Identifier
Created
Classification
Origin
08CHENNAI378
2008-11-14 07:45:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Chennai
Cable title:  

INVESTMENT IN SOUTH INDIA CONTINUES, AS DO JITTERS ABOUT

Tags:  ECON EFIN ENRG ETRD EINV PGOV IN RU 
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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

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