each applicant have at least 15 years
of education — usually high school plus 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 the 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 one million
more jobs than workers to fill them. Factories elsewhere in China face less
severe 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<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=HMC>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 the Essar Group's complex in Hazira is already impressive. Essar
has its own port to bring in iron ore and 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 2 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 with 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
employees 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 a result was hundreds of thousands of businesses too small to be
competitive; India lags behind even the 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
highly 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-size machine that was stretching a minivan-size 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.

Labor laws, however, 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 extremely 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,
the 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 in 2005 to call for more contract workers to
be eligible for the bonuses as well.

*Bad Roads and Blackouts Take a Toll on Efficiency *

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 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 the 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 bulk cargo ports. Inflation quintupled in a year, to
5.3percent, as bottlenecks at ports, highways, railroads and elsewhere
in China
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 2006, 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 its 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
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 has his steering systems
factory. 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,
it looks as if the next icon 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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