by Glenn Hodges and Bill Russo
In this series of postings, we have introduced four clear themes which provide insight into the nature of the challenges and opportunities for creating value in and through the China and India markets. Each of these themes stands on its own to provide insight for companies looking to maximize value from China and India. The real value of these themes, however, is that collectively they demarcate a range of options for maximizing value within China and India as well as globally.
THEME 4: New pathways to innovation are made possible by leveraging core strengths derived from the geographies and capabilities of local partners
By allocating engineering resources across a limited number of developing and emerging markets, Multi-National Corporations (MNCs) can unlock new pathways to innovation. Engineering resource allocation decisions are being determined by a combination of national comparative advantage and a desire to achieve scale in key markets. We observed “hub and spoke” product development systems in which engineering resources were coordinated through a central home country hub and engineering tasks were allocated to various countries (including the home market) largely in line with their national comparative advantages. However, the desire to develop certain markets’ sales potential also played a role in determining engineering resource allocation. A good example of this approach can be seen with a major American construction equipment manufacturer where three different levels of engineering capabilities are allocated across various countries (spokes). The US is the center for 90% of the highest level (Core) engineering work, while China is being developed to handle the remaining 10% of Core engineering. China was selected for this highest level of engineering capability development over India, despite India’s comparative advantage relative to China in this area, due to its importance as a major market.
Another model with some similarities to that being deployed by the construction equipment manufacturer can be seen at a European electrical equipment maker. At this company, product development work done on each product is allocated across a global R&D network spanning four countries (France, Mexico, China and India) in line with the capabilities resident in each location. India is a center for software development and systems engineering, whereas China’s focus is on electro-mechanical engineering. Simultaneously, localized development processes are utilized through one of their Chinese JVs to develop low-cost local market products, which are also sold internationally through the global distribution network.
A third model has been deployed by an airframe manufacturer, which has allocated engineering resources primarily based on current market importance and future market potential. For this reason, its product development resources are located in the US, Russia, China and India. Unlike the construction equipment model in which a certain level of engineering is being conducted in a given country, this company has a specific portion of a jet being developed in each country. This requires a more complete set of engineering capabilities to be resident in that country. In the case of China, engineering resources are also being outsourced and brought in from other countries. Approximately 15% of the engineering being done in China has been outsourced and is largely being conducted by Indian nationals working in China at the Chinese JV headquarters.
In conclusion, it is clear that companies are primarily leveraging the differentiated skill sets in China and India as part of global efforts rather than at a localized China-India level. The ultimate expression of country / company capability leveraging can be seen in JVs between developed market MNCs and their local market partners when they focus their efforts beyond the local market. In these cases, developed MNC technology, global distribution and brand strength combined with local market partner low-cost product development and manufacturing can provide a powerful platform for global success.
It is also worth noting the relevance of our findings for an important, broader automotive theme. A major theme in the automotive industry, and manufacturing in general, has been year-over-year cost reductions, which have been driven in large part through low cost country sourcing and assembly. This study points to the fact that new trade regimes have opened previously unavailable arbitrage opportunities across the entire value chain. The existence of these opportunities is already providing cutting-edge companies with the ability to lower their cost structures, enhance their innovation capability and generate increased revenue and profit. At the same time, those firms that do not develop the capability to exploit these opportunities will find themselves at an increasing disadvantage in terms of cost and innovation to those that do. While this study focused on China and India, similar opportunities across other rapidly emerging markets with liberalized trade regimes should be explored by companies looking for competitive advantage.
LINK to the Introduction
Links to the previous themes:
THEME 1: Differentiated demand profiles across markets provide limited opportunity for leveraging a common product portfolio in both markets
About the authors:
Dr. Glenn Hodges is a Professor of Management & International Business at Walsh College in Troy, Michigan. He has over 20 years of industry experience, having served most recently as an executive responsible for strategic planning with Chrysler LLC.
Bill Russo is the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.