The Chindia Flip

For an economy of its size and maturity, India has an unusual skew in that services makes for some two-thirds of its GDP and just one-sixth comes from manufacturing. Given the relatively low employment intensity of services - it provides for only one in three jobs in India - most agree that factories are clearly the way to go if India wants to employ its one million citizens who cross the age of 18 every month. Here's the enormity of that number: it is enough to overtake Portugal's population in a year or Canada's in three. But, for most parts, India's ambitions of serving the world's merchandise appetite have remained castles in the air. For three reasons, primarily. One, with its cheap energy, labour and currency, China was miles ahead of India in its manufacturing prowess. Two, India's supporting infrastructure and regulations sucked. And, three, there wasn't a big enough market in India to make the costs of shipping from China (or elsewhere) big enough to justify putting up factories here. Not much has changed on the second factor, but there's definite change in #1 and #3. Labour costs have risen in the Middle Kingdom and foreigners need to spend more dollars to buy the yuan. As Senior Associate Editor Goutam Das found, Indian companies have reacted quickly to these signals. They are slowly and surely moving their manufacturing work from China to India. Not just the Indians. Multinationals, too, are increasing their manufacturing in India either by themselves or via their contractors.

It is an early trend and will not move the needle any yet, to be sure. Especially at a time when government estimates show a contraction in manufacturing output for the first time in over two decades. But in sectors as varied as washing machines, ACs, TVs, LED lamps, and mobile phones, to tiles, toys, undergarments and stationery, companies such as Godrej, Micromax, Havells, ITC, Bosch, Funskool and Haier, to name some, have made what I will call "the Chindia Flip". In some cases, like Havells in table fans, they have entirely stopped sourcing finished products from China and instead are making them in Haridwar. Others like Godrej and Micromax have shifted or are shifting production to India. The Chindia Flip will not happen overnight. Neither will it happen in energy-intensive manufacturing such as metals, where China will for long have the edge. But in areas where labour costs crimp margins, spending on logistics ratchet up with volumes, and as the yuan continues to strengthen, you will see new factories increasingly hum in India, not in China. And, as that volume increases, global corporations will find it optimal to source from India not just for consumption in India but also in its immediate neighbourhood. No such story would be complete without chronicling the havoc that cheap Chinese imports have wrought on Indian small and medium enterprises in the last 10 to 15 years. The businessmen behind the SMEs have survived: by turning traders importing from China products that they made in India, as Assistant Editor Taslima Khan's reporting shows.

The India Today Group, which Business Today is a part of, also publishes Harvard Business Review's South Asia edition. And, in every alternate issue of BT, we carry a piece from HBR. This issue, I urge you to read a piece on the leadership of Manchester United's Alex Ferguson. If you enjoy your read, scan the newsstands for the latest HBR South Asia OnPoint issue with 'How to Create a Culture of Excellence' on its cover. Great reading to sharpen your leadership spurs.

Lastly, as usual, we have a few stories that could enrich your worldview: Mukesh Ambani's spectrum strategy, a bullish outlook for the Indian markets this year , an exclusive interview with PWC Chairman Dennis M. Nally , MTR's former owners Maiyas fight the very franchise they sold seven years ago, how competition in premium ice creams gets hot, and Thomas Cook India's road ahead. Enjoy.