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February 04, 2007

Manufacturing's comeback

Business Today's 15 year anniversary issue has an feature on the resurgence in Indian manufacturing.
The recession of the mid-90s followed. It was the worst of times. The doomsayers said Indian industry was going under. But displaying a resilience few thought it possessed, India Inc. invested heavily in modernising and upgrading capacities and on rationalising its bloated manpower. The process was painful, but the sector emerged from it leaner, meaner and fighting fit. Ravi Kant, MD, Tata Motors, remembers how the company cut almost Rs 2,000 crore in annual costs over a span of just a few years. "Our break-even point reduced from about 60 per cent capacity utilisation to 34-35 per cent," he says.

The tide has turned quite decisively. India Inc. is once again on a capacity expansion drive. So are several foreign companies (see Talking Big Bucks). And many Indian companies are aggressively eyeing overseas markets. What has caused this change? Liberalisation has, over a period of time, created an extremely robust and hungry-for-consumption domestic market. This is creating demand for manufactured products. Want proof? Look at the telecom sector. The total subscriber base crossed 180 million, and the country is adding an average of six million mobile subscribers every month. Result: there is a veritable boom in the associated manufacturing segments. Finnish telecom equipment company Nokia has invested $200 million (Rs 900 crore) on a mobile handset manufacturing unit here. Says Jukka Lehtela, Director (Operations), Nokia: "India is one of the fastest growing telecom markets in the world and it is, therefore, imperative for companies to be closer to the customers by being present in it." About 80 per cent of the output at the Nokia Telecom Park in Tamil Nadu is sold in India.

A thriving eco-system of suppliers and vendors is also helping manufacturing grow. Tata Motors, for example, outsources nearly 80 per cent of its mini-truck, the Ace. There are significant cost advantages as well. According to McKinsey, it is possible for a Fortune 500 company to manufacture products in India at about 70 per cent of the cost of a similar product in the US (see The India Edge). Tata Motors' Indica costs about 40 per cent less than what a comparable car developed in the West would have cost.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.