The boom is over in Detroit. But now India has its own motor city

The car industry in the region around Pune, Maharashtra, is growing apace as manufacturers see the potential for the Indian market to overtake China. By Richard Orange

The tiny Mahadev Temple is beginning to look out of place on its hill above the village of Chakan, 30km from the Indian city of Pune. Just a few years ago, its squat bulbous cupola looked down over an empty plateau of farm and grazing land. Now, more than 2,500 workers swarm over the 2.3sq km of land beneath it. By early next year, the steel and concrete hangars rising from the scrub will have become a Volkswagen plant able to churn out more than 110,000 cars a year.

To the other side is another sprawling 4sq km plot tipped to house a factory for the ultra-low-cost car planned by Indian motorcycle giant Bajaj and France's Renault. And just 10km away in Talegaon, General Motors is putting the finishing touches to a factory which will produce 120,000 cars a year. The Mahadev Temple is now the centrepiece of one of the world's most rapidly industrialising regions.

Dr Thomas Dalhem, who is in charge of setting up the plant for Volkswagen, says: "They speak about the Detroit of India, but I don't like it. If you think back to when the car industry in the US was booming, then you can compare it to Detroit."

The plants announced so far add up to investments of more than £2.5bn. Once they are up and running, this part of Maharashtra alone will be making 1.8 million cars a year – more than Britain.

And these are just the biggest international projects. Next door to Bajaj and Renault, Daimler has an assembly plant for Mercedes. Indian jeep maker Mahindra & Mahindra is planning a £500m plant in the village. The UK's JCB has built a heavy machinery factory in Talegaon.

"We were not ready for this kind of boom," says Chetan Patil, the marketing manager for the Maharashtra Industrial Development Corporation (MIDC). "We lost 1,900 acres of land in two years to these car makers."

The region will employ 25,000 people in car making in two years, he says. That still leaves it far from the 129,000 workers employed by the car industry in Detroit – the historic centre of US car manufacturing (down from 316,300 in 1999).

But it is catching up fast: Every one of the 112 plots MIDC has created here has already been bought and the corporation is now trying to buy 12,500 acres for further expansion. Patil says he is in discussions with four or five other major international companies seeking land for new factories.

In 1998, when Sandesh Tamhane, one of the Bajaj plant's senior managers, first arrived here, there was nothing. "When we came here in 1998, not a single plant was here," he remembers. "The condition of the road was horrible."

Bajaj's 800 staff now produce 1.3 million of its Pulsar, Avenger and Discover motorcycle brands every year. And 35 of the company's suppliers have set up factories in the area.

"This plant was basically created to change the culture at Bajaj Auto. In the 1980s, people weren't conscious about quality: whatever you produced, it used to get sold."

The Chakan plant today is a collection of scrupulously clean white buildings surrounded by lush gardens and fountains, highly automated and steeped in Japanese lean production techniques.

Every other month, Sueo Yamaguchi from the Japanese Institute of Plant Management visits the Bajaj site to assess its progress. "The way one used to work 20 years back and the way we work today has drastically changed," Tamhane says. "Maybe in five to 10 years we will be at par with anywhere abroad."

The acquisition of Jaguar and Land Rover by India's Tata Motors last month has raised the status of Indian car making. And in January, the launch of its £1,300 Tata Nano brought Indian engineers a new reputation for imaginative, frugal design.

The change is already apparent in the settlements nearby. Traditional Maharashtrian village houses are giving way to garishly painted concrete villas.

But Ganesh Yelwande, a local farmer, complains that he has gained little. "People don't like selling to the government, but people are under pressure. They were giving a very low rate for the land. The mediator is getting the benefit."

Even Yelwande admits, though, that new training institutes and schools have come to the region.

And Dalhem sees development every time he drives to work. "What will happen for sure – if you drive between Chakan and Pune you can see it – this will all be fully developed. Everywhere I see new signs saying, 'Here's your chance. Buy a new apartment here.' All of our staff will move here. Schools and supermarkets will come up."

The immediate draw of India for the international car makers is the potential size of its market. Both Volkswagen and GM expect India to overtake China as the world's fastest-growing car market. Sales of passenger cars increased 12.17 per cent to 1.5 million in the year to March 2008. Volkswagen expects India to overtake the UK as the sixth largest world car market by 2010.

Following the Nano, Volkswagen, Renault-Bajaj, GM, Honda and Toyota are all planning to launch small cars suited to Indian consumers' buying ability. Before the Nano, Maruti Suzuki's Maruti 800 had dominated the Indian market for cheap cars for over 20 years.

Pune is well located between the major metropolises of Delhi, Mumbai, Bangalore and Chennai (Madras). It also has around 500,000 students, giving it a vast pool of educated labour. Tamhane says the labour shortages that had started to happen in Chakan are now lessening as new engineering colleges open.

Every year, Bajaj takes on 120 new employees, most with engineering diplomas, to top up its 850-strong workforce, paying as little as £150 a month. "We don't want to retain people," Tamhane explains. "We want them to leave after five to six years. Here we think enthusiasm is more valuable than experience."

The cost of building a factory here is also cheaper than it would be almost anywhere else in the world. Volkswagen is spending £470m setting up its new plant. Much of the machinery is still imported: Dalhem has three ships waiting at Mumbai loaded with equipment and he just received the first shipment of containers on site – treatment baths for the paint shop from Germany's Dürr.

But huge savings are made on manpower – workers on construction sites in India are paid about £1.30 a day. As a result, major car makers are considering using their India plants for export, both for finished cars and components.

GM has said it wants to make India an export hub for small and mid-sized cars destined to be sold in other emerging markets. Hyundai plans to make India the sole production centre for its new I20 model, even though it will not be sold domestically.

The Pune region is well-positioned for exporters – linked by the the six-lane Mumbai-Pune Expressway to the Jawaharlal Nehru Port, one of India's largest and most efficient.