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Friday, October 15, 2004

Bloomberg view on Indian Manufacturing Potential

( Via Reuben) Bloomberg's Andy Mukherjee writes,"A renewal of manufacturing in India has been long overdue. Like in most developing nations, the share of agriculture in the economy is shrinking, dropping to 22 percent last year from 28 percent in 1990. Factory production, however, hasn't picked up the slack. Excess rural labor has gotten pushed into low-productivity, unorganized businesses that cater to the needs of a domestic population, which has historically had very little purchasing power. Meanwhile, software and other ``knowledge'' industries failed to create jobs for less-educated workers". It's a development motto that has been fashionable in India in recent years -- software, not hardware, Deutsche Bank's Sanyal says. "We doubt that India will be the first country in human history to make the transition from agriculture to services without going through manufacturing development." A correction is under way. India's booming service industries have now begun to create a significant source of demand for manufactured goods. Software company executives now earn salaries that are on par with developed- country pay packages when adjusted for the purchasing power of the local currency. Deutsche Bank AG economists Michael Spencer and Sanjeev Sanyal said in December 2002 that for global manufacturers India may now be a more attractive destination than China was in 1990. Their thesis was received with skepticism, even disbelief.LG Electronics Inc.'s decision to set up a $43 million cellular phone factory near Mumbai signifies the growing appeal of India as a manufacturing location, complementing its already formidable reputation as a computer-software and call-center powerhouse. Beginning in 2003, Hyundai Motor Co., South Korea's biggest automaker, shifted its entire global production of the Santro compact car to its Indian unit. Unilever Plc's India unit said in May last year that it had been selected by its Anglo-Dutch parent to supply toothpaste to Europe after a study found that India was one of the cheapest places in the world to manufacture personal-care products. And now LG plans to spend $150 million in the country by 2007 and make India its second-largest overseas production base after China. Financial investors, who are usually one step ahead of direct investors, have already placed their bets on a manufacturing revival.``It is with some trepidation that we declare renewed enthusiasm for India, given our record here,'' James Alexandroff and his team at Arisaig Partners, which manages $927 million in Asian assets, wrote in their May 2003 investment diary. When Arisaig wrote that report, its $248 million India Fund had lost almost a fourth of its value in three years. Still, ``the fact that Hyundai Motors has declared India to be its global center for manufacturing cars tells a story,'' Arisaig said. That story, according to the fund manager, is one of ``new- found and well-based confidence in India's manufacturing sector.''The bet has paid off. The India Fund has returned 31 percent in the past year, compared with a 1.3 percent return on Arisaig's $385 million Greater China Fund.Infrastructure bottlenecks are clearing up, although slowly. It's possible now to call a small town in India from anywhere in the world, something that was unthinkable 10 years ago.A $12 billion highway project will, by 2007, cut down travel time by 25 percent and save companies $1.7 billion annually in transportation costs. The time taken to unload a ship at major ports has fallen 60 percent over 10 years to four days -- still a long way from the global benchmark of a few hours. Still, a long way to go, however the outlook is one of optimism

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