What are the main disadvantages of India

India

Oliver Muller

To person

Oliver Müller, born in 1968, has been working as the South and Southeast Asia correspondent for Handelsblatt since 2003 and lives in the Indian capital New Delhi. Before that, he was a correspondent in Hong Kong for three years, reporting from there for the Handelsblatt on economics, business and finance in East Asia. In October 2006, Hanser Verlag in Munich published his book "India's Economic Power - Opportunity and Challenge for Us".

More and more German companies are investing on the subcontinent

From a once bitterly poor emerging country with catastrophically poor infrastructure, India has risen to become a global player, especially in the high-tech sector. German companies also have a share in this upheaval, which is making India the world's extended office and its outsourced research laboratory.

Robot technology "you can touch", Angela Merkel and Manhoman Singh at the Hanover Fair 2006
Photo: Press and Information Office of the Federal Government
Hot and dusty, riddled with potholes and chronically clogged, Hosur Road winds south from Bangalore's city center out onto the flat, poor country. An endless stream of small cars and rattle buses fight their way through a cloud of exhaust gases at walking pace. But under this pox-colored asphalt strip, data cables pump the knowledge of tens of thousands of engineers around the world at the speed of light.

This makes the Hosur Road a symbol of modern India and all its contradictions: a desperately poor emerging country with a catastrophically poor infrastructure skips several stages of development in fast motion and soars into a global player in the high-tech area.


German companies are part of the upheaval that is making India the world's extended office and its outsourced research laboratory. Corporations like Siemens have set up shop along Hosur Road. Robert Bosch GmbH has also set up a development center on this artery of globalization. It soon grew to be the largest outside of Germany. Here, 3000 engineers design navigation systems and engine controls. "The international competition leaves Bosch with no alternative," explains Walter Grote, who heads the Bosch development center in Bangalore. The head of the center soberly clarifies the basic principle of global capitalism: "Work is done where it is best and cheapest."

An Indian engineer earns less than a fifth of the salary of a German. He speaks English, and there are many of them: around 400,000 graduate from universities every year, ten times more than in Germany. Fast-growing companies such as Siemens or Bosch can no longer find enough young talent at home. That drives them to India more than the savings that await them there. Because knowledge is decisive for success in the market in all industries in the 21st century. This resource has become India's most precious export. It now earns more from it than from textiles, tea and spices, which have been its most important exports for centuries.

Investments in India increase German competitiveness

The fact that more and more German companies are investing in India's knowledge industries raises the interdependence of the two economies to a new level in terms of quality. The country is no longer just a market for expensive German goods such as machines that are used there to manufacture cheap T-shirts for export back to Europe. It is developing into a knowledge resource that will help determine the future of German companies.

"Without the help of Indian engineers, Bosch would not have been able to cope with the high global growth of recent years," explains Grote. His employees develop software, simulate the function of new components on computers and process invoices that are read in in Stuttgart and sent to Bangalore via data line. "All of this cuts costs and thus increases the competitiveness of our German locations," the manager is convinced. The argument of globalization critics, Offshoring - The relocation of corporate functions and processes abroad - destroy jobs at home if he does not accept: "That secures jobs," contradicts Grote. Bosch is still hiring in Germany. But those who run after the shift of added value to low-wage countries will soon be swept from the market. This logic is driving more and more German companies to India.

In Mumbai (formerly Bombay), Bangalore and Delhi, well over 5,000 Siemens engineers work on software and medical technology or design power plants. Degussa is developing fine chemicals in the country, while the pharmaceutical company Altana is researching new drugs. For Deutsche Bank, Indian bankers analyze stocks that are traded in New York or London. The development center of the software manufacturer SAP in Bangalore has also advanced to become the second largest after the headquarters in Walldorf and is growing the fastest in the world. In 2003 it only had 750 employees. At the end of 2006 there were 3,500. One in four SAP developers worldwide is based in India, and with investments of one billion dollars, the company plans to double the number there again. "We have to invest here", defends the longtime head of the Indian SAP subsidiary Clas Neumann Offshoring-Strategy of his employer, "this is the only way we can keep up with prices on the world market".

First trade contacts as early as the 16th century

Managers like Neumann and Grote, who deal with India's knowledge, are descendants of merchants in the service of the Fuggers and Welsers. They were the first German businessmen to enter the country in the 16th century. Like the Portuguese, Dutch, French and British, they looked for the gold of their time: pepper. But in the last few years the Internet and the telephone have enabled a revolution in world trade from which India has benefited more than any other country. Services can now also be traded across borders, such as cell phones, refrigerators or televisions, with the same opportunities for cost arbitrage (exploiting price differences). The historical forerunners of the data lines that enabled India to become a leading service exporter were laid by German engineers. In 1870 Siemens connected Calcutta and London with the first telegraph line.

This shows how far back German-Indian economic relations go, with research and development only playing a role since the turn of the millennium. After India's independence in 1947, other things were initially required. State founder Jawaharlal Nehru pursued an ambitious industrialization program, and with the help of Krupp and Demag the steelworks in Rourkela (Union state Orissa) was built. Bosch built a spark plug factory, Bayer a paint factory. A truck factory built by Daimler-Benz laid the seed for Tata Motors' rise to become India's leading commercial vehicle manufacturer. But the interest of German managers soon died out because India sought its salvation in isolation from world trade and socialist planning. For a long time they flew over India in the direction of China, which opened up earlier and faster.

That only changed after India made its belated turn to a market economy in 1991 and opened up to foreign investors. China's economy is now three times bigger and the standard of living there is twice as high. But India's economy has also grown by an average of over six percent a year since the reforms began. And since 1993, the cumulative effect of many small liberalization steps has even increased growth to over eight percent. Economists see a structural break with the past and many expect the country to keep up this pace or even to accelerate further. Experts from the major bank Goldman Sachs believe that India will enjoy the highest growth rates in the world on average over the next five decades. They predict its economy will rise to number three in the world in 30 years, after China and the US. "India is without a doubt on the verge of becoming a major new player in the world economy," said Siemens' supervisory board chairman Heinrich von Pierer. "The country will be as important to the world as China is within the next 15 years," said Steve Brice, Asian economist with Standard Chartered Bank. "In 30 years it will be even more important than the People's Republic."

"India has massively exceeded our expectations"

India has stepped out of China's long shadow. The economic awakening of the second Asian giant with more than a billion potential consumers has made the country a hot topic in corporate headquarters from Tokyo to Munich to New York. "Until recently, there was only China for German companies," observes Deutsche Bank board member Jürgen Fitschen, who is in close contact with executives, "but now it is said everywhere: We also have to go to India".

The position in both key markets will determine the global success of a company. German managers and politicians are now making pilgrimages to the subcontinent more than ever before. The number of interested parties knocking at the Indo-German Chamber of Commerce in Mumbai doubled in 2005. On average, the chamber now processes one foundation every week, and the trend is rising. The interest in India also makes it the focus of trade fairs with global appeal: in 2006 it was the partner country of the largest trade fair for industrial goods in Hanover. Shortly afterwards it was at the center of the Frankfurt Book Fair, and at the beginning of 2007 it is a partner of the Berlin tourism fair ITB.

In addition to many cheap technicians, the fast-growing middle and upper classes act as a magnet for investors. Thanks to the economic boom, more and more Indians can afford their first cell phone, car or home, open accounts or buy insurance. For Allianz AG, the country has quickly developed into the most rewarding growth market in the world. The group entered the insurance business in 2001, in a joint venture with the vehicle manufacturer Bajaj. Today the Germans are India's largest private life insurer and the second largest property insurer. As early as 2006, the threshold of one billion dollars in premium income was exceeded. In addition, Allianz in India reached break-even in record time: In the business area, it only took one year. "India has massively exceeded all of our expectations," explains Heinz Dollberg, Executive Vice President for Asia Business.

Not everything is rosy: resistance by the communists to a greater opening to foreign investors, which is also slowing down the expansion of other companies, is preventing insurers from increasing their stakes in Indian subsidiaries to 49 percent. Nevertheless, they benefit from a much more liberal regulatory framework than in China. There the alliance can only operate in three cities. "In India we are not subject to any growth restrictions," says Carsten Glombik, the manager responsible for the industrial business there. In the country, the insurer has set up over 600 branches on its own in five years and trained well over 100,000 agents. "Our growth here is phenomenal and would not be possible anywhere else," says Glombik.