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Edition: U.S. Article Comments (1) Follow Reuters Facebook Twitter RSS YouTube Read Powerful quakes rattle New Zealand city 12:48am EDT Texas governor addresses L.A. anti-abortion rally 12 Jun 2011 Mavericks beat Heat to win first championship 2:25am EDT Filipino teen declared world's shortest man 12 Jun 2011 Syrian forces take border town as inhabitants flee | 12 Jun 2011 Discussed 122 Alabama governor signs nation’s toughest immigration law 99 Obama weighs new steps to boost jobs 77 U.S. debt default unimaginable, creditors say Watched Obama resigns from church Mon, Jun 2 2008 Battles rage on the outskirts of Misrata Sun, Jun 12 2011 Bodypainters apply their skill Mon, Jul 19 2010 Manufacturing 2.0? Dell's lessons for India's big push Tweet Share this Email Print Related News Special report: Scientists race to avoid climate change harvest Fri, Jun 10 2011 Record exports temper slowdown fears Thu, Jun 9 2011 Special Report: After Japan, where's the next nuclear weak link? Thu, Jun 9 2011 Cooling employment casts shadow on recovery Fri, Jun 3 2011 Canada's Port Hope reaps uranium's rewards and risks Thu, Jun 2 2011 Analysis & Opinion All eyes on RBI’s monetary policy review DMK, Congress to untie the knot? Related Topics Technology » Media » A man pushes a trolley full of Dell computers through a company factory in Sriperumbudur Taluk, in the Kancheepuram district of the southern Indian state of Tamil Nadu, June 2, 2011. Credit: Reuters/Babu By Matthias Williams SRIPERUMBUDUR, India | Sun Jun 12, 2011 9:41pm EDT SRIPERUMBUDUR, India (Reuters) - The 500 workers at India's Dell factory, clad in blue uniforms and the occasional bright pink salwar kameez, are all Indian. Computers leaving the assembly line go to millions of newly affluent Indians feeding an explosion in consumer demand. But the boxes of component parts on the floor say "Made in China." That fact alone says a lot about how far the country's manufacturing sector has to go to match its world famous information technology- and services prowess and sustain searing economic growth. India needs to crank up its industrial base to wean itself from service sector-led growth and tame a trade deficit which could more than double in three years, mainly because of billions of dollars worth of Chinese imports. Shabby infrastructure, cumbersome bureaucracy, a meandering tax regime and a nascent local supplier base are holding back industrial growth and more foreign investment. "We are really taking baby steps in the IT manufacturing space," M.R. Sundaresan, Executive Director at Dell, told Reuters from offices at the factory. "We have a huge opportunity to be able to build on this." "Electronics are still largely imported into the country," he added. "We don't have a component or parts manufacturing supply chain available in the country." While Dell is bullish about India's prospects as a global growth driver, it is held back by issues ranging from a pesky permit system and the country's fragmented taxation methods. One of the biggest challenges is an underdeveloped supplier base to make components, such as microprocessors, locally. The result is a "chicken and egg" dilemma for the country. Dell needs component makers to set up shop in India, but big players will only come when there are enough Dells to drive demand. This matters, because India can no longer rely on a mix of its IT and service sector clout, remittances from its citizens working overseas and capital flows to finance a huge import bill of one of the world's fastest growing economies. Dell's challenges are by no means unique, but reflect what firms grapple with as they seek to expand in one of the world's hottest economies, from stifling labor laws to sudden government changes that catch companies off guard. Dell prides itself on making desktops and laptops to order, delivering from the factory straight to a customer. But sending a finished item to certain Indian states requires the customer to obtain a permit from a local tax officer, which the delivery truck driver then has to produce at state checkpoints. "It's an impediment to the ease of doing business," Sundaresan said. "The transport industry is highly immature, fragmented," he added. "The guy who comes and delivers it to your home, is not a company. He's still a person who owns one truck." Dell's annual revenue in India is closing on $2 billion. Its factory in the southern Tamil Nadu state, one of India's most business friendly, caters to 90 percent of local demand. But most of the components needed to assemble computers are sourced overseas. The rise of Texas-based Dell Inc, the world's No.2 maker of personal computers, as a manufacturing heavyweight in India is a snapshot of how the country is striving to follow in China's footsteps as an industrial giant. Dell started in India as a services provider, setting up shop in 1996 and opening up a series of call centers for customer support to anywhere from the U.S. to Africa and riding a crest of a software and services boom that has tagged India as the back office to the world. The tipping point for demand came in 2007. Strong double digit growth in computer sales in India had made the time ripe for Dell to set up a manufacturing hub to lower costs and slash delivery times to customers, helping it to expand in a bulging white collar market with economies of scale. It now employees nearly 25,000 people in the country, second only to the United States Dell also prides itself on having been the country's first major personal computer exporter out of its Indian factory -- Dell's third in the Asia-Pacific region -- selling mainly to markets nearby in the Middle East. In time, greater expansion could follow. "If I get more and more of my ecosystem locally, there is no reason why I shouldn't be able to ship to western Europe as well as to the U.S.," Sundaresan said. TIME TO DELIVER Asia's third-largest economy is starting to shed its status as a manufacturing laggard with an influx of global big-hitters, to a sector once infamous for its red tape, countless license requirements and pitiful output before liberalization. Sriperumbudur town is about an hour's drive from Tamil Nadu's capital, Chennai. It is known for two things: it is where the technology-loving Prime Minister Rajiv Gandhi was assassinated by Tamil Tiger rebels in 1991, the same year India unleashed economic reforms which sowed the seeds of today's 8.5 percent boom. It has also since become a magnet for foreign giants such as Dell, Nokia, the world's largest handset maker, and South Korea-based Hyundai Motor Co, as part of Tamil Nadu's industrial belt also known as "India's Detroit." The Indian government is pinning its hopes on the growth of the likes of Sriperumbudur to lift manufacturing to 25 percent of GDP from about 16 percent by 2025 to create jobs for tens of millions expected to join the workforce during that time. Tamil Nadu's government won praise for attracting investors with tax incentives, easy access to land and an educated workforce. Proximity to sea ports and an airport is also key. Dell has reciprocated by hiring hundreds of factory workers from the state's rural hinterland, giving them the chance to become more fluent in English, take correspondence courses with colleges and send money back home to their families. "I want to build my future here," 21-year-old Manikandan, who takes apart dud computers at the factory, told Reuters. GET IN LINE However, no matter what incentives companies such as Dell get from states, national problems persist. Chennai's sea port is the export-import point for many multinational firms who set up nearby. But the road to the port is strewn with trash, has shabby shops and slums with thatched roofs. Trucks have to wait in a queue which can be more than a mile long to unload their cargo. Reuters spoke to one truck driver near the end of this queue at quarter past five in the afternoon. He said he had been waiting there since ten in the morning. Chennai port is not alone in this. Many of India's roads and ports are clogged and underdeveloped. The average cost to move a container around within India is $945, more than double the $460 it costs in China. And it's not just infrastructure. Foreign investors and local firms alike have long pushed for Prime Minister Manmohan Singh's federal alliance to implement a Goods and Services Tax to simplify the country's tax regime. "It's not about giving freebies or anything," Ganesh Lakshminarayanan, President of Dell India, told Reuters. "It's about having a stable tax regime which can signal to the component manufacturers, signal to companies like Dell, that the business environment is going to be stable." The Indian government is trying to foster industrial growth, setting up manufacturing zones like China's with the help of tax breaks, flexible labor laws and world class infrastructure to attract foreign players and foster export growth. But such initiatives have been a mixed bag. Getting land is tough, while ministries have clashed over how to implement such zones and how much the companies should be taxed, if at all. While Dell flourished to become India's top computer hardware seller, others may have a tougher time. Tamil Nadu's industrial rise, for example, may be becoming a double-edged sword with its infrastructure starting to rip at the seams. As well as clogged up ports, businesses complain of long blackouts. "Manufacturing has suffered quite a lot in the past ten years," said Shanker Gopalkrishnan, president of the Madras Consultancy Group, of Tamil Nadu industry. "If you don't service these industries well, there is a danger of losing business to another country." Whatever its problems, companies such as Dell remain bullish about India's prospects, even if it may not eclipse China. "India is the most exciting thing we get to talk about," Dell's Lakshminarayanan said. "The whole point is acknowledging China's growth in the manufacturing sector and positioning India as the next best destination," he added. (Editing by Vidya Ranganathan) Technology Media Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story directly or with relevant tangential information. We try to block comments that use offensive language, all capital letters or appear to be spam, and we review comments frequently to ensure they meet our standards. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. Comments (1) Rajunews wrote: More than anything, government doesn’t involve in creating more projects to provide power to domestic and where do we see manufacturing happening even when hiccups mentioned in article are addressed. Jun 13, 2011 1:03am EDT -- Report as abuse See All Comments » Add Your Comment Social Stream (What's this?) © Copyright 2011 Thomson Reuters Editorial Editions: Africa Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom United States Reuters Contact Us Advertise With Us Help Journalism Handbook Archive Site Index Video Index Reader Feedback Mobile Newsletters RSS Podcasts Widgets Your View Analyst Research Thomson Reuters Copyright Disclaimer Privacy Professional Products Professional Products Support Financial Products About Thomson Reuters Careers Online Products Acquisitions Monthly Buyouts Venture Capital Journal International Financing Review Project Finance International PEhub.com PE Week FindLaw Super Lawyers Attorney Rating Service Reuters on Facebook Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests. NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here.

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