Big firms fight India's bottlenecks with pedal power and generators
April 9, 2006
By Cherian Thomas and Anand Krishnamoorthy
New Delhi - Honda Motor's factory outside New Delhi boasts $3 million (R18 million) of robots that assemble Accord sedans. It also has its own power plant. The government supplies just a quarter of the electricity Honda needs.
"Anywhere else in the world, we probably wouldn't have had to build a back-up generator," says Rajive Saharia, the general manager of the Indian unit of Japan's third-biggest car maker.
Companies are relying on ingenuity and cheap labour to overcome crude power grids, roads and ports in India, a market of 1.1 billion people that's too important to ignore. Analysts say the nation's antiquated transport and communications links are cutting profits and slowing growth.
HJ Heinz, the world's top tomato sauce maker, pays villagers to collect tomatoes from farms that vehicles can't reach. Pantaloon Retail India, the country's biggest retailer by market value, gets 40 percent of its deliveries on hand-drawn carts, motorised rickshaws and bicycles to avoid traffic jams and to navigate poor roads.
"Companies can work the system for a while but not forever," says Saumitra Chaudhuri, an economic adviser to Prime Minister Manmohan Singh. Inadequate power and transport networks shave 1 percentage point from annual growth, he says.
India's economy grew 8.1 percent in the year to March, the government estimates, trailing only China among the biggest economies.
India produces about 8 percent less electricity than it needs, cutting gross domestic product by a tenth, the finance ministry estimates.
Highways, which move almost 80 percent of the goods transported in India, account for only about 2 percent of the country's roads. On average it takes 85 hours to unload and reload a ship at India's major ports, 10 times longer than in Hong Kong or Singapore, according to official figures.
"The biggest impediment to doing business in India is the lack of basic infrastructure," says William Harrison, the chairman of JP Morgan Chase, the third-biggest US bank. "India must accelerate the work, as there is a direct payback to the economy."
Without improving roads and ports, India can't sustain its economic boom or compete with China for international investment, says Song Seng Wun, an economist at CIMB-GK Securities in Singapore.
"Mobility of people, goods and services is critical to sustain this growth," Song says. "That's what we're seeing in China now. India must replicate that for the kind of development it wants to see."
China received about $60 billion of investment from international companies last year as manufacturers built factories to take advantage of low wages and falling tariffs. India drew about $5 billion. Manufacturing accounts for 16 percent of India's economy, versus 39 percent in China.
For now, companies such as Ford Motor, Honda and Heinz are finding ways around India's inefficiencies so they can profit from a consumer market where personal incomes doubled in the past decade.
Ford sold 20 370 vehicles in India last year, 36 percent more than in 2002. Chief executive William Clay Ford said during an October visit that India's growth and rising incomes made it a "top priority" for the car maker.
Ford, whose factory near the south Indian city of Chennai makes Ikon and Fiesta sedans, requires its engine supplier in central India to fit delivery trucks with global positioning system devices so it can locate vehicles stuck in traffic and adjust production schedules, says Arvind Mathew, the managing director of Ford's Indian unit.
To hedge against the risk of delays, the Chennai plant stocks more parts than needed, increasing storage costs, says Mathew.
"Inefficiencies add at least 5 percent to 10 percent to costs," he says. "But you've got to learn to get around the problems as India's potential stares you right in the face."
Honda takes seven days to truck cars from its plant near New Delhi to dealerships in Chennai and Bangalore, about 2 500km away, says Saharia.
"Transit times in India are among the highest, and there's a cost to it," says Saharia. "But I can't wait for the infrastructure issues to be sorted out and then move in. I better be part of the market now."
Retailer Pantaloon has a computerised inventory management system, yet it relies on hand-drawn carts and bicycles to get goods to its stores, says managing director Kishore Biyani.
Those limitations aren't preventing the Mumbai-based company from planning to build 51 shopping malls.
"We don't have the best of roads, trucks or systems, but we still manage to make our goods reach a lot of places in time," says Biyani.
Finance minister Palaniappan Chidambaram said in his budget speech that the government would spend 992 billion rupees (R135 billion) on infrastructure in the year from April 1, a 24 percent increase, as it sought to boost the growth rate to 10 percent.
India had been building roads at the rate of 4.5km a day since Singh's government came to power in May 2004, compared with 1.9km a day prior to that, he said.
The proposed public works spending is still just 3.4 percent of gross domestic production. China probably spent $150 billion on infrastructure last year, which is equal to 11 percent of economic production, estimates Chetan Ahya, an economist at Morgan Stanley in Mumbai.
Nilesh Patel, the head of Heinz's Indian unit, isn't waiting for roads to be built.
Heinz pays village youths to carry tomatoes from farms that aren't accessible by road to collection points where they are loaded on to trucks, says Patel. India's incomplete road network boosts freight costs by a fifth, he says.
"Infrastructure can never be comparable to China or Europe, but India can't be ignored," he says. - Bloomberg
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