India has succeeded in services, and failed in manufacturing. So goes the popular wisdom. But that may be about to change.
For, the country’s export of automobiles has grown faster than software over the last four years (more than 35 per cent annually). Admittedly, that is from a low base, and the total exports of vehicles last year fetched no more than $2.5bn. But the pace is slated to pick up, not slacken; and in less than 10 years the industry hopes to be exporting vehicles worth $35bn - twice as much as the software guys did last year. Add the better-known success story on automobile component exports (like forgings), and it does look as though automobile manufacture will be a new arrow in the country’s quiver.
This may be hard to believe, when one looks at the strengths of the automobile industries in the US and Japan, China and South Korea, and the European manufacturing hubs. But the Indian end of the business is probably being under-estimated because it has gone mostly unnoticed that it has already acquired respectable volumes, on the base of a growing domestic market.
At nearly 7m units a year, India is the second-largest two-wheeler manufacturer in the world, next only to China. In cars, India has just crossed the million mark; 10 other countries have done that before India, but if you go by the figures provided by the Society of Indian Automobile Manufacturers, none of them is growing as fast as India’s industry. And in buses, believe it or not, India makes a sixth of the global total. Even in medium-size tractors, the country does very well in the global pecking order. This varied base is now being used as the launch-pad for getting into other markets.
The leading makers of two-wheeler companies (Hero-Honda, Bajaj and TVS) are all doubling capacity, adding another 6m to their present total. The leading players in the domestic car market have their eyes firmly set on exports. Hyundai wants to treble its car exports from 100,000 to 300,000; Maruti is developing a new car for the export market (beginning with 100,000 car exports); and Tata Motors wants to double exports every two years. Ford too has decided that India will be a sourcing point for some markets. With Toyota now set to enter the small car segment, the finance minister may well have been right in spotting the opportunity to make the country a hub for small car manufacture. Export of a million cars five years from now looks a distinct possibility.
The unusual part of this story is that car companies make good money in India. General Motors, Ford and others may be struggling in the US, and some German car companies too have been troubled, but Maruti has just announced 39 per cent growth in quarterly profits, with improving margins. That explains why it accounts for 10 per cent of parent Suzuki’s turnover, but a handsome 25 per cent of its profits.
Tata Motors has recovered well from a crisis five years ago and, having benefited from substantial re-engineering, now has a healthy bottom line. Hyundai and most of the others (like Ford and Volvo) are privately held, so their financial numbers are not available, but Hyundai would not be targeting aggressive growth from an Indian production base if it was not a very good business; and Toyota announced the other day that it has wiped out the losses incurred in the early years of its India venture.
Clearly, there are cost advantages involved in operating from India - one of them being labour. And the rapidly growing domestic market for small cars, of a kind that few countries can boast of, provides the base for volume production of cars with an engine capacity of 1000cc - 1100cc, which the American and European car companies don’t focus on, but which nevertheless has a substantial market in many countries.
Sure, India’s infrastructure constraints must present difficulties, but they don’t seem to have affected the growth impulse of a potentially giant manufacturing sector.
T N Ninan is the editor and publisher of Business Standard, one of India’s leading business newspapers. An award-winning journalist and a member of various boards and professional bodies, he is a familiar figure on Indian national television as a commentator on economic issues. His weekly column, devoted to analysis of the Indian economy and business environment, now appears on FT.com every Tuesday. Visit the Business Standard website at http://www.business-standard.com