SYLVIE DOUGLIS, BYLINE: NPR.
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DARIAN WOODS, HOST:
In the world of manufacturing, China is the undisputed champion, but on its doorstep lies a huge country vying to be the next champion - India.
ADRIAN MA, HOST:
That's right. Companies like Samsung and Apple are growing their Indian suppliers. A small share of the latest iPhone is now produced in India. And this growth has been accelerated by China's heavy-handed lockdowns and growing geopolitical tension between the U.S. and China.
WOODS: But assembling a few iPhones in India with imported parts is really different from building a vast, high-tech supply chain like you have in China right now. That said, Gurcharan Das is not intimidated. He's a board member of Procter & Gamble's Indian subsidiary.
GURCHARAN DAS: We are not an Asian tiger. We are more like an Indian elephant, but I hope a wise elephant.
WOODS: This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.
MA: And I'm Adrian Ma. Today on the show, can an elephant beat a tiger? We lay out the case for whether India could become the next high-tech factory for the world.
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WOODS: There are several reasons why India might or might not become the next big global manufacturing hub, and we're going to go through them one by one.
MA: But before we get to that, it can be helpful to know a bit of Indian history. The modern country was formed in 1947 after it gained independence from British rule or, as it's also called, the British Raj. And the country was slow to industrialize after, partly because its layers of bureaucracy in the decades afterward was, well, legendary.
WOODS: Gurcharan Das is a board member for Procter & Gamble's Indian subsidiary. And when Gurcharan thinks about why India doesn't have a large manufacturing sector, he thinks back to the 1970s when there was a flu epidemic in the country.
DAS: Our company made a product called Vicks VapoRub.
MA: Vicks VapoRub - you know, that menthol ointment you use for pains and coughs? Well, during the 1970s flu epidemic, the company he worked for at the time produced more Vicks VapoRub than its license actually allowed it to. And breaking this license was taken very, very seriously by authorities; so serious, in fact, that Gurcharan was summoned to speak with a government official in New Delhi, the capital city.
DAS: There was a potential jail sentence associated with breaking the law.
WOODS: For producing too much of Vicks VapoRub during a flu epidemic. That sounds absurd.
DAS: Exactly. Exactly.
MA: In the end, the inquiry was dropped. But Gurcharan says that was indicative of the overreaching bureaucracy of India at the time, and it made it really hard to set up and run businesses like factories.
DAS: The British Raj gave way to the license Raj. That's the point I'm making, and that's why I say we got our political freedom when we threw out the British. But we got our economic freedom in 1991.
WOODS: That's when market-friendly reforms greatly reduced this license Raj or the license rule. And while there are still complaints today about slow and fragmented bureaucracy in India, it's not a fatal flaw stopping India from becoming a high-tech manufacturing hub anymore.
MA: So that is where India has come from. Now, turning to the future, we wanted to know whether India could catch up with Chinese manufacturing.
STEVEN TSENG: In the near future, it's going to be difficult, but in the longer term, it's definitely possible.
WOODS: Steven Tseng is a senior analyst at Bloomberg Intelligence, focusing on tech hardware. Steven lists a bunch of pros and cons for India. So first, the positives, and we start with the fact that India is not China. Leaders of a Western company looking for a manufacturing base might look at the trade war between the U.S. and China, and they might remember China's heavy-handed lockdowns. And they might worry about how geopolitical tension with the U.S. might play out.
MA: India, on the other hand, is an English-speaking democracy that has traditionally been pretty friendly with the West. Second, India has its population. The U.N. estimates India will officially be the most populous country in the world this year, and its demographics skew much younger. China's median age is 38, while India's is only 28, and that means more people to potentially work in factories.
WOODS: Third, India's government is subsidizing large companies to move their manufacturing to India.
TSENG: What they're doing now is that they are providing a lot of incentives.
WOODS: The companies will get a few percent of what they make extra from the government. It'll sweeten the deal for them to come over. So those are the positives.
MA: Now for, well, the negatives; first, education. Now, India does boast some of the best engineering education in the world at its top end. The CEOs of IBM and Alphabet both graduated from the globally competitive Indian Institutes of Technology. But these top universities only educate a tiny fraction of the population. At the broader level of mass schooling, Steven says India compares unfavorably with China.
TSENG: The average labor quality is probably not as good as China at this point.
MA: The adult literacy rate in India is about 74% versus about 97% in China.
WOODS: Now, tariffs are the second headwind facing India if it's to really compete with China in high-tech manufacturing. You have so many imported components for things like smartphones. So when you're making them, any frictions and added expenses and importing parts makes the country less attractive.
MA: The third negative for India is its infrastructure.
TSENG: In China, they can pretty much set up the factory anywhere.
WOODS: They can set up factories anywhere.
TSENG: It's not too difficult to ship a product from A to B, right? But in India, it's actually a different story.
MA: Now, India's roads have been improving, but there's still a lot of congestion on the roads - right? - hard to get from A to B. Only 5% of the roads are highways, while 40% of roads are dirt roads. And India's decentralized political system makes building new transport connections more difficult.
TSENG: If you build in some sort of railroad or highway from province A to province B, if province B have some issue with that, the construction could be stopped in the border of this two province. And it can take years to sort out their differences.
WOODS: And ensuring movement is critical, not just for getting components and products shipped but for factory inspections. Take the example of Apple. It's been reported that before the pandemic, Apple had at least 50 business-class seats a day running from San Francisco to Shanghai. That cost over $150 million a year for the company. And it shows just how important those physical connections are.
TSENG: Apple actually got a very high standard in terms of quality control. Even you use the same equipment, same company in a different location, Apple need to run the inspection again just to make sure everything is perfect.
MA: OK. Let's say India does spruce up its roads and rails and airports. There is a fourth obstacle, which is language. India is a vast and diverse country where people speak tons of different languages, which brings us to our final obstacle for India - discrimination.
WOODS: Discrimination might be in the form of religious animosity, or it might be in other forms. India has a class system of castes that can mean that people in lower castes are passed over for jobs that they're qualified for. Or if they're, for instance, given a supervisory role, they might not be listened to.
MA: And when you add in tariffs, infrastructure problems and lower education levels for workers, India can be a more expensive place to do a high-tech manufacturing operation than China.
WOODS: The Financial Times recently reported that an iPhone supplier in India was rejecting half the parts it made. These parts didn't meet Apple's standards, and Apple aims for zero rejections.
MA: But with all that said, multinational companies are setting up shop in India. Samsung has been rapidly increasing its factories there, and Apple CEO Tim Cook said in a recent earnings call that he is, quote, "very bullish on India."
WOODS: India can take on more manufacturing now, but everyone we spoke to said it will take a lot of work and a 10- or 20-year period to get close to where China is today. Gurcharan Das put it like this.
DAS: It's a large country, and it has stability. And so, yes, I'm optimistic.
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MA: This episode was produced by Noah Glick, with engineering by Katherine Silva. Sierra Juarez checked the facts. Viet Le's our senior producer. Kate Concannon edits the show. And THE INDICATOR's a production of NPR.
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