SOMEDAY YOU MAY REAP WHAT YOU SOW
ASIA AND DELOCATION
ADVANTAGES FOR WESTERN COMPANIES
Arun Maira
The Boston Consulting Group
Barcelona
22 Nov '04
-0-
THREE INEVITABILITIES
Two Opportunities
Global Competition
Technology
Demographics
Pressure on Economics
Digitisation and Connectivity
Ageing and Booming
Deconstruction of
Business Value
Chains
Emerging
Sources of
Competitive
Advantage
-1-
PRESSURES ON ECONOMICS IN DEVELOPED COUNTRIES
Deconstruction of Business Value Chains
Intense competition between firms in developed countries in their own
developed country markets
Competition between firms for customers in developing countries
Emerging of new competitors from developing countries
Pressure on prices and margins
-2-
Case Study: Automobiles
INCREASED COMPETITION IN DEVELOPED MARKETS REQUIRES
INCREASING INVESTMENTS IN NEW CAR MODELS
Average life of new models (Europe)
Life (years)
16
14
Increasing models and decreasing
sales per model (US Market)
Number of vehicle models(1)
1500
14
1050
1000
12
550
500
9.7
9.2
10
8
0
8.0
7.5
6
7.5
7.4
9.1
7.2
7.2
8.0
1980
6.7
4.5
6.0
4
Avg. total sales per model(2)
5.1
7.2
1999
5.1
4.6
30000
20500
15000
20000
2
10000
0
0
80
82
84
86
88
90 92 94 96
Year of introduction
(1) Total number of models of cars and light trucks
(2) Average total annual sales per model
Source: Automotive News
1980
1999
-3-
Case Study: Automobiles
ELECTRONIC AND SOFTWARE APPLICATIONS ARE INCREASING
IN AUTO INDUSTRY
Growth in Automotive Electronics
Market ($Bn)
Sales ($ Bn)
CAGR%
100
83
75
50
Overall
8.4%
Interior
10%
Body
37
7%
Chassis
23%
25
Power
train
0
1995
Source: EIU
Increasing importance of
electronics & IT in auto industry
2005
4%
Automotive electronics as much
as 30-40% of cost of new model
cars
IT applications are rapidly
increasing in automotive
business processes
•Product design
•Manufacturing
•Supply chain management
•Customer relationship
management
-4-
Case Study: Automobiles
INDIAN AUTOMOBILE INDUSTRY HAS DEVELOPED CAPABILITIES
UP THE VALUE CHAIN
Global average development cost of new car > $600m
R&D/Product
development
Tata Indica- $350 m
M & M Scorpio- $150 m
Very high quality: 1 Japan Quality Medal and 5 Deming Prize
Winners- largest number outside Japan
Component
manufacture
Exports growing 30% per annum; 80% to 'developed' countries
Low capital intensity, BEP <100k units/ annum
BEP is 150-200k units/ annum)
Assembly
(Global
Total Manufacturing Cost 20- 30 % less than USA
-5-
Case Study: Healthcare and Pharma
COSTS OF MEDICINES AND HEALTHCARE SOARING
IN DEVELOPED COUNTRIES
1.8
1.6
CAGR UK: 9.2%
CAGR Ger: 6.2%
Total USA Healthcare Spending
US$ Trillion
US$(‘000s)
Annual Household Expenditure on Healthcare
1.4
1.2
1.8
1.4
1
1.2
0.8
1
0.6
0.8
0.4
0.6
0.2
0.4
0
0.2
2001
2002
UK
Source: EIU, Literature Review
2003
Germany
2004
(EST)
CAGR: 10.9%
1.6
0
2000
2001
2002
-6-
Case Study: Healthcare and Pharma
R&D COSTS & PRODUCTIVITY OF US PHARMA PROBLEMATIC
-7-
Case Study: Healthcare and Pharma
LOW COST, HIGH QUALITY MEDICAL CAPABILITIES
AVAILABLE IN INDIA
Healthcare Cost Differential
Cost Saving
Quality a Key Factor
850
Gall Bladder
Transplant
80%
8000
4400
Heart Surgery
91.2%
50000
Bone Marrow
Transplant
30000
400000
92.5%
600
Salary: Nurse
50000
98.8%
4000
Salary: Doctor
180000
0
40000
20000
USA
Source: IBEF, Literature Review
60000
80000
US$
97.7%
Not just cost
advantage:
•The success rate
in the 43,000
cardiac surgeries
till 2002 was 98.5%
•India's success in
110 bone marrow
transplants is 80%
India
-8-
Case Study: Healthcare and Pharma
COST EFFECTIVE AND GOOD QUALITY DRUG
DEVELOPMENT AND MANUFACTURE
DEVELOPMENT
(Example: Disease- Psoriasis)
USFDA Approved Plants Outside USA
DRUGS IN USA
• Cost of developmenthundreds of million dollars
India
61
Italy
60
• Amgen antibody- $10.00/
dose
Spain
• Cost of treatment- $20,000
China
INDIAN DRUG
• Time for development- 3
years
• Cost of development- $4 m!
• Cost of treatment- $50 !!
25
22
Taiwan
9
Israel
7
Hungary
5
0
20
40
60
80
-9-
Case Study: The Emergence of India
EMERGING SOURCES OF COMPETITIVE ADVANTAGE
A potent combination of
1.
IT capability
2.
Favorable demographics
3.
Domain knowledge in many industries.
OPPORTUNITIES FOR WESTERN
COMPANIES IN MANY FIELDS
- 10 -
INDIA OFFERS EXCEPTIONAL VALUE AT SIGNIFICANT
COST ADVANTAGES IN IT
Comparative salaries of an IT engineer
$ pa
Comparative salaries of an MBA
$$pa
pa
125,000
100,000
80,000
100,000
75,000
75,000
50,000
50,000
50,000
25,000
25,000
7,500
5,000
0
0
India
US
India
US
55% OF THE FIRMS IN THE WORLD WITH SW CMM LEVEL 5
CERTIFICATION ARE INDIAN !
Source: Literature Survey
- 11 -
INDIA HAS A LARGE RESERVOIR OF HUMAN RESOURCES
Reaping What You Sow
Potential surplus population in working age group (2020)
Ireland
Russia
0M
U.K.
-2M
-17M
-3M
France
U.S.
Czech
Italy
2M
2M
-2M
Turkey
Israel
4M
5M
0M
Egypt
Mexico
-6
M
-1M Republic
Iraq
Iran
3M
China
Pakistan
19
M
47
M
India
-10
M
-9M
Japan
7
M
Bangladesh
5M
Vietnam
4M
Philippines
Malaysia
1M
5M
3M
Indonesia
Brazil
Note: Potential surplus is calculated keeping the ratio of working population (age group 15 – 59) to total population constant
Source: U.S. Bureau of the Census International Data Base; BCG Analysis
- 12 -
SOMEDAY REAPING WHAT YOU SOW
INDIA'S LEGACY
INDIA'S OPPORTUNITIES
• Vertical
integration
• Small
volumes, but
growing
• Logistics &
infrastructure
problems
MASS
MANUFACTURING

Small
volume,
high
variety,
low cost
mfg

REMOTELY
PROVIDED
SERVICES

INDIA'S
STRENGTHS
• Domain
knowledge
• Software
capabilities
• Remote
delivery
possible
- 13 -
SUCCESSFUL MNCs DEEPENING R&D PRESENCE IN INDIA
4. Fundamental
research
Level of
expertise
3. End-to-end product
development for
global markets
2. End-to-end product
development for
emerging markets
1. Selected steps
in product
development
GE: 1700
people; 77
patents; 2
products
TI: 900 people;
225 IPs, 20
products
Akzo Nobel:
75 of 400 in
India
Source: Literature, BCG interviews
- 14 -
INDIA EMERGING AS A "KNOWLEDGE SERVICES" HUB
IN THE WORLD
India already providing knowledge-based services in several sectors
Remotely delivered services
Industry
Transaction
processing
Design and
analysis
Information Tech


Research
and
developmen
t

Pharma/Healthcare



Education Services


Import of customers
to service in India
Value
added
tourism




Leisure
tourism

Auto/ engineering



Chemicals



Financial Services
Source: BCG Analysis



- 15 -
INEVITABILITIES AND OPPORTUNITIES BUT....
POLITICAL AND ORGANISATIONAL CHALLENGES
Global Competition
Pressure on Economics
Technology
Demographics
Digitisation and Connectivity
Deconstruction of
Business Value
Chains
Ageing and Booming
Emerging
Sources of
Competitive
Advantage
Political: For every $1 gained, $6-7 of dislocation
Organizational: Global 'networks'; not 'pyramids'; not even 'matrices'
- 16 -