The New Generation

India's rise as an economic power is known the world over, thanks largely to the global ambitions of its biggest corporations. But names like Infosys, Tata and Reliance aren't necessarily as important to India's future as modest firms like Acme Tele Power Ltd. It sounds a bit like a store you might find on Main Street in Peoria, but one look at the numbers belies this association. Acme has a profit margin of 33 percent on 2006 revenues of $300 million, which have risen more than 3,000 percent in four years. Acme makes energy-efficient sheds that protect cell-phone relay stations, but its 32-year-old founder Manoj Upadhyay is plowing most of that profit into R D, and files for a new patent about once a month. "He is poised to grow exponentially," says Sandeep Ghosh, director of commercial banking for Citigroup India. "If only one of Upadhyay's new ideas comes off, it's going to be fabulous."

Acme is part of a new wave of small, entrepreneurial firms that are rising in the wake of the giants that first put India Inc. on the map. Whereas the first wave built global software-development and business-process outsourcing houses, the second is made of small and medium-size manufacturing companies in autos, pharmaceuticals and other sectors. Unlike the big conglomerates, these are not old family enterprises that can still capitalize on longstanding political connections. The newcomers are independent entrepreneurs who have learned to work around India's infamous bureaucracy. Many started out supplying larger Indian companies, and flourished as India's growth took off on the heels of free-market reforms over the last decade. "It's an incredible segment that is really driving the Indian economy in a big way," says Sanjay Nayar, Citigroup India's CEO.

To describe these smaller manufacturers as bullish hardly does justice to the energy they are bringing to their markets. While the national economy has been growing at 8 percent a year, manufacturing is growing at about 12 percent, small and medium-size manufacturers are growing at about 15 percent and the small-company stars like Acme are in the triple digits. Upadhyay says his ambition is "to change the world." He boasts that no company is keeping up with Acme in its specialty. He claims, for instance, to have invented a maintenance-free air-conditioning and refrigeration system that consumes one sixth as much power as a conventional unit because it does not have an energy-hungry compressor.

These second-wave firms are hard to define. Most of the hottest new companies seem to have at least several hundred employees, $50 million in revenue, a position at or near the top in their section of the Indian market and a desire to expand globally. A few are already well established abroad. Everest Kanto Cylinder Ltd. has taken less than a decade to become the world's second largest maker of cylinders for high-pressure, compressed natural gas. Chairman P. K. Khurana says he can't expand fast enough, domestically or internationally, to keep pace with demand.

A salient characteristic of this industrial class is its lack of debt. Whereas bank loans and foreign credit have fueled much of Asia's national development, India's small firms are raising money from private banks and stock sales to the public. Acme has no debt, even though banks and venture-capital firms are now constantly plying its chairman with offers. To keep their independence, second-wave entrepreneurs are plowing money into design and R D earlier than many young firms, which distinguishes them from their Asian forebears and current Chinese rivals.

Self-sufficiency has not always been a signal trait of small Indian companies. Mohandas K. Gandhi was skeptical of large firms, and made sure the nation's first prime minister after independence, Jawaharlal Nehru, championed the village loom and the individual shoemaker as a bulwark against corporate colonialism. New Delhi drew up lists of thousands of items, from pens to rubber stamps, that could be produced only by small manufacturers. Those uneconomical rules were gradually lifted, and then scrapped after free-market reform began in 1991. Since India has no bankruptcy laws, many of those defunct businessmen went into hiding from bill collectors. The lesson for many was to avoid entangling alliances with creditors.

Under the old regime, small companies that tried to grow big ran into the full force of the Indian bureaucracy. Survivors of that period tell horror stories of 180 percent tariffs and limits as low as $8 per day on what executives could take for foreign business trips. Arvind Kapur, the managing director of Rico Auto Industries Ltd., recalls that when he was a kid in the 1950s, New Delhi threatened to prosecute his father every time his small sewing-machine company produced too many machines. Sudhir Dhingra, founder and chairman of Orient Craft, a rising apparel exporter, recalls being summoned in the middle of the night by the export Enforcement Directorate to explain paperwork. "Of course, all they wanted was to get their palms greased," he says.

Today's challenges are more strategic than bureaucratic. Dhingra says many smaller Indian firms have learned the hard way what it means to "add value." In the 1970s Orient Craft was doing a boom business in Nehru shirts when the fad suddenly ended. Dhingra survived the crash by moving aggressively into design, and he now has an office in New York where his designers work with customers to create next season's fashions. It makes clothes for some of America's top brand names--Ralph Lauren, Banana Republic, Tommy Hilfiger, Nike, Levi's--and is now India's second largest garment exporter, with an estimated turnover of some $180 million in 2006. "We don't just make apparel, we design it," says Dhingra, who started the company with $300 he borrowed from his father. "India's creative edge is huge."

In the case of Rico, Kapur has managed to transform his father's firm into a major auto-parts manufacturer. He pushed orders for computer-controlled Japanese die-casting and tooling machines through the reluctant bureaucracy in the late 1980s. They arrived just in time for Rico to exploit the lifting of market barriers in the early 1990s. Rico now makes parts for both rapidly expanding domestic automakers, such as Maruti Suzuki and Tata, and international brands like Ford, GM, Honda, Jaguar, Volvo and Land Rover. Kapur says exports now represent 12 percent of company revenues, but he expects that share to rise to 50 percent in a few years. "We used to run after customers," says Kapur. "Now we are on the radar screens of every major automaker."

The hottest second-wave firms are already looking beyond what has been India's traditional strength: cheap labor. They know that relentless competition (from countries like Bangladesh, Vietnam and Mexico) makes labor alone a weak base. They talk instead about harnessing India's engineering, scientific and managerial skills to stay ahead of the pack. "This success is not about sweatshops but about world-class engineering, R D, designing, machining and tooling," says Citigroup's Ghosh.

The medium-size pharmaceutical companies are moving away from bulk production of ingredients for foreign pharmaceutical giants and putting more emphasis on R D. Hikal, which had nearly $54 million in turnover last year and is growing at a 25 percent annual pace, is building a modern $10 million research facility in Pune where it will be doing contract research for several major international drug companies. "The multinationals say to us, 'Here's the idea--now help us develop it and let's see if it will work'," says managing drector Jai Hiremath.

The next move is to employ China. Hikal, based in Mumbai, runs five manufacturing plants employing 700 people, many of them Indian Ph.D.s and senior managers who have been lured back from the United States. Exports now make up 75 percent of Hikal's revenue, and Hiremath's plan is to marry Hikal's R D expertise to China's manufacturing clout. Earlier this year Hikal bought a 10 percent equity stake in Sino-Chem, a major Chinese pharmaceutical firm. "We will do the high-end work and the Chinese will do the bulk," he says.

In fact, the newest tactical weapon of this class is the global deal. According to Citigroup India, Indian enterprises have acquired more companies abroad in the past 18 months than foreign corporations have bought Indian businesses. Rico is planning to acquire a Thai and a Turkish auto-parts maker. Orient Craft bought a failing Levi's plant in Spain for $15 million, dismantled it and reassembled it at its Gurgaon plant. Everest Kanto already has a cylinder plant in Dubai and is building a $50 million plant in China. Iran and Pakistan, two of its best customers, are pestering the company to build factories in their countries. The company's stock, which went public last December, has tripled in value to more than $10 a share in the past year.

This is heady stuff, but second-wave entrepreneurs are sobered by the knowledge that they are still playing catch-up with China. India's total textile-export revenues will reach only about $8.7 billion in 2006, compared with China's $71 billion. One key, says Orient Craft's Dhingra, is to match China's increasingly modern infrastructure. Since New Delhi is far less likely than Beijing to direct such projects, entrepreneurs are stepping in. Dhingra, for instance, is building a $200 million, 262 hectares Special Economic Zone outside New Delhi that will house 100 garment manufacturers, including an Orient Craft factory, and a training and R D facility. "This will help keep us ahead of the game," he says. At least in the race with China.