CALCUTTA — Early this year, Executive Director J.B. Lee of Hyundai Motors, India, the Indian subsidiary of the Korean car giant, wrote to his 70 parts suppliers urging them to add a new clause on “product liability” to their contracts.
The clause was meant to make suppliers liable for any product recalls that Hyundai might have to make anywhere in the world as a result of a faulty part supplied by them.
For most suppliers to Hyundai India, the letter from Mr. Lee came as a major surprise. After all, Hyundai India was selling almost entirely in India — exporting just a fraction of its production — and defective cars, or any other product for that matter, are never recalled here.
But they agreed, to please the No. 2 car seller in the country, which sells $1 billion worth of cars each year.
However, an announcement from the company in early June added more meaning to Mr. Lee’s letter to suppliers.
B.V.R. Subbu, president of Hyundai India, said the company is going to be the global manufacturing hub of Hyundai’s small cars.
“A European delegation visited our plant in Delhi recently to check standards and we are likely to enter the European market in the next couple of months,” said Mr. Subbu, adding: “We aim to be among the top five auto companies in the world. While the U.S. and Europe will be the hubs for large and midsize cars, respectively, we see India as our global hub for small cars.”
Hyundai India is not the only one to have put its faith in India’s manufacturing.
Over the past week, three more global manufacturing giants have made similar announcements. Ford Motor Co. said it is aiming to source $120 million to $160 million worth of auto parts from Indian manufacturers over the next two years.
Global consumer electronics giant Matsushita of Japan announced that, for the first time, it has decided to source Panasonic color television sets from India for its international market. The first consignment has already left India’s shores.
And, Thermax India, a large engineering company, announced an agreement with General Electric Co. of the United States, to supply parts for the latter’s power systems.
It is also negotiating deals with Detroit Technologies and Capstone Turbines Corp. in the United States, and Wartsila Corp. in Europe.
Other multinationals that include names like American Power Co., Knoll Pharma, Pfizer, Procter & Gamble Co. from the United States, Volvo, Motor Minelli, Cadbury Schweppes, Nokia, Renault from Europe, plus Toyota, Koyo Steering, Kawasaki Motors of Japan and Hyosung Motors of Korea are lining up to make India their global manufacturing outsourcing hub, either for a whole product or for one or more critical components.
Suddenly, India, whose manufacturing base was shrinking until two years ago, has emerged as one of the preferred destinations for major-name companies to outsource their manufacturing activities. For India, this is a multibillion-dollar opportunity.
As the world draws closer to the January 2005 deadline — scheduled completion date for the Doha round of world trade talks, and for the abolition of the Multi-Fiber Agreement, which has restricted world textile trade for decades — cost pressures are driving giant firms to low-cost destinations for producing at the lowest possible cost.
Although many have flocked to China, some, like those mentioned, are making a cautious entry in India to take advantage of its democratic governance.
The Confederation of Indian Industry (CII) estimates that manufacturers’ outsourcing could be as big as $10 billion by 2007, and $50 billion by 2015. In the last few years, outsourcing from India has been growing at $1 billion a year. Already, an estimated $5 billion worth of engineering goods, auto components, pharmaceuticals and textiles have been outsourced to India over the past four years.
Although cost cutting is the primary driver, firms involved say cheap labor is not the only advantage luring global manufacturers to India. “India doesn’t have a universal cost advantage like China,” said David Friedman, managing-director of Ford India. “But India does have a clear advantage in engineering, including forgings and castings. I am amazed at the kind of engines and the number of engines that are made in India.”