Asia Outsourcing: China Vs. India - Amazon Web Services

Asia Outsourcing:China vIn today’s global economy, companies arelocation searches to weigh the relative advantages14GLOBAL DATELINE I SPRING2005

vs. Indiaincreasingly broadening corporateand disadvantages of various countries.By Bob HessCUSHMAN&WAKEFIELD15

There are many reasons China andIndia appear on the radar screens ofso many companies these days. Thetwo countries have a combined population of 2.4 billion, growing domesticconsumer markets, and enjoy relativelylow costs of doing business— compelling opportunities for growth,market share, and cost competitiveness.Foreign direct investment (FDI) foreach country grew by more than1,500% between 1990 and 2003.Both economies are starting to produce higher value products and developnetworks to maintain competitiveadvantages beyond mere cost. In addition, these countries are emerging asmarkets for consumer products.China, for example, is now one ofthe largest consumer electronics markets and recently surpassed the U.S. inits use of mobile phones. By 2030 it islikely that China and India’s combinedpurchasing power will be five timesgreater than that of the U.S. today,according to a 2004 UBS report.approaches reflect the most basic difference between the two: India is a democracy and China remains state run.China is taking an “outside in”approach, while India is growing moreorganically. In 2003, China received 53.5 billion in FDI, more than 10times that of India ( 4.3 billion). Inaggressively seeking outside investment, China has focused less on encouraging domestic entrepreneurship.Today, nearly 400 of the Fortune 500firms have invested in more than2,200 projects in China. Facilitiesinclude computer electronics, telecommunication equipment, pharmaceuticals, petrochemicals, and powergenerating equipment.India has created a more nurturingenvironment for its own entrepreneurs,and has a number of homegrown companies that can compete with the bestWestern firms. As a result, India is typically more service oriented and enjoysan advantage over China in talent-driven and private-enterprise activities,economy without bringing it to a halt.In October, the government raised itsone-year lending rate for the first timein nine years, from 5.31% to 5.58%, andis under G-7 pressure to allow its currency to float. The government is particularly wary of lending money tooverheated industries such as buildingconstruction and automakers.3. Wage GrowthWhile both countries offer less expensive labor costs than the U.S. or Europe,this cost advantage may erode as wagesrise. Rural wages in China haveincreased 14% over the past year. Someindustries already have experienced ashortage in migrant workers, whichhad seemed unlimited over the past twodecades. In the last three years, wageinflation in executive and professionaloccupations has been growing at atamer 6% to 8% per year, according toHewitt Associates.Wage inflation in India was about13% to 14% last year in softwarein” approach whileIndia is growing more organically.In 2003, China received 53.5 billion in FDI,more than10 times that of India.The real estate market is also hot inboth countries. It’s not unusual forpotential tenants to inspect specificsites in hundreds of EconomicDevelopment Zones along the coastalregion three or four times a day, sevendays a week. Beyond these similarities,the decision gets more complex.The Differences Makethe DifferenceEach country has its own uniqueadvantages and challenges, so corporatedecision makers must have the discipline to gather and sift through variedand inconsistent information.1. Government PolicyChina opened its doors to FDI in 1978;India in 1991. The two countries,though, are taking very different pathsto developing their economies. The16GLOBAL DATELINE I SPRING2005such as software and biotechnology.Despite being friendly to entrepreneurs, India still has a high level ofbureaucracy, regulation, and poor execution for infrastructure development.But after the upheaval following thelast national election, there are indications the government is ready to loosenthe reins. India’s Union Cabinet, forexample, recently amended a law toallow companies with up to 1,000employees to close or reorganize without government permission. India’slegal and judicial systems are generallymore established than China’s.2. Monetary PolicyWhile both countries are concernedwith inflation, India’s restrained monetary expansion has managed to keepinflation at approximately 2% to 3%.China is trying to control its boomingdevelopment and IT solutions occupations. The ratio between the U.S. andmainland China wage rates for product engineers is about 10:1, while theratio for a software developer in theU.S. versus India is about 12:1, according to a 2004 McKinsey & Companyworking paper.This cost advantage will not last indefinitely, and companies should be waryabout placing too much emphasis on thisfactor in their decision-making process.Instead, firms should build longer-termadvantages by cultivating the distinctiveskills found in both countries and mitigate risks inherent in each one.Before a company makes a decision,other government policy questionsneed to be addressed. Here are justthree examples: Does the competitiveadvantage of the operation rest on protection of intellectual property? ArePHOTO (PREVIOUS PAGE LEFT) BY FAYAZ KABLI/REUTERS/CORBIS; PHOTO (PREVIOUS PAGE RIGHT) BY SAJJAD HUSSAIN/AFP/GETTY IMAGES China is taking a more “outside

Export CompetitivenessWorld rankRevealed comparative advantageINDUSTRIESChinaIndiaChinaIndiaLeather 34.5212620.081160Miscellaneous manufacturing1.590.61856Electronic components1.040.232264Basic manufactures1.011.295841Fresh food0.772.5512784Processed food0.570.7112106Non-electronic machinery0.520.323959Chemicals0.461.077525Wood t equipment0.25.25256IT & consumer electronicsValue greater than 1 indicates specializationRank of 1 is highest specializationSOURCE: ITC (2002), COMTRADE OF UNSDthere cost advantages in manufacturing/distribution? If cost advantagewere a key driver, how much wouldinflation have to increase to diminishthose initial advantages?ing FDI in manufacturing research anddevelopment. The chart above indicatesChina and India’s competitive positionsin a variety of export industries.4. ExportsRelated IssuesBig-picture factors are an importantstarting point, but much of the decisionmaking will come down to standardreal estate and site-selection issues,including infrastructure quality, laborforce availability, and skills.China possesses a generally superiorphysical infrastructure compared toIndia. The percentage of paved road isconsiderably higher in China, makingthe cost of shipping lower. Real estate inChina is also generally newer than inIndia, so a Class A building in Indiamay be similar in quality to a Class Bbuilding in China.India, however, is not standing still.In November 2004, India announced a 11.1 billion investment to upgrade 30of the nation’s airports by 2008. China,however, will continue to outpace Indiaover the next decade in attractingindustries that require dependable utilities, roads, and ports.Both China and India have healthyexport markets and are competitivein a number of industries. Thismay allow new entrants to take advantage of existing supplier andsupport networks, as well as existinginfrastructure.China’s trade-friendly policies havehelped it grow a sizable export sector,accounting for 29% of GDP in 2002, upfrom 18% in 1990. For India, exportstotal 15% of GDP for 2002, more thandouble its 1990 total.Many of China’s exports are in thehigh–tech industries. The country isthe biggest producer of personal computers in the world, and at least 85million Chinese have Internet access.China also ranks eighth in the worldin exporting labor-intensive products,such as toys, baby carriages, games, andsports equipment.India is a leader in software, attract-5. Real Estate and6. Raw MaterialsFor industrial operations, access to rawmaterials is critical. Industries locatedin both countries are constantly scanning for local sourcing alternatives.Look for domestic sourcing of rawmaterials to be a significant topic forboth countries as domestic demandcontinues to increase.Easy inbound/outbound access isalso critical for the smooth function ofthe supply chain and can be an important factor in location analysis.7. Labor Force SkillsLabor force characteristics are also akey driver. China has developed greattalent in the area of semiconductordesign for consumer electronics. Eachyear it graduates five times moreengineers than the U.S.China is also perceived to have aseemingly endless supply of rural laborwilling to work in low-skilled manufacturing jobs for relatively low wages.Migration to cities and increasing competition among businesses appears to beeroding this advantage.Indians generally have betterEnglish skills than Chinese. ThisCUSHMAN&WAKEFIELD17