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Tim Hanley | Deloitte Touche Tohmatsu

While the US car industry is emerging from its recession-induced doldrums, government incentives to create local jobs are prompting some American manufacturers to reverse outsourcing decisions. Across the Atlantic, weak fourth quarter results indicate that the sovereign debt crisis is having a lasting dampening effect on the economy in the euro zone, which could create ripples across the globe.

In India, despite near-term threats, the potential of the domestic car market will continue to attract manufacturers, and in turn, cash-rich companies will increasingly look to make investments in the US and Western Europe in the next 5-10 years.

Positive potential: Hanley says India is the place to be in the longer term.

How do you think the Indian auto market is going to shape up in the coming years?

I believe the next 12 months, with high gas prices and interest rates and other factors, might be flat. But if you take a longer-term view, this might be a pretty good place to be. If you look at urbanization in this country versus Brazil, Brazil is 87% urbanized, whereas India has a lot more room for additional growth. We see that as a potential positive for India. China is in a little different solar system. One of the slight advantages it has is infrastructure. It’s got roads and ports; its government clicks its fingers and buildings get torn down and roads happen.

Do you see any challenges to global companies doing business here?

I’ve heard from CEOs that they are making investments in India because they’ve heard from the government of its intent to improve the infrastructure. But having the intent to improve and showing progress in improving are two different things. Compared with some of your industrialized competitors—the US, Western Europe and China—it’s more difficult to move the product and have the kind of supply chain you want, and so you’re forced to have buffers. I was really encouraged to read about your country’s new manufacturing policy. Now you have to execute it. You have some fairly ambitious goals of driving up manufacturing as a percentage of GDP (to 25% by 2022 from 16% now) and making the dollar investment you’ve committed to in infrastructure. But your ability to deliver that in an environment where there’s lot of pressure on government spending and how you deal with subsidies and taxes—it’s a significant balancing act and one that will take some real commitment to deliver.

The US government is now trying to promote “insourcing" by offering incentives to companies to bring jobs back to the US. Ford Motor Co., for instance, has moved jobs related to its hybrid and electric vehicles to the US from Japan, China and Mexico. What does this mean for India?

On insourcing, the answer is to have a strong focus on developing talent here. A year-and-a-half ago, we did a study of 400 global CEOs and asked them what was driving global competitiveness. The No. 1 driver of global competitiveness was not low costs, but access to talent-driven innovation. And we asked them to rate countries (with access to talent-driven innovation) today and five years from now. The top five in sequence for today were China, India, Korea, the US and Brazil.

Five years from now, the US slipped one spot, but India kept its No. 2 spot and moved up dramatically closer to China. What that says is they would view this country as being a great source for talent.

What is your reading of the euro zone situation and what implications is it going to have globally?

It’s going to be really bumpy. The south—Italy, Greece, Portugal and Spain—have got it much tougher. They really have to ratchet down spending and be austere. There’s so much global trade that if Europe softens, and I think it is softening, that affects the US, it impacts China and other growth markets, and it might have some impact on India as well. I was surprised at the fourth quarter—it’s not just flat growth, it’s negative growth. My personal view from client discussions is that it’s not going to be six months, it’s not going to be a year, it’s going to take a year or two of pushing to get flat growth in Europe.

Any significant manufacturing trends to watch out for?

The thing I’m going to be watching for is the momentum of foreign direct investments (FDI) that come from this country. We are beginning to see companies headquartered here and their ability to make FDI outside India. If you looked at this over the last 20 years, you’d say maybe not as much. But look at companies like Tata and Mahindra that have the ability to acquire (firms) outside, because they want to diversify outside India. I think that will have a lot more influence in the US and Europe in the next five to 10 years than it has before. Slowly now, but I think it has the momentum building up.

We spent decades watching FDI flowing out of the US into India, China and Brazil. I think we’re now going to see more and more investment flow back.

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