The next wave of globalization is swelling here, in this southern Indian city that was battered by a real wave during last year's tsunami. This new wave is not about Gap T-shirts or Dell laptops, the poster children for the light industries that already have global supply chains. And it is not about software and/or call centers, the industries for which India is famous. Instead, this new globalization is about heavier manufacturing, particularly cars. Detroit's panicking firms know it.
Cars? They are not what spring to mind when you say "Indian economic miracle." India's economy has grown at more than 6 percent per year since market reforms began in 1991. But it has scrambled the classic transition from agriculture to manufacturing and then eventually to services. Indian agriculture has indeed shrunk from 30 percent of output to 22 percent since the reforms began. But manufacturing has not increased its share. The entire shift has been to services.
You can see why this is so the moment you arrive in Chennai. On Saturday the airport was teeming; the roads are always an exuberant mess; businessmen complain about the creaking infrastructure. Compare that to Ningbo, a medium-size coastal Chinese city I visited six months ago, where the roads, airport and docks are all new and shiny. In the just-in-time manufacturing culture, delays mean money down the drain. That's why China is the manufacturing platform for the world -- and why India, so far, isn't.
Chennai also shows why India succeeds in software and services. To do software, you don't need a broad infrastructure base; you need one functional building. I visited Tidel Park, a gleaming office block here that houses 31 software firms, two-thirds of which are foreign. There aren't any power cuts here because the building has its own backup generators. There are no connectivity worries because it is served by six competing broadband providers. And it certainly is safe. Tidel Park boasts 150 guards and a security control room that would not look out of place on Darth Vader's Death Star.
Chennai's boosters say they've learned some Chinese lessons. Jayalalithaa, the authoritarian former actress who leads the state government of Tamil Nadu, has thrown money at the infrastructure deficit. When government workers went on strike, Jayalalithaa turned a bit Chinese and arrested thousands of them. (Although her Bollywood career was based on eye-fluttering and dance, she makes California's governator look like, well, a girlie man.) Chennai is also proud of its new Special Economic Zones, modeled on China's tax-free export hubs. The promotional literature promises "complete freedom in fixing working hours" and a chance to "totally eliminate any unlawful/illegal strikes."
This tough approach may be good for manufacturing investment. But the main force behind the next globalization wave comes from something different. Until the reforms of the 1990s, India had good engineers but lousy manufacturing because high tariff walls made its firms complacent. But the opening of India's economy has forced its manufacturers to reinvent themselves.
Chennai's auto-components firms have done this almost manically. Ten years ago, their brakes and valves were crummy enough to scare away the international car majors that considered manufacturing in India. Today, you can't spend an hour with any of the components firms without hearing about the international quality certifications they've amassed; the Deming Prize, awarded for manufacturing excellence by a Japanese committee, has acquired talismanic status. Much as Chennai's government leaders look to China, the city's business leaders pepper their conversation with Japanese management lingo.
The results are dramatic. The TVS Group, the largest of India's auto-components firms, now exports around a third of its output -- proof that it meets international standards. The rival Rane Group reports that it has reduced defects from 10,000 parts per million to 250 and that 28 percent of its engine valves are now exported. One of the TVS companies, Sundram Fasteners, has won a General Motors "Supplier of the Year" award five times, and it supplies 100 percent of GM's radiator caps.
Because Indian car parts are now reliable, international car majors have reversed their attitude. Ford and Hyundai have opened factories in Chennai; BMW recently announced that it would follow; Volkswagen and GM seem interested. Multinational parts makers are arriving, too, strengthening Chennai's attraction as a hub. Saint-Gobain, a French glassmaker, has built a brand new production line that may foretell Chennai's future. It's designed so that the initial capacity of 500,000 windshields per year can be cheaply scaled up to 3 million.
In short, Chennai's car industry is reaching critical mass, and its output is good enough to compensate for dodgy (though improving) infrastructure. The same story is playing itself out in India's two other automotive hubs, around Delhi and Mumbai, and to an even larger extent in Mexico, Thailand and (yes) China. The McKinsey consultancy projects that the outsourcing of car parts, relatively limited until now, will sextuple from $65 billion in 2002 to $375 billion in 2015, with India's share soaring from around $1 billion to $25 billion. If you think Detroit is ailing now, wait until you see what's coming.