When many executives think about manufacturing, China is the first country that comes to mind. But there are other players grabbing a bit of that spotlight — like India. Despite the conventional wisdom that says India’s place in the global economy revolves around digital bits and services rather than material atoms, the country is starting to attract more attention for its manufacturing potential for a number of reasons: India is the third-largest economy in purchasing power parity after the U.S. and China, it has a large population of engineers and factory workers, its intellectual property is widely respected, and it is easy to find English-speaking managers there.

While Narendra Modi’s “Make In India ” initiative to promote manufacturing in India was mocked by some, North American executives are increasingly looking to expand their manufacturing supply chains beyond China. To decide if India is a good candidate for your operations, it’s important to understand the opportunities of doing business in the country — as well as the challenges.

American success stories in India

While American companies are only starting to explore India’s potential for manufacturing, we’re already seeing a few examples of how these efforts can be successful. For example, Chicago-based Abbott, which operates in 150 countries and owns top brands such as Similac infant formula, recently built a manufacturing facility in Jhagadia, Gujarat, in order to compete in India’s large growing nutrition market. In 2014, its 14,000 employees in India generated $1.09 billion in sales. This is largely because it manufactures products that reflect the local environment (to deal with spicy Indian food, it sells the antacid Digene), and are widely used there (to manage aches and pains, most Indians are prescribed Abbott’s Brufen when they want ibuprofen). It also adapts some its products to meet local expectations — for example, the plant caters to Indian mothers by manufacturing a version of the popular kids’ nutritional supplement PediaSure that is flavored with saffron and almonds.

India was one of the first expansion markets for Abbott, after Canada and the U.K, and today it’s the company’s third largest market globally — all six of the company’s business units have a presence in the country. “Last year, we signaled that India is a key manufacturing destination for us with a $75 million investment,” Abbott Vice President Bhasker Iyer told us. “It is one of the fastest growing markets globally — with a young population, strong macroeconomic indicators, a huge consumption story, and a politically stable government working to accelerate reforms. For a healthcare company, the reasons to be part of this vibrant country are even more compelling — it’s an opportunity to serve the unmet healthcare needs of a 1.2 billion population.”

Abbott’s new $75 million factory in Gujarat state. Courtesy of Abbott.

While Abbott does not currently export its products from India, the U.S. company Cummins does manufacture its engines, generators, and turbochargers there to export across the globe. India is hugely important to the company’s revenue stream, and Cummins India is only one of eight operations they have in the country. According to its latest investor presentation, Cummins India exports grew at 14% annually over the last five years and now constitute 40% of sales. The company has 20 manufacturing plants in India, compared to Abbott’s three, and one-sixth of Cummins’ 54,000 worldwide employees currently work there.

Another company planning to boost exports by manufacturing in India is GE. Among the 10 factories it has in the country, its new factory in the city of Pune serves as a global supply source for a number of its diverse businesses, from aviation and turbo machinery to wind turbines and diesel locomotives. “In the future, manufacturing will be far more decentralized. But decentralization poses a challenge to the concept of economies of scale,” said Banmali Agrawala, President for GE South Asia. The Pune factory helps solve this challenge. The company plans to send half of the output to GE’s global factories and the other half to the domestic market in India. And it was recently announced that CEO Jeff Immelt is headed to India again this month, in part to assert support for manufacturing in the country.

GE’s new plant in Maharashtra state will export half its production. Courtesy of GE.

While our success stories have focused on large companies, opportunities for manufacturing in India are open to smaller entities, even ambitious startups. Former Texas Instruments engineer Lou Hutter, now CEO of the startup Cricket Semiconductor, is raising $1B dollars (largely from investors of Indian origin) to build India’s first analog chip fabrication (“fab”) facility. Hutter and his partners hope to be located in the middle-sized city of Indore in Madhya Pradesh, where the Chief Minister has offered free land and a stable supply of water and electricity. Most fabs produce digital microchips that power modern electronics. But these digital devices must also interface with the analog real world in useful ways. The analog fab is much more aligned with India’s strength in automotive and industrial sectors, according to Hutter.

Overcoming challenges

While these companies show the potential of manufacturing in India, they can also illustrate the challenges western companies face when doing business in India. For example, Cummins’ biggest obstacle was navigating a difficult land acquisition process and complex government regulations. Land ownership is often opaque, and re-zoning from agricultural to industrial use has been fraught with peril and delays.

The first step to overcoming these challenges is to understand India as a collection of states, rather than one monolithic entity. It’s the states that are working to help companies establish their manufacturing facilities, and four have made significant recent advances. For example, the state of Madhya Pradesh has implemented a single online registration for business licenses to replace the complicated system businesses previously had to go through: 61 different registers operating under 13 separate federal labor laws. The state has also systematized the inspection process. Before, a barrage of inspectors would show up at companies without notice and slow down production; now the state has implemented process where inspectors come once every five years, and have to give advance notice. Meeting these challenges also requires a ground-up evaluation of your company’s needs in order to match them to India’s opportunities and current capabilities. If you don’t have in-house knowledge or resources, you may wish to consult state-based officials or engage a third party advisor.

Another challenge is that historically, India has regulated companies’ ability to fire factory workers, making it especially difficult for larger companies. While this was aimed at protecting jobs, one unintended consequence was that many factories stayed small to avoid increased regulatory burden and many others try to show their workers as contract labor.

Western companies also don’t have to build their own manufacturing facilities; they can rely on Indian factories. While advising American corporate clients, one of us (Bagla) found that Indian suppliers can be globally competitive in manufacturing items as diverse as manhole covers, automotive components, and even personal care cosmetics, which shows how India’s manufacturing sector is advancing beyond bits.

The takeaway

Just two decades ago, most Western executives thought of Ireland or Central America as the place to outsource software and business processes; today, we believe that India’s knowledge worker base rivals those two destinations combined. We don’t expect Indian manufacturing to go head to head with factories in China, Japan, the United States, or Germany any time soon. But top executives who wish to diversify their supply chains should no longer only consider India as a supplier of software and call center services. Manufacturing is the next frontier in India, and companies such as Abbott, Cummins, and GE have already proven that the countries resources hold tremendous potential.

We believe that western CEOs should follow Jeff Immelt’s lead and begin including India as part of their global supply chain. While there is no single formulaic answer to manufacturing success in India, patience and a trusted local partner or advisor to guide western executives’ efforts are necessary — as well as an understanding of the challenges.

And from India’s perspective, manufacturing is probably the only way to lift half a billion more of its population out of poverty. If Prime Minister Modi is able to inspire those around him to unlock India’s land and labor for manufacturing, domestic and global corporations will accelerate this transformation.