India always compared poorly to China in costs, quality and support to foreign manufacturers. Today costs of manufacturing are comparable and in some cases even less than China. While China became the focal country for global manufacturing and the focus was on exporting what was produced, India’s manufacturing has always been more targeted at the home market.

Historically, companies have invested to produce finished products that meet the local demand and not to export. Now that this home market is growing rapidly, and when combined with improved manufacturing costs, India is far more interesting to many.

Therefore during the last 2-3 years, many companies have been developing India as their production hub either specifically for the country or for certain regions. Some early investors who have been successful include:
Hyundai, Suzuki (for small cars), Ford India (Small cars and engines for small cars), Timken (bearings), Skoda – all of who now use India as a manufacturing (Production site) base. The recent spurt in manufacturing activities and related investments, coupled with a boom in real estate prices, has resulted in the price of infrastructure going “through the roof”. For example, industrial land in Chennai which was available at € 35,000 in 2005 went up to an average of around € 200,000 per acre in the government promoted industrial areas. The price of privately held industrial land has appreciated more as it was driven completely by market demand and sentiments.

The recent development has led the availability and cost of industrial land to become a major bottleneck for companies who plan to invest (see “Setting-up a Production site in India”). The existing well-developed industrial areas like Chennai and Pune have become overcrowded and other options often have the infrastructure and other barriers, creating a demand/supply problem.

Given this scenario, companies are exploring other location options which are either secondary cities like Nagpur or industrial areas slightly far from the metro cities. Places like Satara (near Pune), Madurai (in Tamil Nadu) etc. are becoming attractive investment destinations for both international and Indian companies. Various state governments in India are planning to develop other industrial areas to meet the growing demand. Maier+Vidorno has identified 25 manufacturing centers that have been studied on the basis of the following salient parameters which are critical in setting up a plant- and to be considered while choosing the manufacturing site in India:

  • Industrial infrastructure and availability
  • Availability of energy/water
  • Communication infrastructure
  • International connectivity
  • Road connectivity to major metros
  • Ports infrastructure

The availability of manpower in an area has also been evaluated by considering the following factors:

  • Availability of manpower
  • Number of technical institutions in the area
  • Language skills
  • Also included are the different kinds of tax breaks and incentive schemes state governments offer to companies setting up their manufacturing in their state.

The study also takes into account the political environment and bureaucracy prevalent in any particular state. A stable government reflects a stable environment for investment. Various state governments in India are planning to develop other industrial areas to meet the growing demand. For the full report, please contact Maier+Vidorno.