Mr. Singh Goes to Washington – Part II

LOS ANGELES: Indian Prime Minister Manmohan Singh’s trip to Washington this week is the first official state visit of the Obama presidency. Such visits are elaborate affairs and the status-conscious Indians will take special note of the honor, especially since President Obama just returned from his own high-profile trip to China. Economic cooperation certainly occupied much of the agenda. But it is likely that little thought was given to the looming bilateral problems that will be caused by the evolving global system of production and commerce.

The wrenching restructuring now underway in the global auto industry offers a sobering view of these challenges. India has come a long way from a decade ago when Chrysler’s president summarily dismissed the country’s automotive prospects. “Call me when you’ve built some roads,” he was reported to have said. But in early 2008, India succeeded in capturing the auto industry’s notice as the Tata Group, one of the country’s largest conglomerates, delivered two major breakthroughs. The first was the introduction of the Nano, the hyper-efficient but ultra low-cost minicar that has drawn much international fanfare. As Alan R. Mulally, CEO of Ford Motor Company, notes, “Literally, India is designing the small car for the world.” 

The second of Tata’s breakthroughs was its purchase of Ford’s Jaguar and Land Rover units, whose main markets are in the United Kingdom and the United States. Tata was bidding against another Indian auto company, Mahindra & Mahindra, and the ultimate sale price of around $2 billion represented a considerable discount from what Ford originally paid for the brands. The acquisition was a moment of sublime irony: An iconic but money-hemorrhaging U.S. corporate giant unloading European luxury brands to an Indian firm that only began making passenger vehicles a decade earlier and which, at that very moment, was launching the world’s cheapest car.

The two episodes illuminate the strategic shifts radiating from Asia that are redrawing the world’s economic landscape. The greater prominence of the exploding mega-markets of China and India in driving global consumer demand, combined with the emergence of both countries as world-class technology and manufacturing powers, are key factors that will shape global business and international politics in the coming decades.

The large bulk of the auto industry’s future global growth will take place in developing countries, with China and India leading the way. In India’s case, the size of the middle class will swell over the next two decades, with overall consumer spending undergoing a four-fold increase and the country in the process becoming the world’s fifth-largest consumer market. India already possesses one of the world’s highest rates of personal consumption and its retail sector is expected to grow by over 60 percent in the next few years to become an $833 billion market. The country is now one of the world’s fastest-growing vehicle markets and Carlos Ghosn, the head of Nissan-Renault, estimates that its automobile market will triple in size, up to 6 million units sold annually, over the next decade. 

Taking note of these trends, major companies have ramped up their expansion efforts into India: Toyota, Nissan-Renault, Honda, Volkswagen and other car makers have all announced plans to spend billions of dollars to increase production capacity in the country.

Foreign companies are also beginning to utilize India’s low-cost engineering talent and manufacturing skills, especially in the vital small-car segment of the global vehicle market. Hyundai, South Korea’s leading auto firm, is making the country a global base for its small-car development and production, perhaps even for export to the United States, and recently invested $1 billion in a new manufacturing facility in the country. Suzuki is likewise turning India into an export hub for Europe and a focal point for small-car research. Toyota is about to open a 100,000-unit plant outside of Bangalore and also plans to make the country an export base for its small cars. Overall, Indian car exports, mainly to Europe, totaled 336,000 units in the 2008-09 fiscal year, up from 72,000 in the 2002-03 period, and some analysts predict exports will soon climb to more than 500,000 cars a year. 

American firms have likewise turned to India even as they shed workers and unproductive units in their home market, GM recently invested $500 million to expand production in India. Its technical center in Bangalore houses 1,000 employees engaged in research and development activities, and as the auto industry restructures the company could conceivably end up exporting Indian-built cars to the United States. Ford is doubling production capacity and has announced that India will be a key design and manufacturing hub in the future. 

India’s increasing prosperity will create major opportunities for home-grown and multinational businesses alike. Much of the future of the global auto industry, including for GM and Ford, will be written in India. But the political flipside of this development is not well appreciated. India’s rise also means that Americans will increasingly come to view the country as an economic competitor. Indeed, the rumblings have already started.

While much of the populist backlash against globalization is currently focused on China, India, the world’s top outsourcing destination, has not escaped attention. There was a notable upsurge in opposition to the outsourcing of work to India during the 2004 presidential campaign, reaching a high point with John Kerry calling business leaders engaged in corporate outsourcing “Benedict Arnold CEOs.” Following up his rhetoric during the recent presidential campaign, Mr. Obama proposed tightening tax penalties on corporate outsourcing and his economic stimulus package includes a provision restricting the H-1B temporary visa program for skilled foreign workers, actions that have a disproportionate effect on India. And as the Times of India observes, the president has an unfortunate tendency to use Bangalore as “a catch-all term to hang U.S. economic woes on.”

The backlash against the perceived ill-effects of India’s economic rise is likely to become stronger and more broadly entrenched in the coming years. Competing successfully in the booming Indian market will require establishing more American-owned R&D and manufacturing facilities in the country rather than relying solely on exports from the United States. Cost reductions by U.S. corporations and the lure of India’s inexpensive but talented labor force will reinforce this process, but the greater weight of India and China in setting global consumer trends will also force multinational companies to turn traditional business models on their head. Companies from Cisco and General Electric to Proctor & Gamble and John Deere have already begun de-Westernizing their innovation strategies in order to leverage the flow of ideas, talent and products from India and other emerging markets to developed countries.

Such business models may well be a necessity for major American corporations competing in a globalizing world, but explaining why it is good for workers in Michigan and other Rust Belt states will be a great political challenge. As they celebrate the growing U.S.-India economic partnership, Prime Minister Singh and President Obama would also be wise to give thought to the coming political reverberations.