CALCUTTA, India, June 11 (UPI) -- 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.
