Battle of the new manufacturing titans

The two largest emerging economies in the world – India and China – are squaring up for a battle to secure an ever-larger slice of global manufacturing production with far-reaching implications for the real estate sector.

With both countries posting double-digit growth figures in recent quarters, and the flow of outsourced production continuing to increase, the potential rewards for each country are vast. China is already the third largest country in manufacturing output, behind Japan and the U.S., while India lies in 14th place, but there are signs of a significant acceleration in India’s role, according to recent reports.

“We’re convinced that India’s time has come,” says Scott Bayman, head of General Electric’s Indian operations. In comparison to an earlier wave of economic enthusiasm in the mid-1990s, “I think the underlying fundamentals are really there this time,” says Bayman. “You’ve now got a much more sustainable manufacturing industrial sector that is going to help drive this economy.”

Crucial to the country’s progress is its understanding of service industries. Having become a world leader in business process outsourcing (BPO), India now has a depth of skill and experience which is being combined with its low-wage, high productivity manufacturing base, with startling results. “The BPO boom in India provided a core of expertise in software and a service-based approach to customers around the world,” says Anand Sharma, president of U.S.-based TBM Consulting. “It has led to an interest by manufacturers in India to add value to basic manufacturing through offering services.”

Philippe Joubert, head of the power equipment division of French engineering company Alstom, with operations in both India and China, sums up the difference: “China is geared to mass production. India focuses on manufacturing backed up by software and high-level engineering.”

Altogether, global manufacturing is thought to be worth around $15 trillion each year, with the service proportion of this total (at least in the U.S.) estimated to be around one-fifth of the total. Strategic consultancy McKinsey, which arrived at this figure, estimates that countries such as India could reap up to a third of this service-oriented business in the coming years, as infrastructure and communications levels rise to Western norms. Increased customization, speed of reaction and strong customer service, along with India’s pervasive use of the English language, put it in a formidable position to take advantage of the trend.

China, meanwhile, is pushing ahead forcefully with its policy of industrial privatization, with state-controlled companies falling from 300,000 in 1995 to 150,000 today. The government’s aim to quadruple per capita gross domestic product between 2000 and 2010 is on track, with multinational corporations expanding their operations in the country month by month. “China is certainly gearing up for an expansion of its manufacturing output and NAI is already assisting several international companies to fulfil their real estate needs,” says NAI Global’s Steve Atherton, managing director, Asia Pacific.

Most recently, ProLogis announced it will increase its facilities in China by almost 50 percent to meet soaring demand for logistics services, building on the 4.1 million square feet of space it already operates for manufacturers such as Adidas, Nokia and Samsung Electronics. In addition, companies such as UPS, FedEx and Deutsche Post are also building major new facilities in the country.

For the commercial real estate sector, the competition between these two emerging giants promises to create countless new opportunities.