India leads the market in offshored back-office services, but as a manufacturing center it lags behind China, Thailand, and the rest of Asia (Exhibit 1). The reasons are well documented: multinational companies operating in India must overcome erratic electricity supplies, poor roads, and gridlocked seaports and airports while contending with government policies that discourage hiring and hold back domestic demand for goods in many sectors.

Such obstacles can be considerable, but they haven't stopped some multinational manufacturers from setting up shop in India. The companies that have done so include ABB, Honeywell, and Siemens in electrical and electronic products; Cummins, DaimlerChrysler, and Toyota Motor in auto components and engineering; and Degussa as well as Rohm and Hass in specialty chemicals. Moreover, it is no accident that these particular companies have chosen India. All operate in skill-intensive industries requiring advanced technical expertise—areas in which India is likely to become a primary sourcing and manufacturing base.

Indeed, McKinsey research supports the view that the next wave of global outsourcing in manufacturing will take place in just these kinds of industries. In addition to auto components and assembly, they include fabricated metal...