India: Where Shipping Is Shaky

Obstacles that triple driving time are routine for truckers on the subcontinent's poor road system. But upgrade plans aren't exactly on the fast track

Say the words "road trip" in India, and you won't hear shouts of excitement. Journeying from Point A to Point B in this country is bad enough for normal motorists; but for shipping companies and their drivers, it's pure torment.
And the so-called Golden Quadrilateral, more than 3,000 miles of new highway being built between India's major cities, doesn't begin to fill the roadway deficit. "The GQ is only a marginal improvement," says Cyrus Guzder, chairman and managing director of AFL, India's largest logistics firm, in Mumbai.

Much of the new highway system, which is supposed to be finished this year, is just four traveling lanes without a central divider. "They've broadened the road and made a passing lane. This is not an expressway," says Guzder. "We only have 1,000 miles of separated expressway. We need 8,000 to make any difference."

TOLL OF THE ROAD
Even now, any trip between two major Indian cities takes three days, compared with making the same journey in Europe in one.

To understand the difficulties facing truckers on India's highways, consider a routine trip from New Delhi in the north to Bangalore in the south. The route is just 1,500 miles, yet it often takes four to five days. Drivers are bedeviled by traffic jams, prohibitions on traveling through major cities during daylight hours, and long delays at state border crossings.

The route passes through five states and the New Delhi Metropolitan District. At each border, drivers must stop and pay a tax. In some states they have to stop twice.

Guzder figures a driver will lose 14 to 16 hours waiting at border stations on this trip. On top of the cost of paying taxes and the delays involved, drivers often have to pay bribes to government functionaries to get clearance to pass, Indian business leaders say.

INFRASTRUCTURE NOT UP TO SPEED
One other snag: The state of Madhya Pradesh is notorious for "dacoits," gangs of criminals who ambush trucks at night and steal their cargo. Many truckers prefer not to travel through there at night, or wait until they can join a convoy that offers them some security.

Right now, trucks average about 20 mph on the New Delhi to Bangalore route. AFL's Guzder figures that if there were real expressways and no required stops at borders, the drivers could perhaps double that speed. He also calculates that they could save 15% of their costs on fuel and wear and tear.

The Indian government seems to get it. "This is a big problem," admits Dayanidhi Maran, the country's IT and telecommunications minister. "We're very much aware of the fact that growth is happening so fast and our infrastructure isn't able to handle it. We realize we have to do much more and move faster."

But eliminating bureaucracy and building new expressways have proven difficult for India to manage, so the dream of speedy transit on multilane expressways isn't likely to come true any time soon.

Building Opportunity in India

By putting $10 billion into the country's infrastructure, Cayman Islands-based real estate investor Trikona Capital plans to do well by doing good

The rich parts of India are like a handful of diamonds scattered on a sunny beach. There's a lot of hot sand between the shiny bits. In places such as the Delhi suburb of Gurgaon, the outskirts of Hyderabad, and around the high-tech capital of Bangalore, new buildings rise from the ground with breathtaking speed. Yet elsewhere, the real estate boom stimulated by the country's fast-growing high-tech industry has barely made a mark. The hang-ups: poor infrastructure, convoluted land ownership rules, and an out-of-date financial system.
Cayman Islands-based Trikona Capital, one of the world's largest investors in real estate projects, has a simple prescription for these problems: "If you're socially conscious, you can do something about it," says Aashish Kalra, a co-founder and managing director. By that he means financiers can accelerate Indian projects and improve their returns if they invest some of their capital in building infrastructure like roads, bridges, hospitals, and even low-income housing. "If you do the right thing for society, you're creating the opportunity—and you make your profit," says Kalra. He expects the firm to reap more than a 25% return on every project it finances in India.

Development experts applaud what Trikona is doing. "The fact that companies like Trikona are paying attention to the social infrastructure bodes well, and I believe should be a new trend that other developers could follow," says Srinath Koganti, a professor at the Delhi School of Architecture & Planning.

FOREIGN MONEY IS TRICKLING IN
Foreign direct investment in Indian real estate began to take off in the past couple of years, after the central government began lifting restrictions. A November study by the Associated Chambers of Commerce& Industry of India projected that foreign investors would sink about $2 billion into Indian real estate in the fiscal year ending in March, helping to fuel a commercial real estate market that topped $12 billion last year and is growing at 25% to 30% a year, according to investment bank Edelweiss Capital.

In spite of a lot of announcements and excitement, however, not much of the foreign money has found its way into bricks and mortar. "It has made a start, but it will be a couple of years before we see FDI (foreign direct investment) materializing on the ground," says Manish Grover, associate director in India of Jones Lang LaSalle, the Chicago real estate service firm.

Trikona is in the vanguard. It became active in India only last year, but it has committed to investing $10 billion over the next several years. Its strategy is to form partnerships with local investment and construction companies, and, in most of its projects, there's a social component. For instance, last October it entered a partnership to build a 1.37 million-square-foot condominium development in central Mumbai that will include 2,500 free apartments for low-income city dwellers. The goal is to help overcrowded Mumbai become a more livable city and a better environment in which to do business.

LETTING GOVERNMENT PAVE THE WAY
Outside Mumbai, Trikona is financing the construction of a new 127-acre township in Thane, a city with a population of about 1 million. In addition to erecting commercial and residential buildings, the developers are sprucing up the old parts of town and working with a large health-care provider to establish a first-rate hospital. Without excellent medical care, it would be hard to attract tenants and home buyers.

One of the big hang-ups for real estate developers in India has been the tangle of land rights. Sometimes several people own a tiny plot of land, and many tiny plots must be purchased to assemble a large tract. Developers are forced to track down and negotiate with all the owners. Trikona has found a way to get around that obstacle: by investing in large government-sponsored infrastructure projects. That way, the government acquires land adjacent to new highways that is available for development and unencumbered by ownership claims. For example, Trikona has invested in ITNL, which is developing several major public-private highway projects throughout the country. "We now have access to thousands of miles of land along the highway—one of the largest land banks in India," says Kalra.

While Trikona is spreading its money around liberally, new financing techniques are needed if India is to quickly upgrade its tattered infrastructure. Until recently, there were no municipal and state bond markets. Laws have been passed to open things up, but local governments and financial firms have been slow to capitalize on the changes. In the meantime, Kalra urges India's central government to allow foreign direct investment in municipal bonds. "We have a great equity market and a pathetic bond market," he says. "Once we create a bond market that resembles our equity markets, that's the missing link."

He's optimistic about the country's prospects, however. Kalra grew up in India and remembers a time when people who wanted a car had to wait 10 years; and getting a phone line could take five. "All of these (infrastructure) problems are solved if you throw enough money at it," he says. "The good news is that India now has the growth rate to attract the money."

The Trouble With India

Crumbling roads, jammed airports, and power blackouts could hobble growth

When foreigners say Bangalore is India's version of Silicon Valley, the high-tech office park called Electronics City is what they're often thinking of. But however much Californians might hate traffic-clogged Route 101, the main drag though the Valley, it has nothing on Hosur Road. This potholed, four-lane stretch of gritty pavement—the primary access to Electronics City—is pure chaos. Cars, trucks, buses, motorcycles, taxis, rickshaws, cows, donkeys, and dogs jostle for every inch of the roadway as horns blare and brakes squeal. Drivers run red lights and jam their vehicles into any available space, paying no mind to pedestrians clustered desperately on median strips like shipwrecked sailors.

Pass through the six-foot-high concrete walls into Electronics City, though, and the loudest sounds you hear are the chirping of birds and the whirr of electric carts that whisk visitors from one steel-and-glass building to the next. Young men and women stroll the manicured pathways that wend their way through the leafy 80-acre spread or coast quietly on bicycles along the smooth asphalt roads.

With virtually no mass transit in Bangalore, Indian technology firm Infosys Technologies Ltd. spends $5 million a year on buses, minivans, and taxis to transport its 18,000 employees to and from Electronics City. And traffic jams mean workers can spend upwards of four hours commuting each day. "India has underinvested in infrastructure for 60 years, and we're behind what we need by 10 to 12 years," says T.V. Mohandas Pai, director of human resources for Infosys.

India's high-tech services industry has set the country's economic flywheel spinning. Growth is running at 9%-plus this year. The likes of Wal-Mart (WMT ), Vodafone (VOD ), and Citigroup (C ) are placing multibillion-dollar bets on the country, lured by its 300 million-strong middle class. In spite of a recent drop, the Bombay stock exchange's benchmark Sensex index is still up more than 40% since June. Real estate has shot through the roof, with some prices doubling in the past year.

But this economic boom is being built on the shakiest of foundations. Highways, modern bridges, world-class airports, reliable power, and clean water are in desperately short supply. And what's already there is literally crumbling under the weight of progress. In December, a bridge in eastern India collapsed, killing 34 passengers in a train rumbling underneath. Economic losses from congestion and poor roads alone are as high as $6 billion a year, says Gajendra Haldea, an adviser to the federal Planning Commission.

For all its importance, the tech services sector employs just 1.6 million people, and it doesn't rely on good roads and bridges to get its work done. India needs manufacturing to boom if it is to boost exports and create jobs for the 10 million young people who enter the workforce each year. Suddenly, good infrastructure matters a lot more. Yet industry is hobbled by overcrowded highways where speeds average just 20 miles per hour. Some ports rely on armies of laborers to unload cargo from trucks and lug it onto ships. Across the state of Maharashtra, major cities lose power one day a week to relieve pressure on the grid. In Pune, a city of 4.5 million, it's lights out every Thursday—forcing factories to maintain expensive backup generators. Government officials were shocked last year when Intel Corp. (INTC ) chose Vietnam over India as the site for a new chip assembly plant. Although Intel declined to comment, industry insiders say the reason was largely the lack of reliable power and water in India.

Add up this litany of woes and you understand why India's exports total less than 1% of global trade, compared with 7% for China. Says Infosys Chairman N.R. Narayana Murthy: "If our infrastructure gets delayed, our economic development, job creation, and foreign investment get delayed. Our economic agenda gets delayed—if not derailed."

The infrastructure deficit is so critical that it could prevent India from achieving the prosperity that finally seems to be within its grasp. Without reliable power and water and a modern transportation network, the chasm between India's moneyed elite and its 800 million poor will continue to widen, potentially destabilizing the country. Jagdish N. Bhagwati, a professor at Columbia University, figures gross domestic product growth would run two percentage points higher if the country had decent roads, railways, and power. "We're bursting at the seams," says Kamal Nath, India's Commerce & Industry Minister. Without better infrastructure, "we can't continue with the growth rates we have had."

The problems are even contributing to overheating in the economy. Inflation spiked in the first week of February to a two-year high of 6.7%, due in part to bottlenecks caused by the country's lousy transport network. Up to 40% of farm produce is lost because it rots in the fields or spoils en route to consumers, which contributes to rising prices for staples such as lentils and onions.

India today is about where China was a decade ago. Back then, China's economy was shifting into overdrive, but its roads and power grid weren't up to the task. So Beijing launched a massive upgrade initiative, building more than 25,000 miles of expressways that now crisscross the country and are as good as the best roads in the U.S. or Europe. India, by contrast, has just 3,700 miles of such highways. It's no wonder that when foreign companies weigh putting new plants in China vs. India to produce global exports, China more often wins out.

China's lead in infrastructure is likely to grow, too. Beijing plows about 9% of its GDP into public works, compared with New Delhi's 4%. And because of its authoritarian government, China gets faster results. "If you have to build a road in China, just a handful of people need to make a decision," says Daniel Vasella, chief executive of pharmaceutical giant Novartis (NVS ). "If you want to build a road in India, it'll take 10 years of discussion before you get a decision."

Blame it partly on India's revolving-door democracy. Political parties typically hold power for just one five-year term before disgruntled voters, swayed by populist promises from the opposition, kick them out of office. In elections last year in the state of Tamil Nadu, for instance, a new government was voted in after it pledged to give free color TVs to poor families. "In a sanely organized society you can get a lot done. Not here," says Jayaprakash Narayan, head of Lok Satta, or People Power, a national reform party.

Then there's "leakage"—India's euphemism for rampant corruption. Nearly all sectors of officialdom are riddled with graft, from neighborhood cops to district bureaucrats to state ministers. Indian truckers pay about $5 billion a year in bribes, according to the watchdog group Transparency International. Corruption delays infrastructure projects and raises costs for those that move ahead.

Fortunately, after decades of underinvestment and political inertia, India's political leadership has awakened to the magnitude of the infrastructure crisis. A handful of major projects have been completed; others are moving forward. Work on the Golden Quadrilateral—a $12 billion initiative spanning more than 3,000 miles of four- and six-lane expressways connecting Mumbai, Delhi, Kolkata, and Chennai—is due to be completed this year. The first phase of a new subway in New Delhi finished in late 2005 on budget and ahead of schedule. And new airports are under construction in Bangalore and Hyderabad, with more planned elsewhere. "We have to improve the quality of our infrastructure," Prime Minister Manmohan Singh told a gathering of tech industry leaders in Mumbai on Feb. 9. "It's a priority of our government."

Singh, in fact, is promising a Marshall Plan-scale effort. The government estimates public and private organizations will chip in $330 billion to $500 billion over the next five years for highways, power generation, ports, and airports. In addition, leading conglomerates have pledged to overhaul the retailing sector. That will require infrastructure upgrades along the entire food distribution chain, from farm fields to store shelves.

Envisioning a brand-new India is the easy part; paying for it is another matter. By necessity, since the country's public debt stands at 82% of GDP, the 11th-worst ranking in the world, much of the money for these new projects will have to come from private sources. Yet India captured only $8 billion in foreign direct investment last year, compared with China's $63 billion. "Having grandiose plans isn't enough," says Yale University economics professor T.N. Srinivasan.

Just about every foreign company operating in India has a horror story of the hardships of doing business there. Nokia Corp. (NOK ) saw thousands of its cellular phones ruined last October when a shipment from its factory in Chennai was soaked by rain because there was no room to warehouse the crates of handsets at the local airport. Japan's Maruti Suzuki says trucking its cars 900 miles from its factory in Gurgaon to the port in Mumbai can take up to 10 days. That's partly due to delays at the three state borders along the way, where drivers are stalled as officials check their papers. But it's also because big rigs are barred from India's congested cities during the day, when they might bring dense traffic to a standstill. Once at the port, the Japanese company's autos can wait weeks for the next outbound ship because there's not enough dock space for cargo carriers to load and unload.

India's summer monsoons wreak havoc, too. Even relatively light rains can choke sewers, flood streets, and paralyze a city, while downpours are devastating. Two years ago, Florida-based contract manufacturer Jabil Circuit Inc. saw shipments of computers and networking gear from its plant near Mumbai delayed for five days after an epic storm. "In our business, five days is a really long time," says William D. Muir Jr., who oversees Jabil's Asian operations.

Companies often have no choice but to make the best of a bad situation. Cisco Systems Inc. (CSCO ), the American networking equipment giant, has had a research and development office in India since 1999 and already has 2,000 engineers in the country. To supply the country's fast-growing telecommunications industry, Cisco decided last year to try its hand at making some parts locally. In December it contracted with another company to build Internet phones in the southeastern city of Chennai. Although Cisco says the quality of the workmanship is up to snuff, it has to fly parts in because the ports are so slow—and getting them to the factory right when they're needed is proving nettlesome. "We believe in manufacturing in India, but we don't believe in logistics in India—yet," says Wim Elfrink, Cisco's chief globalization officer. Elfrink adds that unless the Chennai operation demonstrates it can run as efficiently as Cisco setups elsewhere, it won't go into full production as planned this summer.

Even the world's largest maker of infrastructure equipment is constrained by India's feeble underpinnings. General Electric Co. (GE ) last year sold $1.2 billion worth of gear such as power generators and locomotives in India, more than double what it billed in 2005. To meet that surging demand, it is scrambling to find a location where it can manufacture locomotives in partnership with India Railways. But when GE dispatched three employees to survey a potential site the railway favored in the northern state of Bihar, the trio returned discouraged. It took five hours to drive the 50 miles from the airport to the site, and when they got there they found...nothing. "No roads, no power, no schools, no water, no hospitals, no housing," says Pratyush Kumar, president of GE Infrastructure in India. "We'd have to create everything from scratch," including many miles of railroad tracks to get the locomotives out to the main lines.

But there is a silver lining for GE and other international giants: India's infrastructure deficit could yield huge opportunities. American executives who traveled to India last November on the largest U.S. trade mission ever were tantalized by the possibilities. Jennifer Thompson, director of international planning at Oshkosh Truck Corp. (OSK ), viewed construction projects where swarms of workers carried wet concrete in buckets to be poured. That told her there's great potential in India for selling Oshkosh's mixer trucks. "There are infrastructure challenges, but we see a lot of opportunities to help them meet those challenges," she says.

That explains why so many multinationals are flocking to India. Take hotel construction: In a country with only 25,000 tourist-class hotel rooms (compared with more than 140,000 in Las Vegas alone), companies including Hilton (HLT ), Wyndham (WYN ), and Ramada have plans for 75,000 rooms on their drawing boards. Or consider telecom. Because of deregulation and ferocious demand, India boasts the fastest growth in cell-phone service anywhere, with companies adding some 6 million new customers a month. No wonder Britain's Vodafone Group PLC (VOD ) just ponied up $11 billion for a controlling interest in Hutchison Essar, India's No. 4 mobile carrier. U.S. private equity outfits also want in on the action. On Feb. 15, Blackstone Group and Citigroup announced they are teaming up with the Indian government and the Infrastructure Development Finance Corp. to set up a $5 billion fund for infrastructure investments in India.

But while the laws of supply and demand would argue that India's infrastructure gap can be filled, that logic ignores the corrosive effect of the country's politics. To gain the favor of voters, Indian politicians have long subsidized electricity and water for farmers, a policy that has discouraged private investment in those areas. That's what wrecked the now-infamous Dabhol Power plant. In the late 1990s, Enron, GE, and Bechtel spent a total of $2.8 billion building a huge complex near Mumbai capable of producing more than 2,000 megawatts of electricity. But a government power authority set prices so low that it was uneconomical for Dabhol to operate, and the whole deal fell apart. (The plant, taken over by an Indian organization, now runs only fitfully.) A 2001 law was supposed to create a framework to support private investment in power generation. But according to American construction company executives, it's not working well. "Everybody knows what needs to be done, but they have great difficulty doing it," says one of the Americans. "If the party in opposition offers subsidized power, the party in power has to give subsidized power to get reelected."

Politicians who refuse to play the game pay a steep price. N. Chandrababu Naidu, the former chief minister of the state of Andhra Pradesh, transformed the state capital of Hyderabad from a backwater into a high-tech destination by building new roads, widening others, and aggressively carving out land for factories and office parks. Google (GOOG ), IBM (IBM ), Microsoft (MSFT ), and Motorola (MOT ) have all built R&D facilities there.

His reward? Voters tossed him out of office two years ago. During his decade in power, Naidu didn't do enough for rural areas, and his challenger promised to channel state funds into irrigation projects and electricity subsidies. "Naidu thought economics were more important than politics. He was wrong," says V.S. Rao, director of the Birla Institute of Technology & Science in Hyderabad. Naidu, 56, is plotting a comeback in elections two years hence. This time, he's preaching a new gospel. "You can't just target growth," says a chastened Naidu. "You have to create policies that make the wealth trickle down to the common man."

But even when politicians say they're beefing up infrastructure, it rarely helps the poorest Indians. Agriculture is stagnant in part because of a lack of the most rudimentary of roads to get to and from fields. N. Tarupthurai, for instance, scratches out a living from a five-acre plot in Jinnuru, a village in northeastern Andhra Pradesh. But his fields are more than a mile from the nearest paved road, so each day the 40-year-old Tarupthurai must carry his tools, seeds, fertilizer, and crops down a dirt path on his back or on his bicycle. "I have asked for a road, and the government says it's under consideration," says the mustachioed, curly-haired farmer. Then he shrugs.

One reason little practical help makes it from the seats of power to India's impoverished villages is that so much money gets siphoned off along the way. With corrupt officials skimming at every step, many public works projects either go over budget or are never completed. "You figure that 25% of the cost goes to corruption," says Verghese Jacob, head of the Byrraju Foundation, which promotes rural development. "And then they do such a bad job that the road falls apart in one year and has to be patched over again," Jacob says as he jostles along in a car on a potholed byway outside Hyderabad.

None of the solutions to India's infrastructure challenges are simple, but business leaders, some enlightened government officials, and even ordinary citizens are chipping in to make things better. The most potent weapon India's reformers have against corruption is transparency. Last October a new right-to-information law went into effect requiring both central and state governments to divulge information about contracts, hiring, and expenditures to any citizen who requests it. The country is also putting to work its vaunted technology prowess to police the government. Officials in 200 districts are using software from Tata Consultancy Services Ltd. to help monitor a government program that offers every rural household a guarantee of 100 days of work per year. Most of this labor goes into public works. To minimize "leakage," the TCS software tracks every expenditure—and makes all of the information available real-time on a Web site accessible to anyone.

Sometimes frustrated Indians take matters into their own hands. Tired of spending four-plus hours a day in traffic, Aruna Newton last fall helped organize something of a women's crusade to speed up infrastructure improvements. Nearly 15,000 volunteers now monitor key road projects and meet with state officials to press for action. They even enlisted the state chief minister's mother, who helped get his attention. "It's about the collective power of the people," says Newton, a 40-year-old vice-president for Infosys. "I just wish building a road was as easy as writing a software program."

Increasingly, companies trying to expand in India have the government as a willing partner rather than a roadblock. The state of Andhra Pradesh rolled out the red carpet last year for MAS Holdings Ltd. of Sri Lanka, South Asia's largest garment manufacturer. It promised subsidized electricity, new access roads, and even a deepwater port if the company would place a huge industrial park on the southern coast. Now MAS Holdings plans to build a cluster of factories that will eventually employ 30,000 production workers. And it chose India over China. "The government support was absolutely vital," says John Chiramel, India director for MAS Holdings. "If we can work together, there's no stopping growth in this country."

A key to getting massive projects off the drawing boards is forming public-private partnerships where the government and companies share costs, risks, and rewards. In 2005, India passed a groundbreaking law permitting officials to tap such partnerships for infrastructure initiatives. Developers ante up most of the money, collect tolls or other usage fees, and eventually hand the facilities back to the government.

The first project to take advantage of the new law is the $430 million international airport scheduled to open next year in Bangalore. The facility is designed to handle 11.5 million passengers per year—nearly double the capacity of the overburdened existing airport. It will be owned by a private company, which will turn it over to the Karnataka state government after 60 years. Global engineering and equipment giant Siemens (SI ) is helping to build the facility, and Switzerland's Unique Ltd. will manage it. These companies are also equity investors. The state had to contribute just 18% of the cost. Without such an arrangement, Karnataka wouldn't be getting a new airport.

A lot of India's hopes rest on the airport deal's success. If it proves the viability of public-private partnerships, more such ventures could come pouring in. A visit to the site instills confidence. Project manager Sivaramakrishnan S. Iyer is a crusty veteran of mammoth infrastructure ventures throughout South Asia and the Mideast. Wearing a scuffed hardhat, with a two-day growth of white stubble on his face, he surveys the site from a 2.5-mile-long bed of crushed granite that will be the runway. Work goes on seven days a week, 18 hours a day. Iyer is intent on wrapping up on schedule in April, 2008. "We have the will to do it, and it will be done," he says.

Will the airport open on time? That's not within Iyer's control. Two government authorities are responsible for building the road that leads to the airport, and they're locked in a dispute over how to do it. Work hasn't started.

And so it goes in India. Unless the nation shakes off its legacy of bureaucracy, politics, and corruption, its ability to build adequate infrastructure will remain in doubt. So will its economic destiny.

Asia's Hot Growth Companies: 2006

Here are the pace-setters from around the region, including a surprising No. 1 from Thailand

The list of Asia's hot growth companies reveals a number of startling trends. One is the strength of Japan, which despite China's undisputed rise still has vibrancy as an economy. Japanese companies occupy more slots on the list than companies from any other country, and they range from temp agencies to retailers to electronics outfits. Taiwan's high-tech promise comes through clearly on the list. Singapore, long criticized for its inability to nurture startups, has a healthy contingent. China shows its prowess in heavy manufacturing. And even Thailand makes the ranks, snagging the No. 1 spot with a marine shipping company—about as far from the chip labs of Japan and Taiwan as you can get.

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Businessweek - India Wants to Build Your Small Car

Maruti Suzuki's managing director talks about the need for small cars, global players expanding in India, and why his company will prosper

At a time when most of his colleagues are leading a life of leisurely retirement, Jagdish Khattar, 63, is facing the managerial challenge of a lifetime. The former India bureaucrat is managing director of Maruti Suzuki, the Indian subsidiary of Suzuki Motor, the Japanese automaker's biggest operation outside of its domestic market.

The Indian unit now faces an onslaught from global competitors rushing into the country with ambitious expansion plans. Honda (HMC), Toyota (TM), Hyundai (HYMZY), General Motors (GM), and others have announced plans to make small cars in India.

Maruti has 65% of India's one-million-unit car market and 11 brands, but is hardly sitting still. It will spend more than $650 million to make diesel cars and set up two new plants in Manesar in the northern state of Haryana, one of which was to be with Nissan Motor (NSANF).

However, Nissan recently scrapped talks with Suzuki and Maruti about a new car-making facility and instead will work through a joint venture between India automaker Mahindra and Renault (RNSDY) of France, which owns a 44% stake in Nissan.

Such are the current competitive dynamics facing Maruti Suzuki in one of the fastest-growing auto markets in the world. Khattar spoke to BusinessWeek.com correspondent Nandini Lakshman in New Delhi about the Indian car market and strategy. Edited excerpts of the conversation follow:

Now that the Nissan deal has fallen through, what does it mean for Maruti Suzuki?

When (Suzuki chairman Osamu) Suzuki was in India in September, he had made it clear that there were two parts to the Nissan deal. We were going to invest $2 billion in Manesar to produce 100,000 small cars for export to Europe. Nissan said it would pick up 50,000 cars from us for export, and that deal still stands. The second aspect about setting up a plant to manufacture 200,000 cars for Nissan's export markets was still under discussion, but that won't happen.

Today 80% of your revenues come from compacts and small cars at a time when there is a lot of action in the luxury car segment.

This segment is down 1%. It has grown with big companies and big launches, but where are the numbers to talk about? It is still the small car for the rest of the country.

Will India emerge as a global hub for small-car production?

India cannot be a major player in automobiles for quite some time. As a country we produce one million cars, but there are stand-alone companies globally who produce more than one million each. The biggest compact car player in Japan builds 1.5 million cars a year. The industry in Brazil makes 800,000 and then there is India with 650,000. China has all big cars, and only now do they make small ones.

Secondly, as we have seen in the U.S., big SUVs are going out of fashion, and fuel-efficient cars are important. In Europe, green models are coming where a company has to give you certain carbon emission performance. All the seven major manufacturers in Europe produce only 500,000 compact cars. We produce more small cars than them. If these major manufacturers have to get the carbon emission averages lower, they have to produce small cars. So they will come to us.

What is the India car industry's export potential?

The domestic market is growing. But in small cars, many people from outside will also try to source from India. And those who are big-volume players in India will be able to do it.

You are building Suzuki's new Asian car. Is this a challenge?

Why? We have been producing cars for some time. Suzuki has decided that the car will be produced here, and we will export the model to their overseas markets. Suzuki exports bigger cars from Japan, medium cars from Hungary, and small cars from India. Maruti already contributes 10% of Suzuki's revenues, the largest outside of Japan.

Today, with every foreign auto major talking of making small cars in India, isn't Maruti's 55% market share reign under threat?

We've had competition for the past 15 to 20 years. If there are more small cars, it is good for the country where the market is growing. Yes, it has been tough, but we have been able to maintain our share for the past five years, and we've had a dozen manufacturers in India for the last 12 years.

How will Maruti differentiate itself from the pack?

At the end of the day, it comes down to the customer's confidence in the manufacturer. And there, I think, Maruti has been doing pretty well. We have led in customer satisfaction rankings in the J.D. Power (MHP) annual quality surveys for the last six years. Our products again score high on quality. If you look after your existing customers, new ones will come. And that's what 40% to 50% of our new customers say: that they are buying it on the recommendation of their friends and relatives who already own a Maruti Suzuki.

Has the lack of diesel models been a handicap?

Yes, it has. Diesel has become 20% of the total market, and we are not there. We are present in only 80% of the market. That's why in the next four to five months, we should have our first diesel vehicle.

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How This Tiger Got Its Roar

IT WAS THE KIND OF CALL THAT makes a young man grow up fast. On Aug. 11, 1966, Azim H. Premji was a senior at Stanford University in Palo Alto, Calif., studying for finals after summer school. When the phone rang, his mother was on the line from India with devastating news: His father, M.H. Premji, had died of a heart attack at the age of 51. The younger Premji quickly booked a flight and left for the funeral, expecting to be back at Stanford in time for the fall semester. Instead, his father's death marked a fateful change of direction for the 21-year-old. Rather than pursuing his dream of bringing aid to the developing world as a policymaker at the World Bank, he found himself thrust into the nitty-gritty details of saving a failing company in a backwater economy.

Fortunately, entrepreneurship runs in his blood. Premji's grandfather was founder of one of the largest rice-trading companies in India. Then, in 1945, M.H. Premji launched a cooking oil company called Western India Vegetable Products. But when the young Azim Premji arrived home he found the operation in shambles. And to his dismay, he discovered that his father had selected him to run it, a duty he felt he couldn't shirk. ``It's like being thrown into a swimming pool,'' says Premji, who finally got his Stanford degree six years ago. ``To avoid drowning, you learn to swim quickly.''

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