With wages increasing in China some manufacturers are looking at alternative production centers.  For manufacturers seeking low labor costs, India is appealing and may represent the next frontier for manufacturing, but is it viable option?

A 2010 study by America’s Bureau of Labor Statistics found that, at just under a dollar an hour, India’s labor costs were similar to China’s, being just 3% of American levels.  So, what’s the downside?  While there have been recent progress in India’s intellectual property laws, manufacturers looking to India will still need to navigate a multitude of issues including inadequate power supplies, inefficient transport infrastructure, high poverty rates, changing tax and trade policies as well as complicated property acquisition laws and archaic labor laws.

A recent report by KPMG found that 77% of respondents indicated they intended to use India for production and design activities (up from 48% in 2011) and 67% of respondents indicated they would look to use resources in India for research and development activities (up from 35% in 2011).  Looking at GDP, the manufacturing sector is a relatively low contributor, contributing around 15 – 20% of India’s GDP, well below that of other nations such as China, Malaysia and Thailand where manufacturing comprises 30 – 40% of GDP.

India is already popular with high-end electronics and automotive manufacturers such as Volkswagen and Mercedes-Benz with commentators noting that the Indian advantage is one of value competence more than price competence — so manufacturers in these sectors are more likely to see enhanced benefit than other industries like textiles.

What’s the upside?  With over a billion consumers, the Indian domestic markets offer enormous expansion opportunities for manufacturers and retailers.  According to the KPMG report, the aggregate spending power of India’s middle class is expected to surpass that of North America by 2023.  India’s population is expected to overtake China’s as the largest in the world by 2030 and nearly half of its population is under 25!  Young Indians have access to more money than their parents and will drive the market for technology, fashion, accessories, food and beverages.  Retailers thinking of entering the Indian market should focus on key strategic considerations like creating efficient supply chains without the existence of strong infrastructure or logistics and selection and acquisition of good retail real estate.