India is not the new China

India is now attracting electronics hardware investments, after grabbing a major foothold in the world data processing and call center market and leveraging that into a growing stake in software development. The Indian electronics industry is now less than 5 percent of the size of the Chinese industry but appears poised to expand very quickly.

A word of caution to ambitious electronics executives: The development of the electronics industry will follow a distinctly different growth path in India than in China, because the two countries are following very different economic development models.

China's comparative advantage a decade ago was abundant cheap labor. China followed the path blazed by Japan, South Korea and Taiwan, by focusing on low-skill, labor-intensive markets it could dominate with inexpensive products and quickly earn foreign exchange for further manufacturing investments. This process requires subsidies for production costs to be squeezed from rural incomes and inevitably results in sweatshop factory conditions and massive migration to urban areas.

The Indian development process means that there will be no sweatshops, no disruptive migration to cities and few subsidies offered to either foreign or domestic investors. There are no contract manufacturers in India trolling for business with cheap prices enabled by government capital loans they do not expect to repay.

This explains the recent interest in Indian factory investments. It is typically more expensive to manufacture in India than in China. The physical infrastructure (roads, ports, power) is superior in major Chinese cities, as is the industry infrastructure (parts suppliers and assembly, test and packaging suppliers). India is generally not cost-competitive with China for low-tech manufacturing work such as producing toys and household goods, because labor and transit costs are higher, but high-tech manufacturers are diversifying to India for other reasons.

India offers a large and growing domestic market, access to the huge market elsewhere in south Asia and a commercial and government environment that is both more familiar and more predictable than China's. India is also a hedge against having too many eggs in an often frustrating—and, for many, not yet profitable—Chinese basket. Operating costs are now rising rapidly at Chinese factories, because the supply of workers experienced in operating machinery has been exhausted in some coastal areas.

India is not the new China. It is not and never will be the next-cheaper country to head for in search of the lowest current production costs. Manufacturers using the "least cost" strategy are now moving operations to Vietnam and Indonesia. And there are other Asian countries available when these two become too expensive. The South Koreans have recently set up factories in the demilitarized zone, using North Korean labor.

However, the "Europeanness" of Indian commercial and government institutions is comfortable to foreign electronics companies. Foreign companies can find staff and partners who speak English in India, have a modest understanding of Western cultures and practices and know and respect commercial laws that are similar to those in the United States, Europe and Japan. Potential partners have experience in a market economy. India has had these characteristics for many decades but has actively sought foreign investment for only a few years, since it made a break with its socialist past.

Looking past today's cost premium for Indian operations, manufacturers see a bright future in India just as they did in China a decade ago. As in the case of China, they believe that the first U.S., European and Japanese companies to master India's unique operating environment and domestic customer preferences will have a long-term competitive advantage.