VZCZCXRO7831
RR RUEHBI RUEHCI
DE RUEHCG #0289/01 1071044
ZNR UUUUU ZZH
R 171044Z APR 07
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 0847
INFO RUEHNE/AMEMBASSY NEW DELHI 2445
RUEHBI/AMCONSUL MUMBAI 5022
RUEHCI/AMCONSUL KOLKATA 0755
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 05 CHENNAI 000289 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
USDOC FOR ANESA/OSA/LDROKER/ASTERN 
STATE FOR EB AND SCA/INS 
 
E.O. 12958: N/A 
TAGS: ECON EIND EINV EFIN PGOV IN
SUBJECT: BELLWETHER PROJECT:  TAMIL NADU'S MANUFACTURING BOOM 
 
 
¶1. (SBU) SUMMARY:  Two recently announced proposed projects - an 
almost $1 billion automobile joint venture between India's Mahindra 
& Mahindra, Nissan, and Renault and a $30 million dollar investment 
by Dell - highlight Tamil Nadu's continued growth as a manufacturing 
hub.  While Tamil Nadu also boasts substantial information 
technology development, the growth of manufacturing in and around 
Chennai sets it apart from the rest of South India.  Manufacturers 
locating in Tamil Nadu do so because they can cut costs by 
leveraging cheap skilled labor and take advantage of the state's 
comparatively strong infrastructure, including excellent port 
facilities.  But rapid growth could erode the state's competitive 
advantage as shortages of skilled workers and infrastructure 
inadequacies emerge.  END SUMMARY. 
 
¶2.  (SBU) This is another in a series of cables in the bellwether 
project launched by Mission India's POL and ECON sections in 
September 2006 to take the economic and political temperature in 
states over the next year.  Previous reports covered Punjab, West 
Bengal, Gujarat, Uttar Pradesh, and Bihar.  Because Tamil Nadu has 
one of India's most successful and diversified manufacturing 
economies, Consulate General Chennai officers met with numerous 
business leaders, government officials, and academics to develop an 
understanding of the reasons for the state's success as well as the 
challenges ahead. 
 
------------------------------- 
CHENNAI:  THE DETROIT OF INDIA 
------------------------------- 
 
¶3.  (U) On February 26, 2007, Mahindra & Mahindra, Renault, and 
Nissan announced a joint venture to produce cars at a new facility 
spread over 1100 acres to be located in Oragadem (a suburb of 
Chennai).  The partners plan to invest $900 million in a facility 
that will produce a projected 400,000 cars per year.  The production 
will consist mostly of Nissan subcompacts, as well as versions of 
Renault's Logan platform.  Mahindra & Mahindra (the Indian partner) 
will have the majority equity share in the joint venture, with 
Renault and Nissan each holding approximately 25 percent.  The joint 
venture expects to commence production in 2009. 
 
¶4. (U) Renault and Nissan will augment the region's already 
significant automobile industry.  Since 1999, Ford Motor Company has 
operated a facility located in Marimalainagar (another Chennai 
suburb).  The Ford plant has the capacity to produce 50,000 cars per 
year.  It currently produces the Fiesta and the Fusion, which is a 
hatchback produced primarily for the Indian market.  In addition, 
the company produces knockdown kits for export to Mexico, Brazil, 
and China.  The facility also assembles a limited number of Endeavor 
sport-utility vehicles for the local market.  Hyundai Motors 
operates a much larger facility, with a capacity to produce 300,000 
cars per year, mostly subcompacts for both the Indian and 
international markets.  Heung Soo Lheem, Managing Director, Hyundai 
Motor India, told post that Hyundai plans to double the capacity of 
its Chennai facility to make it Hyundai's worldwide hub for small 
car exports. 
 
¶5.  (U) In addition, Mitsubishi and BMW have assembly units in Tamil 
Nadu that produce smaller numbers of vehicles for the Indian market. 
 The Mitsubishi and BMW models are very large by local market 
standards; as such, the production numbers are quite modest compared 
to the other Chennai automobile plants.  BMW's Chennai facility was 
set up with an investment of over $26 million and will ultimately 
have the capacity to produce between 1,500 and 1,700 cars annually. 
BMW's first car rolled off the assembly line on March 29. 
 
¶6.  (U) International component suppliers, following closely behind 
the major manufacturers, significantly multiplied the effect of the 
original Ford and Hyundai investments.  Visteon, a former Ford 
subsidiary, and now the company's Tier-1 vendor, followed Ford to 
Tamil Nadu.  With its $100 million facility, Visteon supplies both 
Ford and Hyundai with climate control and instrumentation systems. 
TRW in partnership with Rane, an Indian automotive component 
manufacturer, produces power steering and brake systems that are 
used as original equipment by major automotive brands throughout the 
world.  Ford and Nissan have gone a step further, setting up captive 
units in Chennai that provide design and back office support for 
their worldwide operations. 
 
¶7. (U) Chennai has a long history as a leader in India's automobile 
industry.  In 1955, Ashok Motors collaborated with British Leyland 
in setting up a factory in a north Chennai suburb to manufacture 
trucks and buses under the name Ashok Leyland.  In 1962, Standard 
Motors established a facility to produce the Herald model of cars in 
a Chennai suburb close to where Ford's plant now stands.  T.V. 
 
CHENNAI 00000289  002 OF 005 
 
 
Sundram (TVS) Iyengar and Sons, an Indian logistics group, partnered 
with Lucas of United Kingdom to begin production of electrical 
subsystems in 1962.  Today, TVS is one of India's largest component 
manufacturers.  Much of Chennai's current success in the automotive 
sector can be attributed to the supply chain that TVS put in place 
to support Ashok Leyland and Standard Motors. 
 
¶8.  (SBU) The success of the automobile sector in Tamil Nadu has the 
attracted attention of policymakers.  In a recent off-the-record 
roundtable discussion, Union Commerce Minister Kamal Nath described 
the government's desire to bring manufacturing from its present 
position of 17% of GDP up to a goal of 25% of GDP within the next 
decade.  Nath said that growth in manufacturing was critical to 
efforts to include agrarian workers in India's growth story.  He 
specifically cited automobile manufacturing and automobile 
components as an important success on this front. 
 
--------------------------------------------- ------- 
NOT JUST CARS:  MOBILE PHONES AND PCS MADE IN CHENNAI 
--------------------------------------------- ------- 
 
¶9.  (SBU) Tamil Nadu's influence in New Delhi's corridors of power 
has helped steer electronic manufacturers to the state.  Dayanidhi 
Maran, Union Minister for Information Technology and Communication, 
is a member of Tamil Nadu's ruling DMK party.  At Maran's urging, 
mobile phone manufacturer Nokia in April 2005 invested $150 million 
in a manufacturing facility at Sriperumbudur (50 kilometers from 
Chennai).  Nokia's investment also attracted seven of its component 
suppliers to invest in the region. Nokia's printed circuit board 
supplier, Aspocomp Group Oyj, invested $70 million.  At the same 
time, Nokia's handset mechanics supplier Perlos Corporation invested 
$12 million.  Nokia and its suppliers are located in a special 
economic zone spread over 210 acres, which provides fiscal 
incentives and allows for considerable flexibility in the hiring of 
personnel.  By December 2006, the facility had shipped 25 million 
handsets for the booming Indian mobile phone market.  Motorola 
followed in Nokia's wake with an announcement in June 2006 of its 
plans to invest $30 million in a facility to produce handsets.  The 
facility will produce low cost handsets for the Indian market. 
 
¶10.  (U) Personal computer makers were not far behind.  In September 
2006, Dell announced plans to invest $30 million over five years in 
a manufacturing facility with the capacity to produce 400,000 
desktop computers for the Indian market.  Construction began in 
December 2006.  Dell's 150 acre plot includes 100 acres set aside 
for its component manufacturers. 
 
¶11. (U) A month after the Dell announcement, Flextronics, a supplier 
of sub-systems to major computer and mobile phone manufacturers, 
announced an additional $100 million investment in its Chennai 
operation.  Michael Rubin, Flextronic's Director of Business 
Development, told post in February 2007 that the facility had 
already begun production of printed circuit boards for mobile phone 
handsets and had started test runs on lines meant for computer 
systems.  Rubin believes that the company will be ready to supply 
Dell's operation once it begins production in July 2007.  The 
Flextronics facility uses only 10 of the 250 acres that the company 
has acquired; it expects some of its own component manufacturers to 
set up facilities on the remaining the land. 
 
--------------------------------------------- --------- 
SURPRISE!  GOVERNMENT FACILITATES BUSINESS DEVELOPMENT 
--------------------------------------------- --------- 
 
¶12.  (SBU) Unlike in some parts of India, business people in Tamil 
Nadu view the state's government as a positive factor in their 
investment decisions.  Business leaders frequently sing the praises 
of local government.  R. Subramaniam, Secretary General of the 
Madras Chamber of Commerce, told post that Tamil Nadu's "fantastic" 
bureaucracy is a large reason why it has been so successful in 
drawing investment to the state.  (NOTE:  "Fantastic" is not a word 
one expects to be used by business to describe Indian governance. 
Establishing such a positive reputation for governance is quite an 
accomplishment in an environment where businesses generally see 
government as harming, not helping, them.  END NOTE.) 
 
¶13.  (SBU) Tamil Nadu's bureaucracy proactively seeks to smooth the 
way for investors.  The Tamil Nadu Industrial Guidance Bureau acts 
as the state's investment marketing arm.  M. Velmurugan, a dynamic 
officer of the Indian Economic Service, spearheads the bureau's 
effort.  He makes a compelling case for Tamil Nadu, complete with a 
slick power point presentation.  Velmurugan charismatically and 
enthusiastically assuages potential investors concerns by providing 
necessary data, facilitating meetings with government officials, and 
 
CHENNAI 00000289  003 OF 005 
 
 
assisting with drafting a memorandum of understanding (MOU). 
Velmurugan proudly explained to post that his office acts as the 
single point-of-contact for a prospective investor, holding their 
hand through the entire process of negotiating the MOU.  Rather than 
dealing with several different state government agencies, the 
prospective investor works only with the Guidance Bureau.  Although 
other states have similar guidance bureaus, Velmurugan's energy and 
magnetism are no doubt an important factor in Tamil Nadu's success. 
 
 
¶14.  (SBU) The Guidance Bureau had a plan from the beginning. 
Velmurugan told post that rather than going "fishing" for industry, 
Tamil Nadu instead "targeted whales" with the understanding that the 
small fish would come once Tamil Nadu reeled in the whales.  The 
Guidance Bureau has targeted big names in the manufacturing world, 
starting with Ford in 1995 (which brought 35 of its vendors along), 
followed by Hyundai, Nokia, and Dell.  Business leaders frequently 
cite Tamil Nadu's successful courtship of Ford as the defining event 
in Tamil Nadu's development as a manufacturing center.  The Guidance 
Bureau has attracted 168 investment proposals worth on an average 
$50 million per project. 
 
¶15.  (SBU) Tamil Nadu has had less trouble with the often 
quarrelsome issue of land acquisition that has scuttled investments 
in other parts of India.  Under Tamil Nadu's 1997 Acquisition of 
Land for Industrial Purposes Act the state bureaucracy acts as 
facilitator, but leaves the bulk of the land price negotiations to 
be sorted out by the landowners and representatives of foreign 
investor.  Pradeep Yadav, District Collector of Kancheepuram, who 
administers Tamil Nadu's most industrialized area, told post that 
unlike the foreign investors the government was limited by law as to 
the amount it could pay as compensation.  He said that allowing the 
foreign investor to negotiate the price resulted in a shorter 
timeline for land acquisition and, more importantly, fewer disputes 
arising from landowners who feel that they are not sufficiently 
compensated.  Yadav said that the government only intervened in the 
rare cases when landowners refused to part with their land whatever 
the price offered. 
 
---------------------------------- 
LOW COST OF LABOR DRIVES GROWTH 
---------------------------------- 
 
¶16.  (U) Cost competitiveness, primarily in the cost of labor, is 
the number one reason that has attracted the likes of Ford, Hyundai, 
Nokia, Dell, and Flextronics. Nokia and Flextronics estimated that 
the cost of labor in Tamil Nadu is one-third that of China.  The 
cost advantage is driven by the large educated labor pool and 
weakness of labor unions.  Tamil Nadu produces eighty thousand 
engineering graduates each year, along with the skilled labor 
graduates from thousands of polytechnics and industrial training 
institutes.  Companies have the pick of this very large crop:  a 
Ford representative told post that it had received 11,000 
applications in response to advertisements for only four vacant 
engineering positions.  The unemployment rate among engineering 
graduates is between 19% and 22%, allowing companies to pay lower 
salaries. 
 
¶17.  (SBU) Heung Soo Lheem of Hyundai was more explicit, explaining 
that cheap labor more than makes up for the higher infrastructure 
and freight costs of production in Tamil Nadu.  Hyundai's Alabama 
facility had to pay the substantial cost of installing 
air-conditioning throughout the facility.  In Tamil Nadu, where the 
year-round climate is more hot and humid than an Alabama summer, 
there is no air-conditioning.  The Chennai plant works 302 days per 
year, compared to only 230 days for the Alabama plant.  When asked 
about whether its Tamil Nadu plant employees had a union, or were 
demanding a union, Mr. Lheem laughed and told post "there is no UAW 
here."  His blunt assessment highlights the fact that employers in 
Tamil Nadu no longer face the type of labor strife common in the 
past. 
 
--------------------------------------------- 
INFRASTRUCTURE ENABLES INDUSTRIAL DEVELOPMENT 
--------------------------------------------- 
 
¶18.   (U) Better governance has also led to better infrastructure, 
at least relative to the rest of India.  Tamil Nadu has a power 
surplus and a solid electricity distribution network.  Arvind 
Mathew, Managing Director of Ford India, told post that Tamil Nadu 
had made good on its original promise to Ford that it would ensure 
sufficient power to the plant.  When asked about Ford's back-up 
generation capacity, Mathew said that Ford had no back-up generators 
and that none were necessary. Representatives of both Ford and 
 
CHENNAI 00000289  004 OF 005 
 
 
Hyundai said that in the last four and a half years, there have been 
just two power interruptions.  Both disruptions were the result of 
accidents rather than a lack of capacity or distribution capability. 
 In order to meet Tamil Nadu's promise of uninterrupted power to the 
Ford and Hyundai facilities, the state has provided dedicated 
sub-stations for each facility.  Each of these substations is 
connected to two different circuits to minimize the chance of 
failure.  (NOTE:  Despite a generally good record of keeping 
promises, Tamil Nadu dropped the ball on at least one promise it 
made while courting a potential investor.  It promised Ford that it 
would develop a site for hazardous waste disposal.  To date, Tamil 
Nadu has not done so, leaving Ford to store the waste on its site. 
Tamil Nadu credibly cites environmental lawsuits as the reason for 
this failure.  END NOTE.) 
 
¶19.  (U) Two sea ports, one dedicated to the handling of clean 
cargoes such as cars and containers, ensure easy access to worldwide 
markets.  Hyundai's Lheem told post that the relative efficiency of 
the local port played a major role in their decision to turn their 
facility into a global export hub.  Chennai's excellent rail 
connectivity ensures inexpensive transportation of cars for the 
Indian market.  Two undersea fiber optic cables connect Chennai to 
the United States via Singapore and Guam, giving the city the 
largest bandwidth in all of India at 12 terabits.  Connections to 
south-east Asia and Europe through Chennai's international airport 
facilitate the flow of inputs and finished products from the 
electronics industry. 
 
------------------------------------------ 
RAPID GROWTH STRAINS CHENNAI'S ADVANTAGES 
------------------------------------------ 
 
¶20.  (SBU) The rapid pace of growth has stretched Chennai's 
advantages to the limit.  Business leaders say that labor shortages 
are emerging throughout all segments.  These shortages are 
especially acute in the skilled and management segments.  Despite 
the massive numbers of graduates that Tamil Nadu produces, many are 
unprepared to be effective employees.  Sheila Gandhi, of the 
National Association of Software and Service Companies, said that 
only 12% of graduates are actually employable after completing their 
degrees.  Communication skills, in particular, are lacking. 
Companies are forced to provide "finishing courses" for students 
coming out of the state's colleges, adding costs and increasing the 
time before they can begin contributing to the company.  (NOTE: 
Consular officers are struck by the lack of communication skills of 
even the most qualified Indian student visa applicants.  Indian 
engineering graduates, though proficient in highly technical 
computer skills, often have never taken an English reading or 
writing course.  A focus on rote memorization rather than critical 
thinking skills leaves graduates unable to place what they have 
learned in a broader context.  END NOTE.)  With labor becoming 
scarce, wages are increasing.  But, to date wage inflation has not 
offset Tamil Nadu's advantage vis a vis other parts of India or 
other countries. 
 
¶21.  (SBU) Industry analysts fear that power availability in the 
state could be a problem as demand far outstrips addition of new 
capacity.  They point out that in the last two years capacity 
expansion has been in the order of hundreds of megawatts, while 
demand has expanded in the thousands.  In addition to power 
availability, transportation is becoming a concern.  Chennai's 
traffic problem is increasing by the day.  The city's already 
strained roads add at least 600 new vehicles a day.  Referring to 
now legendary traffic jams in India's information technology hub, 
Tamil Nadu's Secretary for Industries Shaktikanta Das told the 
American Chamber of Commerce that "We do not want to go the way of 
Bangalore."   The long-awaited expansion of Chennai's airport has 
been bogged down by controversy over land acquisition.  Government 
officials keep hinting that an announcement on the airport will come 
soon but it remains stalled. 
 
¶22.  (U) Increasing land prices also threaten Chennai's 
manufacturing growth.  Speculative purchases, once uncommon here, 
follow any announcement of a new industrial project.  Cocktail party 
banter, as in many bubble markets, inevitably turns to the cost of 
land.  Industry and government representatives alike cite rising 
land prices as a serious problem.  Land on the road which links 
Chennai to Tamil Nadu's industrialized southern districts have 
increased by fifty percent.  The National Highways Authority of 
India purchased land on the road at $105 per square foot in March 
2006; a year later land from the same plot sold for $141 per square 
foot.  Increased land costs affect both the cost of establishing a 
new industrial project, as well as the wage demands of potential 
workers who must find housing nearby.  (NOTE:  The Consulate itself 
 
CHENNAI 00000289  005 OF 005 
 
 
recently came across the effects of Chennai's real estate bubble 
when it began the search for a suitable site for the New Consulate 
Compound.  The Consulate was quoted prices of $2 million to $4 
million dollars per acre.  END NOTE.) 
 
--------------------------------------------- -------- 
GOVERNMENT AND BUSINESS REMAIN CONFIDENT ABOUT FUTURE 
--------------------------------------------- -------- 
 
¶23.  (SBU) COMMENT: Tamil Nadu is unique in South India in having 
developed a robust manufacturing sector to accompany growth in 
information technology.  Pressures on infrastructure and the state's 
human resources are no doubt increasing with the state's rapid 
growth.  But government officials and industry associations are 
working together to develop plans to tackle the problems Tamil Nadu 
faces -- from developing human resources to untangling traffic 
problems.  Individual business leaders, despite expressing concerns 
about mounting challenges, remain bullish on Chennai's future. 
Validating this optimism will require Tamil Nadu to do even better 
than it has done to date to lay the groundwork for manufacturing in 
the state.  END COMMENT. 
 
¶24.  (U) This cable was coordinated with Embassy New Delhi. 
 
HOPPER