Leveraging China & India for Global Competitiveness: Theme 4

November 22, 2010

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.

Conclusions

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

THEME 2: Differentiated and complementary supply profiles create “islands of opportunity” for leveraging unique capabilities of the resources available in each country

THEME 3: Leading global players seek to leverage horizontal capabilities resident in China or India to achieve competitive advantage

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.

Leveraging China & India for Global Competitiveness: Theme 2

November 6, 2010

by Glenn Hodges and Bill Russo

In our initial posting, we introduced four clear China-India themes which provide insight into the nature of the challenges and opportunities for creating value in and through these 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 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[1]. China meanwhile had 370,000 exports in 2009[2].

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.

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[1] Society of Indian Automobile Manufacturers

[2] Chinese Association of Automobile Manufacturers

Leveraging China & India for Global Competitiveness: Theme 1

October 31, 2010

by Glenn Hodges and Bill Russo

In our last posting, we introduced four clear China-India themes which provide insight into the nature of the challenges and opportunities for creating value in and through these 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.

Background On The Automotive Sector In China & India

As explained in our prior posting, we chose to focus on the automotive sector. Rapidly moving from a low cost source of supply for parts and components, China has become a global automotive powerhouse with increasing activity along the entire value chain. As a car market, China is now unsurpassed as it eclipsed the US in sales for the first time in 2009. The China Association of Automobile Manufacturers (CAAM) projected in September 2010 that China will achieve 25 million vehicle sales by 2015. In 2009, China’s auto market stood at 13.64 million units, and is expected to surpass 17 million units in 2010. These projections lead to the same conclusion: that China will be far and away the largest vehicle market for the foreseeable future.

India’s automotive story is very compelling in its own right. India’s already substantial vehicle market is rapidly growing, and the country has quickly becoming a major center for the development and manufacture of A and B segment vehicles. According to Global Insight, sales of just over 2 million units in 2009 are projected to increase to over 2.5 million units in 2010 and 4.2 million units by 2015. As will be explained, a combination of economic and non-economic factors account for the difference in vehicle sales between India and China, and the markets have rather significant pricing potentials in certain segments.

THEME 1: Differentiated demand profiles across markets provide limited opportunity for leveraging a common product portfolio in both markets

This was a consistent finding across all the companies examined and at both a vehicle level and at a part and component level. In fact, demand profiles across China and India were radically different with much lower volume price points found in the Indian market. This finding has significant implications for both OEMs and suppliers. Companies hoping to achieve scale across China and India with common parts and components or vehicles will find limited opportunity to do so, though there are exceptions at the top and bottom ends of the market.

Based on income differentials alone, vehicle sales across China and India would be expected to be more comparable than they have been. Analysis of socio-economic data suggests that approximately one half of the difference in the Chinese and Indian personal vehicle markets can be explained by economic factors. Of six socio-economic classes, only the top four exhibit high levels of vehicle purchases[1]. There are slightly greater than three times the number of Chinese households in these socio-economic categories than Indian households. However, personal vehicle sales in China are more than six times those in India. Fuel cost differentials across China and India could also play a small role in vehicle sales and a significant role in vehicle size across the two countries given that the price is 50% higher in dollar terms in India than in China[2]. This leads to the conclusion that while the varied demand profiles are strongly impacted by economic factors, they are more likely the result of more than economic differences alone.

A non-economic factor impacting differentiated vehicle demand profiles is the nature of the Chinese and Indian vehicle infrastructures. Although there are large rural areas within China where roads remain in poor condition, there has been a dramatic improvement in the vehicle infrastructure in Tier 1 and 2 cities. In addition, China now has over 65,000 kilometers of mostly new expressway for drivers to enjoy. In contrast, the vast majority of Indian roads remain in poor condition, including those in major cities. Also, India has only 200 kilometers of expressways to facilitate inter-city travel[3]. The net result is lower four-wheel personal vehicle utility for Indian consumers relative to Chinese consumers.

Taken collectively, both the economic and non-economic factors result in highly differentiated demand profiles for China and India. On average, Chinese purchase more vehicles per capita than Indians and at higher average price-points. The Chinese also purchase larger vehicles on average than Indians. Based on global Insight data, more than 60% of light vehicles purchased in India are in the A & B segments as compared to around 15% in China. In addition, a notably larger proportion of SUVs are sold in India than in China to help navigate the poor road infrastructure. Even within the same vehicle classes, Indians are spending less than Chinese for vehicles.

Over time, there is potential for vehicle demand profiles to become more similar as Indian incomes rise and the road infrastructure improves, and as Chinese government policy creates incentives for Chinese to purchase a larger proportion of A&B segment vehicles.

In our next posting, we will address THEME 2: Differentiated and complementary supply profiles create “islands of opportunity” for leveraging unique capabilities of the resources available in each country.

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[1] Canback Dangel data and Booz & Co. analysis

[2] www.nationmaster.com

[3] National Highways Authority of India

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Leveraging China & India for Global Competitiveness: An Introduction

October 23, 2010

By Glenn Hodges and Bill Russo

The economies of the People’s Republic of China and the Republic of

India have captured a great deal of attention among Multi-National

Corporations (MNCs) due to their rapid growth. According to the

projections of the World Bank, China will overtake Japan as the second

largest economy in the world in 2010, while India is expected to rank

eleventh. Near-term projections by the Organization for Economic

Co-operation and Development (OECD) anticipate annual growth for China

averaging over 10% through 2011, which will make it the world’s second

largest economy by 2010. Growth rates in India of over 8% are also expected.

Long-term projections for both these economies anticipate robust growth

through 2040, with China becoming the world’s largest economy by 2030.

These large, rapidly growing economies provide MNCs with substantial

long-term growth potential. This report summarizes how companies

are attempting to leverage their business strategies across China and India.

In particular, we were interested in identifying the ways in which MNCs are

co-leveraging China and India to achieve supply-side and demand- side

competitive advantage.

China and India represent the largest of what are commonly referred to

as the “BRIC group” of countries. Together with Brazil and Russia, these

four countries are typically regarded as the key emerging markets in

terms of population size, economic strength and political influence. The

BRIC group is in fact an artificial construct created by Goldman Sachs in

2003 as more of a tool for marketing the importance of these economies

to the investment banking community. The label tends to ignore the

rather dramatic socio-economic and geo-political differences among the

members of the “group”.

The purpose of our research was motivated in part because of clear

supply-side and demand-side differences across the markets, and was not

an attempt to examine the validity of lumping BRIC countries together

based on the idea that they are similar and can be approached in a similar

manner. On the contrary, this study points to the significance of the

differences across these countries that can in fact be leveraged in their

own right.

On the supply side, both China and India have large low-cost labor

supplies, are in close geographic proximity to each other. This can

potentially facilitate the bi-directional flow of resources (people and

materials) with unique and differentiated capabilities. These differentiated

skill sets that exist in China and India are indeed a potential source of

co-leveraging, but to date, little co-leveraging has actually taken place.

Instead, MNCs have a clear recognition of country-specific comparative

advantages, but are utilizing these skills within a broader network of

capabilities distributed across multiple countries rather than across

China and India specifically.

On the demand side, both countries are rapidly growing markets with

large consumer bases and quickly expanding middle classes, which are

dramatically increasing their income and purchasing power. The

collective purchasing power of these large and growing middle classes

will result in a shift of the epicenter of many value chain elements for

numerous industries from developed markets to China and India. Global

companies need to recognize this fact and pursue the opportunities

created from serving these markets in order to realize their future growth

potential. What we discovered were highly differentiated product markets

which significantly limit, but do not eliminate, the opportunity to present

a similar product portfolio to both countries.

In sum, China-India-specific co-leveraging has been limited by these

countries’ unique demand profiles, and the perceived higher utility of

leveraging China’s and India’s supply profiles in broader multi-country

capability networks to support global product development and

manufacturing efforts.

While cases were examined across several industries, we chose

to focus primarily on the automotive sector. There are three reasons

for this. First, the automotive sector is the largest manufacturing

sector in both China and India. According to the Society of Indian

Automotive Manufacturers (SIAM) and the Chinese Association of

Automobile Manufacturers (CAAM), the industry comprises over 20%

of manufacturing GDP in both countries. Second, the heavy involvement

of numerous automotive MNCs in both markets made it an attractive

industry to explore for insights. This provides an opportunity to study

actions within and across China and India, as well as to examine using

these markets as a platform for global expansion. Third, findings for the

automotive sector are generally relevant to most other manufacturing

sectors, especially durable consumer goods.

Based on this research, we have identified four emerging themes around

leveraging China and India for global competitiveness:

1. Differentiated demand profiles across markets provide limited

opportunity for leveraging a common product portfolio in both

markets.

2. Differentiated and complementary supply profiles create “islands of

opportunity” for leveraging unique capabilities of the resources

available in each country.

3. Leading global players seek to leverage horizontal capabilities

resident in China or India to achieve a competitive advantage.

4. New pathways to innovation are made possible by leveraging core

strengths derived from the geographies and capabilities of local

partners.

We will elaborate on each of these themes in our future postings.

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