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SOMEDAY YOU MAY REAP WHAT YOU SOW ASIA AND DELOCATION ADVANTAGES FOR WESTERN COMPANIES Arun Maira The Boston Consulting Group Barcelona 22 Nov '04 Global Competition Technology Demographics Ageing and Booming Pressure on Economics Digitisation and Connectivity Emerging Sources of

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someday you may reap what you sow asia and delocation advantages for western companies
SOMEDAY YOU MAY REAP WHAT YOU SOWASIA AND DELOCATIONADVANTAGES FOR WESTERN COMPANIES

Arun Maira

The Boston Consulting Group

Barcelona

22 Nov '04

three inevitabilities two opportunities

Global Competition

Technology

Demographics

Ageing and Booming

Pressure on Economics

Digitisation and Connectivity

Emerging

Sources of

Competitive

Advantage

Deconstruction of

Business Value

Chains

THREE INEVITABILITIESTwo Opportunities
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

PRESSURES ON ECONOMICS IN DEVELOPED COUNTRIESDeconstruction of Business Value Chains
increased competition in developed markets requires increasing investments in new car models

Case Study: Automobiles

INCREASED COMPETITION IN DEVELOPED MARKETS REQUIRES INCREASING INVESTMENTS IN NEW CAR MODELS

Average life of new models (Europe)

Increasing models and decreasing sales per model (US Market)

Life (years)

Number of vehicle models(1)

Avg. total sales per model(2)

Year of introduction

  • Total number of models of cars and light trucks
  • (2) Average total annual sales per model
  • Source: Automotive News
electronic and software applications are increasing in auto industry

8.4%

10%

7%

23%

4%

Case Study: Automobiles

ELECTRONIC AND SOFTWARE APPLICATIONS ARE INCREASING IN AUTO INDUSTRY

Growth in Automotive Electronics Market ($Bn)

Increasing importance of electronics & IT in auto industry

Sales ($ Bn)

CAGR%

  • 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

Overall

83

Interior

Body

37

Chassis

Power

train

Source: EIU

indian automobile industry has developed capabilities up the value chain

R&D/Product development

Component manufacture

Assembly

Case Study: Automobiles

INDIAN AUTOMOBILE INDUSTRY HAS DEVELOPED CAPABILITIES UP THE VALUE CHAIN

Global average development cost of new car > $600m

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

Exports growing 30% per annum; 80% to 'developed' countries

Low capital intensity, BEP <100k units/ annum (Global BEP is 150-200k units/ annum)

Total Manufacturing Cost 20- 30 % less than USA

costs of medicines and healthcare soaring in developed countries

Case Study: Healthcare and Pharma

COSTS OF MEDICINES AND HEALTHCARE SOARING IN DEVELOPED COUNTRIES

Annual Household Expenditure on Healthcare

Total USA Healthcare Spending

CAGR UK: 9.2%

CAGR Ger: 6.2%

CAGR: 10.9%

US$(‘000s)

US$ Trillion

(EST)

Source: EIU, Literature Review

low cost high quality medical capabilities available in india

Case Study: Healthcare and Pharma

LOW COST, HIGH QUALITY MEDICAL CAPABILITIES AVAILABLE IN INDIA

Quality a Key Factor

Healthcare Cost Differential

Cost Saving

80%

91.2%92.5%98.8%

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%

US$

Source: IBEF, Literature Review

cost effective and good quality drug development and manufacture

USFDA Approved Plants Outside USA

DEVELOPMENT

(Example: Disease- Psoriasis)

  • DRUGS IN USA
  • Cost of development- hundreds of million dollars
  • Amgen antibody- $10.00/ dose
  • Cost of treatment- $20,000
  • INDIAN DRUG
  • Time for development- 3 years
  • Cost of development- $4 m!
  • Cost of treatment- $50 !!

Case Study: Healthcare and Pharma

COST EFFECTIVE AND GOOD QUALITY DRUG DEVELOPMENT AND MANUFACTURE
emerging sources of competitive advantage
A potent combination of

IT capability

Favorable demographics

Domain knowledge in many industries.

Case Study: The Emergence of India

EMERGING SOURCES OF COMPETITIVE ADVANTAGE

OPPORTUNITIES FOR WESTERN COMPANIES IN MANY FIELDS

india offers exceptional value at significant cost advantages in it
INDIA OFFERS EXCEPTIONAL VALUE AT SIGNIFICANT COST ADVANTAGES IN IT

Comparative salaries of an IT engineer

Comparative salaries of an MBA

$ pa

$ pa

$ pa

80,000

7,500

55% OF THE FIRMS IN THE WORLD WITH SW CMM LEVEL 5 CERTIFICATION ARE INDIAN !

Source: Literature Survey

india has a large reservoir of human resources reaping what you sow

Potential surplus population in working age group (2020)

Russia

Ireland

Czech

Republic

0M

-6 M

-1M

-2M

U.K.

Italy

-17M

China

2M

-3M

-10

M

-9M

Japan

-2M

2M

U.S.

Turkey

France

Pakistan

Iraq

Israel

19M

Iran

7M

47M

4M

0M

5M

3M

Bangladesh

5M

Egypt

Vietnam

Mexico

India

Philippines

4M

Malaysia

1M

5M

3M

Indonesia

Brazil

INDIA HAS A LARGE RESERVOIR OF HUMAN RESOURCESReaping What You Sow

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

someday reaping what you sow

INDIA'S LEGACY

INDIA'S OPPORTUNITIES

INDIA'S STRENGTHS

  • Vertical integration
  • Small volumes, but growing
  • Logistics & infrastructure problems
  • Domain knowledge
  • Software capabilities
  • Remote delivery possible

Small volume, high variety, low cost mfg

MASS

MANU-

FACTURING

REMOTELY PROVIDED

SERVICES

SOMEDAY REAPING WHAT YOU SOW
successful mncs deepening r d presence in india
SUCCESSFUL MNCs DEEPENING R&D PRESENCE IN INDIA

4. Fundamental research

GE: 1700 people; 77 patents; 2 products

>100 MNCs in India, most moving up

Level of expertise

3. End-to-end product development for

global markets

2. End-to-end product development for emerging markets

TI: 900 people; 225 IPs, 20 products

Akzo Nobel: 75 of 400 in India

1. Selected steps in product development

Source: Literature, BCG interviews

india emerging as a knowledge services hub in the world
INDIA EMERGING AS A "KNOWLEDGE SERVICES" HUB IN THE WORLD

India already providing knowledge-based services in several sectors

Remotely delivered services

Import of customers to service in India

Transaction processing

Design and analysis

Research and development

Valueadded tourism

Leisure tourism

Industry

Information Tech

Pharma/Healthcare

Education Services

Auto/ engineering

Chemicals

Financial Services

Source: BCG Analysis

inevitabilities and opportunities but political and organisational challenges
INEVITABILITIES AND OPPORTUNITIES BUT....POLITICAL AND ORGANISATIONAL CHALLENGES

Global Competition

Technology

Demographics

Ageing and Booming

Pressure on Economics

Digitisation and Connectivity

Emerging

Sources of

Competitive

Advantage

Deconstruction of

Business Value

Chains

Political: For every $1 gained, $6-7 of dislocation

Organizational: Global 'networks'; not 'pyramids'; not even 'matrices'