VZCZCXRO0977
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHCG #0378/01 3190745
ZNR UUUUU ZZH
R 140745Z NOV 08
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 1972
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHNE/AMEMBASSY NEW DELHI 3393
RUEHMO/AMEMBASSY MOSCOW 0123
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 03 CHENNAI 000378 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG ETRD EINV PGOV IN RU
SUBJECT: INVESTMENT IN SOUTH INDIA CONTINUES, AS DO JITTERS ABOUT 
THE ECONOMY 
 
REFS: A) NEW DELHI 2908, B) CHENNAI 359 
 
¶1. (SBU) Assistant US Trade Representative Michael Delaney met on 
November 10 with business leaders from key sectors of South India's 
economy, urging progress on the WTO Doha Round and assessing how the 
region's business are weathering the current economic slowdown. 
While all of Delaney's interlocutors could point to softness in 
their markets, they were generally upbeat about their companies' 
abilities to weather the current storm and prosper over the longer 
term.  Most complained far more about Tamil Nadu's power problems 
than about current market conditions.  Some of the optimism may 
reflect simply an unwillingness to appear too downbeat in front of a 
foreign government official, but observable evidence suggests that 
at least some companies in South India continue to expand their 
investments in key sectors, suggesting long-term optimism about the 
region's ability to provide adequate returns. 
 
A/USTR promotes Doha Round and discusses the economy 
--------------------------------------------- -------- 
 
¶2. (U) Assistant U.S. Trade Representative for Central and South 
Asia Michael Delaney visited Chennai November 9-11 as part of his 
tour of India and Sri Lanka to promote the resumption of the Doha 
Round and to gain a keener sense of the region's economy during the 
current worldwide economic turmoil.  He spoke with executives 
working in South India's key industrial sectors, including 
automobile manufacturing, information technology, and textiles.  He 
also met leaders from the region's top chambers of commerce and the 
financial sector. 
 
Plenty of evidence about difficult market conditions 
--------------------------------------------- ------- 
 
¶3. (SBU) All of Delaney's interlocutors offered evidence about the 
slowing economy.  An executive from a textile company that makes 
lingerie for the U.S. market said that earlier this year he 
forecasted export revenues of USD 22 million -- up from USD 17 
million in 2007 -- but now expected to generate only USD 15-16 
million this year.  He said that this time of year should be his 
company's busiest, in preparation for the U.S. holiday season, but 
that he was actually scaling back production because of the drop in 
orders. 
 
¶4. (SBU) Other business leaders were less precise, but conveyed 
similar messages.  An automobile-component manufacturer told 
Delaney, "we've hit an air pocket.  We know we're going to fall, but 
we don't know how far."  He added that both Hyundai and Ford have 
reduced production volumes in recent weeks.  An executive from a 
mid-sized information technology (IT) company said that his company 
was still formally expecting to hit its target of USD 300 million in 
revenue this year, but admitted that it was almost certain to fall 
short. 
 
Not all bad news 
---------------- 
 
¶5. (SBU) A Ford executive told Delaney that he expected sales of his 
company's vehicles in India to grow by about six percent this year. 
While admitting that this figure is only about half of what Ford has 
grown accustomed to in the Indian market in recent years, he said 
that the timing was not particularly bad, because a slowdown will 
make it easier for Ford to manage its $500 million expansion.  (The 
expansion will allow Ford to produce a sub-compact car by 2010 for 
the Indian market, a market segment in which it at present has no 
model.)  He explained that his company was still building all of the 
external infrastructure (buildings, roads) necessary for the 
expansion, but was holding off on purchasing some of the most 
expensive, new machinery (like automated metal presses), until 
market conditions created adequate demand for these upgrades.  He 
told Delaney that 2009 was going to be a difficult year, but that 
things should pick up nicely by 2010. 
 
¶6. (SBU) Executives at Timken's Chennai facility, which makes 
bearings for large trucks, explained to Delaney that their plant is 
largely unaffected by the current downturn in worldwide economic 
conditions. They said that their facility produces a very 
specialized product, and that all of its production is exported to 
the United States. The executives admitted, however, that Timken's 
operations in India as a whole (the Canton, Ohio-based company has 
three facilities in India) were suffering because of softness in 
demand. 
 
¶7. (SBU) A top executive at Cognizant, a U.S.-based IT company that 
has its India operations based in Chennai, told Delaney that parts 
 
CHENNAI 00000378  002 OF 003 
 
 
of the IT sector continue to do well.  He said that most of India's 
big IT players are investing in Tamil Nadu as they try to ramp up 
their capacity to work on aerospace and defense projects, which the 
industry sees as key growth sectors.  Demand for engineers with 
skills in these areas is high, he said, and companies are having 
difficulty hiring enough people with the right skills.  He also 
said, however, that demand for the banking and financial services 
that have long been the mainstay of India's IT services companies 
has been falling. 
 
And not all the bad news comes from the economic slump 
--------------------------------------------- --------- 
 
¶8. (SBU) While most of Delaney's interlocutors could point to both 
positive and negative signs in the market, all expressed dismay 
about a more immediate problem:  Tamil Nadu's shortfall in 
electricity.  One businessman said that companies in the state 
routinely need to operate on their diesel-powered backup generators 
four to six hours per day.  (A textile manufacturer told us in 
October that some parts of the state, including the textile hub of 
Coimbatore, are without power from the grid for up to 10 hours per 
day.)  Another said that he needs to operate his backup generator 
approximately one-half to one-third of his production hours.  As if 
to emphasize the point, the lights went out briefly at a textile 
plant while Delaney was visiting, as the facility switched from grid 
to backup power. 
 
¶9. (SBU) All complained about the extra costs this imposes.  Even 
executives at Ford and Visteon, whose companies benefit from a 
special arrangement with the state that provides them continuous 
power from the grid, complained that their suppliers are having a 
difficult time making ends meet because of the electricity 
disruptions and the additional costs backup power imposes. 
 
¶10. (SBU) Delaney's interlocutors said that the situation should get 
better in two years, when several new power plants come online, but 
stressed that the state needed to take drastic action in the 
interim. A Visteon executive presented Delaney with a formal list of 
steps the government could take in the short-term to alleviate the 
situation.  These included: 
 
-- allowing power producers to sell directly to consumers, bypassing 
the Tamil Nadu Electricity Board (NOTE:  the state government has 
approved a policy that permits this under certain conditions.  END 
NOTE.); 
--eliminating power subsidies sectors like agriculture, which 
receives electricity free of charge; and 
--increasing non-conventional capacity, like installing sea-based 
windmills. 
 
¶11. (SBU) Other businessmen told Delaney that the government should 
obtain "power barges," portable, sea-based power generating stations 
that can supply electricity to the state.  (Businessmen and some 
government officials have told us this before.  Many here contend 
that Russia has several of these barges that could easily be brought 
to India's southern coast and tethered to the grid to provide 
additional power.) 
 
A tale of two markets 
--------------------- 
 
¶12. (SBU) The effects of these uncertain economic times can have 
some unexpected side effects, and can impact different companies in 
the same industry differently.  According to November 12 reports, 
the president of a textile-exporting association said that drops in 
orders could result in up to 20,000 workers losing their jobs in the 
"knitwear cluster" in and around Tirupur (a city in west-central 
Tamil Nadu). 
 
¶13. (SBU) An executive at a textile manufacturer that Delaney 
visited, however, noted that some companies face a different 
problem.  He cited two companies in the Tirupur area that serve the 
domestic market were facing a labor shortage.  He said that many 
workers from these companies had gone home to their villages to 
celebrate the Deepavali (Diwali) holiday in late October and had 
simply not returned to work, since the arrival of the rainy season 
allowed them to return to agricultural work. 
 
¶14. (SBU) He explained that workers producing for the domestic 
market receive lower wages than their higher-skilled peers producing 
exportable products. This means that workers laid off from 
export-oriented companies are generally unwilling to take 
lower-paying jobs at companies that produce for the domestic market, 
even though those companies need more labor.  He predicted that 
 
CHENNAI 00000378  003 OF 003 
 
 
domestic producers would end up increasing wages to attract 
workers. 
 
Comment 
------- 
 
¶15. (SBU) While Delaney's interlocutors were concerned about current 
economic conditions, most were generally upbeat about the long-term 
future of their companies.  Some of this optimism may have been a 
brave face put on to impress a foreign government visitor, but all 
seemed to see the current situation as a relatively short-term 
obstacle.  Evidence that a widespread recession in the West would be 
deeper or last longer than expected, or that India's economy faced a 
drastic deterioration might change minds, but given current 
conditions, most business leaders in South India seem to believe 
that they will weather the current storm and eventually prosper 
again. 
 
¶16. (U) A/USTR Delaney cleared this cable. 
 
SIMKIN