THEME 2: Differentiated and complementary supply profiles create “islands of opportunity” for leveraging unique capabilities of the resources available in each country.
China and India have highly differentiated and complementary supply profiles. These differences are the result of historical regulatory forces, which created “islands of opportunity” in otherwise restricted markets. In China, the government created special economic zones (SEZ), the primary purpose of which was to attract assembly operations. The SEZs, along with China’s auto industrial policy, drove dramatic increases in both assembly and component manufacturing resulting in large scale, efficient operations. In contrast, India’s manufacturing scale was intentionally limited to reflect the goals of internal self-sufficiency laid down by the Gandhi and Nehru governments. Another key government policy factor has been the different approaches to developing road, rail and electrical infrastructures. China has invested significantly more than India and now has an infrastructure, which strongly supports logistics and transportation of manufactured goods. As a result, China has world-class manufacturing and India lacks both the scale and infrastructure to strongly support efficient distribution of manufactured goods.
In India, manufacturing was heavily regulated by the so-called “license raj”, which determined what companies could produce and in what quantities. In contrast, services were largely ignored by the regulators and left unregulated. This provided Indian entrepreneurs, as well as foreign MNCs, with an opportunity to capitalize on India’s strong educational system and English language ability to provide call centers, IT and engineering services as well as other back-office services for MNCs outside India. As a result, India has become the global epicenter for the outsourcing of these services.
Ironically, government policies in India have positioned it to become a major vehicle exporter, while China’s policies have placed it in a weaker position to do so despite its many advantages in manufacturing. In China, obtaining a duty free export license is more complex, and China’s automotive policies often require a local partner to be involved. Some MNCs such as Honda have gone as far as creating a separate facility for export operations. This has limited the participation of MNCs in exporting complete vehicles from China. In contrast, the Indian government has clearly stated its desire for India to become the global hub for the development, manufacture and export of A & B segment vehicles. Hyundai is an example of an OEM that has strongly augmented its local Indian market sales of A & B segment products with vehicles assembled in India for export. Hyundai was the driving force behind India’s 441,000 vehicle exports in 2009 with 285,000 vehicles exported. China meanwhile had 370,000 exports in 2009.
Government policies in both China and India can be expected to reduce the value chain differentials over time. China is investing large sums in engineering education as well as major engineering efforts (e.g. development of EV technologies and infrastructure). This is an area where Indian companies’ know-how and experience could benefit China’s development. At the same time, India is investing more into its physical infrastructure, which will increase its capacity to support large-scale manufacturing. Chinese companies with experience and know-how gained from China’s massive infrastructure development effort could greatly contribute to India’s efforts in this area.
In our next posting, we will address THEME 3: Leading global players seek to leverage horizontal capabilities resident in China or India to achieve competitive advantage.