Chennia/Hyderabad: About a year ago, Isuzu Motors Ltd was scouting for a plot of land in India where it could open a factory. The Japanese auto maker wanted to set up its base in India from where it could export with ease to Thailand, its largest market for pick-up trucks.

The place it chose was near Chennai, but not in the Sriperumbudur-Oragadam belt, about 45km from the city, that is famous as the home to some major auto factories in India, including Daimler India Commercial Vehicles Pvt. Ltd, Hyundai Motor India Ltd, Renault-Nissan and Ashok Leyland Ltd.

Instead, Isuzu chose to set up in SriCity, just 55km further north, but in Andhra Pradesh, not Tamil Nadu. When Isuzu made the announcement in January, it became the latest in a long line of large multinationals that have opted to manufacture in SriCity rather than the industrial belts of neighbouring Tamil Nadu.

A host of companies have been opting for SriCity, driven not only by the latest facilities it offers, logistical ease and government subsidies, but also by a simultaneous slide in Tamil Nadu—marked by erratic power supply, delays and bureaucratic hurdles. Central government financial aid in the process of creating Telangana state from Andhra Pradesh, in June last year, may also be a factor.

SriCity lies 55km from Chennai, an hour-and-a-half to two hours by car, depending on the traffic, on the national highway. It’s a manufacturing hub comprising a special economic zone (SEZ) of 2,700 acres and a domestic tariff area of 4,300 acres. Isuzu Motors is setting up a manufacturing unit at a cost of 3,000 crore to make 50,000 pick-up trucks per year by 2016.

Construction work is proceeding apace in SriCity, evident from the yellow cranes and earth movers that are busy levelling the land at the Isuzu Motors factory and other locations.

Neighbouring Isuzu Motors is another Japan-based company, the Kobelco group that has set up three firms in India—Kobelco Cranes India Pvt. Ltd, Kobelco Construction Equipment India Pvt. Ltd and Kobelco Plate Processing India Pvt. Ltd. They are among around a dozen Japanese companies that have either set up or are in the process of setting up factories in the complex.

Piolax Inc., a Japanese auto parts company, opened in SriCity in spite of the fact that it needs to supply its goods to Nissan Motor Co. Ltd, whose unit is based in Oragadam. Under the public-private partnership model, the government of Andhra Pradesh has granted single-window start-up approvals for setting up in SriCity, along with functional infrastructure approvals.

A distance of 10km is covered within minutes along neatly laid two-way lanes and lined by plants on either side of the road, giving the place the look and feel of a well-planned industrial park.

Having attracted private equity investments from Och-Ziff PE Fund, Credit Asia Capital, Bedrock Llc US and Chintalapati Holdings, SriCity has brought some benefits for other states—labourers from Bihar, Jharkhand and Odisha have been working on the parched land where factories are in different stages of construction.

“I get paid 5,000 a month and send back money home to my family," said 40-years-old Kirodh Chawan from Bihar, who works on a construction site near a Unicharm plant that makes MamyPoko Pants diapers.

Even Tamil Nadu is a beneficiary—the factory that is making coaches for the planned Chennai Metro is at Sri City. Alstom Transport has an order worth €243 million to supply train cars for Chennai Metro.

“We did not find the usual tangles a company would face while setting up a large facility; the Andhra Pradesh government played a proactive role and clearances were quick," said a spokesperson for Isuzu Motors India Pvt. Ltd about the choice of location.

“The combination of state-of-the-art Krishnapatnam port (in Andhra Pradesh) keeping view of handling larger capacity, good infrastructure and stable power, made us decide on SriCity," he added.

“Yes, we did consider Sriperumbudur and Oragadam industrial belts in Tamil Nadu but then the distance to Krishnapatnam would be longer. Routing it through Chennai port, which handles large volumes, would have been tougher," said the spokesperson.

The distance between Krishapatnam and SriCity is 112km; the travel time is close to three hours.

The head of a leading Chennai-based auto component company, who did not want to be named said, “It takes an hour to fly to Chennai from Colombo, Sri Lanka, but to get the goods through the congested roads to Chennai port takes a day or more."

Chinta Sasidhar, managing director of Krishnapatnam Port Co. Ltd, said industries are opting for Andhra Pradesh because of congestion at Chennai and Ennore ports (in Tamil Nadu) on the one hand and greater availability of land and a proactive government in Andhra Pradesh on the other.

The cost of setting up a facility (in terms of real estate) is 35-40% cheaper in SriCity than in Chennai, with good infrastructure and single window clearance, said Vikram Sharma, managing director, Kobelco Construction Equipment. The company was an early entrant in 2011.

Tamil Nadu Industrial Development Corporation, which identifies and promotes the establishment of large- and medium- sized businesses in the state, did not respond to Mint’s calls or email.

“Bureaucratic procedures have delayed projects but investing companies that put up with the Tamil Nadu government’s lethargy no longer do so. They just hop across to SriCity," said the head of a Chennai-based manufacturing company, who did not want to be named.

Good infrastructure and accessibility to a sea port are the most important factors for multinational companies looking to set up a manufacturing facility, said N.K Ranganath, managing director of Grundfos Pumps India Pvt. Ltd, whose parent company is based in Denmark.

Proximity to a huge market like Chennai, easy access to Chennai and Tirupati airports, connectivity to Krishnapatnam port in the north and Ennore and Chennai in the south, as well as National Highway-5 and railways, is what makes SriCity and its adjoining areas attractive to industrialists, said K.V Ramana Reddy, zonal manager of the Andhra Pradesh Industrial Infrastructure Corporation (APIIC) for Chittoor district.

Reddy oversees Industrial Area Local Authorities (IALA), an extended arm of APIIC. IALA works with companies, helping them with their land and infrastructure requirements.

In August 2013, US multinational Mondelez International Inc., maker of Cadbury chocolates, said it will set up its largest international manufacturing facility in the Asia Pacific region and its largest chocolate manufacturing facility at SriCity. It is to house a multi-category food campus on 134 acres of leased land with a proposed investment of 1,000 crore. Four months later, PepsiCo. India announced its largest beverage manufacturing unit at SriCity with an investment of 1,200 crore.

So far, Sricity has attracted over 100 companies and signed memorandums of understanding (MoUs) for investments close to 18,000 crore.

Presenting a counterpoint to Andhra Pradesh’s success with SriCity is the story of Tamil Nadu’s woes—one of a slowing economy compounded by political fights.

In the last two years, Tamil Nadu’s economy has grown at the slowest rate among India’s 17 large states. The southern state’s growth rate fell by two-thirds to 4.14 % in 2012-13 from a galloping 13.12% in 2010-11, according to the Central Statistical Organization. Andhra Pradesh’s growth rate halved to 5.04 % in 2012-13 from 9.66% in 2010-11—partly a fallout of the agitation for a separate Telangana state.

In November 2012, J. Jayalalithaa, the then chief minister of Tamil Nadu—currently out on bail after being jailed and fined in a disproportionate asset case—blamed the previous Dravida Munnetra Kazhagam (DMK) government for delays in the execution of a joint venture between Ashok Leyland and Nissan. She said her government had to sign a fresh MoU with the joint venture company that makes light commercial vehicles because although the agreement was signed in 2008 during the DMK’s tenure, land was not allotted till February 2011.

In 2012, she signed MoUs with 12 companies for investments worth 20,925 crore, including pledges for 4,500 crore by Indo Rama Synthetics (India) Ltd to set up a petrochemical unit, 2,325 crore for a BGR Energy Systems Ltd-Hitachi Ltd joint venture, and 4,100 crore by US-based paint maker PPG Industries Inc.

Pledged investments by auto and auto components companies Sundaram Clayton Ltd, TVS Motor Co. Ltd and Sundaram Auto Components Ltd were far lower—at 700 crore over the next three years.

After large investments went to SriCity, Tamil Nadu slowly realized that the act of carving Telangana state out of Andhra Pradesh would make these two states more attractive investment destinations than itself.

Five months ago, Jayalalithaa wrote to Prime Minister Narendra Modi, warning that any area-based concessions extended to Andhra Pradesh and Telangana will lead to a flight of capital and relocation of industries from neighbouring states.

“Such concessions to new industries will render the existing industries, both in neighbouring States and even in the States where such concessions are granted, completely uncompetitive. These are grave risks which cannot be ignored," Jayalalithaa said.

At the time of bifurcation in June, residual Andhra Pradesh was promised special category status for five years, which includes concessions on excise duty to attract industry, said Sasidhar of Krishnapatnam Port Co.

There are very few complaints to be heard about SriCity—other than insufficient residential accommodation and recreational and entertainment activities. There too, SriCity is working on providing more residential apartments—currently it has 101 rooms on a twin-sharing basis and 600 houses for workers and it is in the process of building two-bedroom apartments.

The only area of concern is an anticipated shortage of labour once the larger companies begin operations. Currently, labour is sourced from the neighbouring villages of Tada, Varadaiahpalem, Sullurpeta, Arambakkam and Koduru.

And although the industrial SEZ promises continuous supply of power, factories have to run generators for a couple of hours every day. “Earlier, Tamil Nadu had an advantage in terms of power but with the state reeling under a power crisis, it does not present itself as good alternative," said a company head in SriCity, who did not want to be named.

That may hold some lessons for SriCity as well.

“Yes, SriCity has attracted big names but only time will tell how it will manage with the availability of power supply and labour," said Jai Subramaniam, co-founder of the consultancy Shop 4 Solutions.

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