International Focus: Just how is India giving China a run for its money?

Forecast to be the fourth-largest economy in the world by 2013, India is a key locale to consider both as an export destination and as a place to set up manufacturing.

The constant focus of North America’s molders on China has nearly blinded us to the enormous potential of India, which by 2009 will be the third-largest user of plastics in the world, according to the Plastindia Foundation.

Well in excess of 45,000 plastics processing plants now operate inside India and at least 18,000 of them do some kind of injection molding. Growth rates for plastics processors in India have consistently hovered around 6-8% over the past five years and are likely to remain on this trajectory for the next five years or more.

Indian consumption of plastics is rapidly expanding yet is still at just about 5.25 lb per capita, well below the global average of about 33 lb per capita, according to Indian government data. This gap between present consumption and potential use shows the very substantial market opportunities available to molders now.

India is not a threat as a major exporter compared to China. It will consume most of its domestic production and ship to its traditional markets such as the Persian Gulf and Africa.

So where are the opportunities for North America and what are the problems?

Problems and opportunities

Key difficulties encountered in India are a severe lack of modern infrastructure, and this will take at least a decade or more to fix. More on the major Indian investment to fix this problem is discussed later.

At the same time, the restrictive import barriers by the Indian government, which are being dismantled at a snail’s pace, make trade and export to India less than attractive. According to a U.S. CIA report in early May 2008, “Tariff spikes in sensitive categories, including agriculture and incremental progress on economic reforms, still hinder foreign access to India’s vast and growing market. Privatization of government-owned industries remains stalled and continues to generate political debate; populist pressure from within the UPA United Progressive Alliance—the coalition of parties currently in charge of governing India] government and from its Left Front allies continues to restrain needed initiatives.”

Yet India is a clear alternative to China. Its effective legal system and an admirable record on human rights, solid English language skills, low labor costs, plus a strong moral code vis-à-vis the protection of copyrights and intellectual property make it an attractive place to do business.

Today’s North American and European molders are in a position to benefit from India by outsourcing production there as well as selling know how and expertise through joint ventures and partnerships.

The China-India rivalry has always been there and has become more intensive in the past years as Chinese labor costs have started accelerating, allowing India to seize business opportunities away from China (a country considered by many in India as a potential military enemy).

U.S. firms are well positioned to exploit this rivalry and take advantage of China’s shortcomings to lessen dependency on China.

Substantial growth continues

Boom times in India continue and, unlike China, the economic expansion is more modest and less risky. While Chinese banks are in a somewhat fragile state, India’s economic expansion has been more reasonable and has allowed the financial system—still heavy influenced by British traditions and value—to grow at the same pace.

Within the next five years, we forecast (and most economic analysis confirms) that India will become the world’s fourth-largest economy and continue to be the second-fastest-growing economy after China.

Foreign direct investment has accelerated since foreign investors and banks see India as socially much more stable than China. In addition, the lack of massive corruption is a comfort to foreign investors.

Where can North America benefit?

Molders from North America have now set up joint ventures to produce a variety of parts in India—and mostly for the Indian market with relatively little aimed for export to either Europe or North America.

The Indian middle class is growing fast and has become a substantial consumer market. We know of molders making components for microwave ovens, for India’s fast-growing automotive market, for washing machines and air conditioners, and for medical devices.

For the United States, India is a reliable partner—something frequently stressed by the White House. India is also seen as a long-term partner in containing communist China, whose current good behavior may turn once the Olympics are completed. Human rights violations and failures to vigorously prosecute copyright theft will most likely resume right after the August games are over and media attention wanders off.

According to the U.S. White House, “Over the last five years, U.S. exports to India have more than doubled, helping to create better-paying jobs in the United States. The United States and India agree that trade is essential to promoting global economic growth, development, freedom, and prosperity.”

The same statement on the strategic partnership with India also said: “The United States and India are working together to support the creation of innovative, dynamic, knowledge based economies.

1. Intellectual Property Rights (IPR): The United States is funding IPR training programs to strengthen enforcement and patent examination, as a vibrant IPR regime is critical to the promotion of a creative, technologically advanced economy.

2. Science: The United States and India established and co-fund the $30 million Bi-National Science & Technology Commission to generate collaborative partnerships in science and technology.”

Indian molders have access to almost all types of imported processing equipment and the overall market just for injection machines and related equipment has grown on average 11% per year since 2001, according to Indian government data. U.S. data show that India is also a major buyer of reconditioned and used molding machines.

Several end markets will see spectacular growth for molded parts made inside India as well as imported from North America. Keep in mind that U.S. exports to India have grown on average about 12% per year in each of the past six years.

Based on Indian projections, demand for molded parts for medical use is set to grow at an annual clip of 16% for the next five years; automotive parts will grow about 9% and electronics are likely to grow about 7.8% per year.

Automotive may be one of the best opportunities for U.S. molders who have lost out due to the decline of the traditional North American carmakers. Major carmakers such as Ford, General Motors, Mitsubishi, and Honda are expanding in India and are poised to produce more than 2 million vehicles by 2012.

For consumers, major OEMs such as Carrier, Sony, Samsonite, Tupperware, Panasonic, Whirlpool, and LG have attracted molding joint ventures from North America into India. More such ventures are likely.

India is now home to several well-known molding machine producers with full operations. Cincinnati Milacron (India) Pvt. Ltd. has a major factory in Ahmedabad. DGP Windsor (India) Ltd. (originally Klockner Windsor) has a major factory, as does Engel (India).

Injection molding, as well as all plastics processing, is classified as a “nationally important” industry and, as such, is permitted to import capital equipment under the Open General License (OGL) arrangement. Tariffs on imported equipment have declined from a high of 65% to 30% and are likely to decline even further.

Infrastructure growth

The single largest complaint about India and doing any kind of business in India is the apparent lack of a solid infrastructure. Yet this is changing rapidly. Indian spending on infrastructure projects such as warehouses, port facilities, roads and rail systems, and solid communications networks will most likely consume more than 9% of India’s expanding GDP for each year of the next decade. Right now it remains grim: just 2% of national highways carry more than 40% of all trucked cargo at a very slow speed.

Indian and foreign businesses are complaining loudly about the “nightmarish” red tape, delays at approvals for new infrastructure investments, and lack of an organized national plan to create a strong national transportation system.

As a result, many of the private business are taking matters into their own hands. For instance, Mumbai-based Future Capital Holdings (and venture capital fund) announced in March that it would invest more than $1 billion in the next two years to build about 10 major warehouse complexes in seven Indian cities to help with product storage and logistics.

At the same time, Indian Railways is investing in a major project to build a freight-only rail system connecting the northern city of Ludhiana in the Punjab with Jawaharlal Nehru (a port area near Mumbai) some 930 miles in the south. This line is likely to be completed by 2011 or 2012 and will be the core of a major industrial corridor.

Authors Agostino von Hassell ([email protected]) and Lisa M. Pellegrino ([email protected]) of The Repton Group LLC (New York, NY) are regular contributors to IMM.