India's manufacturing hopes hit reality A little good news from Germany motored into India's manufacturing sector last week, as Mercedes-Benz unveiled plans to invest an extra Rs2.5bn ($45m) at its main factory in the eastern city of Pune. Peter Honegg, the group's chief executive in India, sounded upbeat, saying he felt "bullish about the Indian market." But the carmaker's move to lift production in one of the nation's most vibrant industrial hubs is a rare boost, at a time when Indian manufacturing faces an increasingly uncertain future. Grim figures released on Wednesday showed the sector contracted 0.2 per cent in July compared with 12 months earlier. This confirmed data last week that revealed manufacturing at its weakest for nine months and underlined the extent to which India's slowdown is filtering through to its plants and factories following five quarters of falling or virtually flat growth. But this sluggish progress now places a wider objective at risk: India's plan, unveiled late last year, to increase the country's manufacturing base from 16 to 25 per cent of the economy in just one decade - aiming to mimic China's path to a mass-industrial economy while creating 100m jobs for the nation's bulging young workforce. "It's been 16 per cent or thereabouts, static over many, many years, while the sector that has grown is the services [one]," says Sudarshan Sampathkumar, a Mumbai-based partner at Bain, the consultants. Successive governments and successive policy makers have failed to act. A visit to Pune reveals the promise and the problems inherent in attempts to turn this round. The Mercedes facility sits just across the road from a second factory owned by Volkswagen, which last week also unveiled an extra Rs7bn ($126m) investment in India. Elsewhere, the city is dotted with foreign vehicle manufacturers, such as Italy's Piaggio and Britain's JCB as well as Indian mainstays such as Tata Motors. A vibrant auto-components and services sector has sprung up around them, including Microsupreme, founded in 1984. Its single factory in the south of the city has since grown to employ 170 workers, making precision engineered components for gearboxes and power-steering units. The business is prospering, explains Satish Joshi, the group's co-founder, but only in the face of any number of awkward impediments - including poor infrastructure, high interest costs, corrupt local officials and an operation that shuts most Thursdays, for a citywide scheduled power outage. But it is the company's attempts to open a second factory on a greenfield site that have been most irksome. "Everywhere we were stuck with the government, and they will say "come tomorrow, come tomorrow . . ." ," Mr Joshi recalls of a frustrating year-long delay gaining permissions for land development and other issues. International customers get frustrated about the fact we can't develop our components faster. Microsupreme's problems are just a taster of those that dog the wider sector, a list that could be expanded to include low productivity, restricted product markets and awkward labour relations, as shown by the July violence that closed the Manesar factory of Maruti Suzuki, India's largest carmaker by sales. Yet India has advantages too, not least a gigantic pool of ultra-cheap labour, abundant raw materials and, crucially, rising costs in many of the countries it seeks to emulate. "China is facing problems in terms of labour costs, availability . . . and demographic issues," says Adi Godrej, head of the $3bn Godrej conglomerate and president of the Confederation of Indian Industry. More and more manufacturing is moving to countries like Vietnam and Bangladesh. India has a clear chance to play a stronger role here. Analysts point to raw material intensive areas such as steelmaking or aluminium as one area ripe for growth, given India's plentiful supplies of coal and iron ore. A second comes in skill-intensive sectors, including the small car and auto-component manufacturing common in Pune, but also branded textiles, gems and generic pharmaceuticals. "In really large-scale manufacturing, China has a 20-year head start and is too far ahead," says Rajat Dhawan, head of manufacturing in Asia for McKinsey, the consultants. "But increasingly we see multinational groups adopting a "China plus one" strategy for their global production footprint, and this is an opportunity for India." With India's economy stalling, it is an opportunity few multinationals have yet taken, while India's hopes of becoming a global industrial powerhouse will require unusually decisive political moves to open up investment. The head of one major Indian conglomerate, speaking on condition of anonymity, is sceptical: "I've seen [government] targets of this sort talked about for decades. It never happens. But back in Pune, the growth of multinationals such as Mercedes and smaller businesses such as Microsupreme provides some hope. "We feel that in the next five years we should be able to grow our turnover by five times," Mr Joshi of Microsupreme says. This would include plans to push more exports to high-end producers in Italy and Germany. If India is to have any hope of achieving its manufacturing ambitions, many other companies must do the same. Additional reporting, Kunal Nathwani in Mumbai