Enhancing Competitiveness: The INDIA Card June 7, 2006 Rajiv Gulati, Director, India-China Strategy Corporate Strategi

1. ASIAN POWERS SYMPOSIUM Enhancing Competitiveness: The INDIA CardJune 7, 2006Rajiv Gulati, Director, India-China StrategyCorporate Strategic Planning

2. India Fact File • Modern India - A vibrant and the world's largest democracy • Home alike to the tribal with his anachronistic lifestyle and to the sophisticated urban jetsetter. • A land where temple elephants exist amicably with the microchip. • Its ancient monuments are the backdrop for most modern facilities where atomic energy is generated • Modern industrial development has brought the country within the world's top ten nations. • 2nd/ 3rd largest producer of Engineers & scientists as a result of initial investment in building institutes of higher education like IITs. • Industrialization process started post independence (1950s), however remained in the range of 2-3% (Hindu Rate of Growth) till mid 80s. • One of the world's fastest growing economies @ 6-7% pa* from 1993 onwards. *Source : Projection for 2004-05 (with Q-1 & Q-2 growth being >6%)

3. India Fact File Current GDP = $ 616 Bn (2003-04)* CAGR** = 6.5% GDP Growth - % PA * …Steady & Sustainable Growth ** from 1997 – 98 to 2004-05 Source: Economic Survey 2002-03, Press note by CSO for financial year 2002-03, * Economic Survey 2003-04 .

4. ….Increasing percentage of Productive Population Source : Census India 2001 ; Central Statistical Organization ; Statistical Outline of India 1999-00

5. Talent • Environ-ment • Cost** INDIA – CAPABILITIES 1 • Yearly graduates • 2,460,000 college • 250,000 post-graduates • 72,000 business majors • 80%-90% speak English 2 • Employee cost for college graduates ~ US$10,400/ year • ~ 70% cost savings possible relative to Europe / US • Infrastructure** • Telcom reliability*: 99.5% • Outbound international bandwidth: 780 Mbps • Available Grade A/B building space (sq ft): 9.2 M; vacancy rate 35%-40% 3 • Business Environment • EIU overall business environment: 6.15/10 • EIU global rank: 40/60 * Satellite ** Assumes skills, physical infrastructure are similar to those required for BPO activities, without vendor margin Source:Statistical Abstract of India, 2005 ; Bureau of Labour and Statistical Standards, joint McKinsey/NASSCOM study; EIU; Jampro; www.stats.gov.cn/english/index.html , Times of India, Company website

6. Vendors • Risk (A=least risky, E=most risky) INDIA – CAPABILITIES 4 • Significant vendor base • Sophisticated BPO environment • Growth of Indian Multinationals for Global delivery 5 • Overall country risk rating: C • Political risk: D • Economic policy risk: C • Economic structure risk: B Source: EIU Viewswire - data as of July 2004

7. INDIA – the objections of past • Lack of Infrastructure- Examples of turnaround. • National Highway Development Project- 14.1 M Km of roads by end 2007, cost US $12 Bn • Privatisation of ports • Electricity Privatization • Cost of Capital high– No more • Banking sector liberalisation leading to nominal lending rates falling to about 11.5%. • Private banks participation adding to health • Labour laws- Not a barrier • - Enough examples of smooth restructuring and down sizing in labour intensive industries. • Indian Manufacturing efficiency has improved significantly due to opening of markets.. • Ford , Hyundai manufacture and export more cars from here than they sell locally. Automotive, IT , pharmaceuticals exports testimony to this.

8. HR services • Payroll processing • HR services including payroll, recruitment, HRIS etc. • Payroll services Finance and Accounts Finance and Accounting • Back-office • Accounts payable • Accounts payable/receivable, financial reporting • Finance accounting • Revenue accounting Product Development Human Resource Management Technology Services Technology Services • Software development • Customization • Hosting & maintenance • Customer technology support Inbound Logistics Manufacturing/ Operations Outbound Logistics Marketing and Sales Customer Service R&D/Product Design • Clinical Research • VLSI design • DSP chip design • Avionics research • R&D and finished goods • R&D and engineering services Marketing/Sales/Customer Service • Outbound tele-sales support for their consumers • Computer help desk • Web-based interaction for answering customer inquiries • Technical support to retail and business consumers. • Inbound voice to consumers • Inbound and outbound customer interaction • Customer service Operations • Order tracking services • Order tracking and logistic services • Claims processing • Credit card processing • Ticket reservations Leading global corporations have been sourcing services across the value chain from India since 1994…

9. India landscape – the BPO Environment Offshore Movement Driven By … Macro Trends in Growth • Sustainable Cost Advantage in LCCs • Opportunities to Consolidate / Re-engineer • Higher Productivity Pressures • 3rd Party Outsourcing, • Value in Bln.USD • 164 38% • UK • High • 17 • USA CAGR • Canada • 2001 • 2008 • Hungary • South Africa • Captive Outsourcing • Value in Bln.USD • Tunisia Small Talent Pool Cost • China • India • Mauritius 26% • 182 • Mexico • Philippines • 35 • CAGR Large Talent Pool • 2001 • 2008 • High • Low • Low Workforce Attractiveness/Skills Source: Gartner Dataquest; Aberdeen group; McKinsey BPO&O Initiative • English • Other Languages

10. Key Trends in India Offshoring is now mainstream… Offshoring is now well accepted worldwide and some large players in the field • Significant long term commitment. At least 10 firms with over 10,000 people each Business Process Outsourcing grows faster than call centers – likely to dominate future growth • Value adding business process overtakes call centres in 2004 ie R&D, F&A, HR New industries like Healthcare actively involved • Telecom, Healthcare, Industrial, R&D collaborations • Sourcing API’s in India ( 75 FDA certified plants ) Demand Side Sourcing Models • Hybrids - a growing model and captives continue to be preferred Greater risk, compliance and information security focus • Risk management, the dominant theme, with dedicated governance models

11. … and an effective supply side management is the key differentiator Talent • Quest for qualified middle management because of rapid industry expansion Cost Competitiveness • Arbitrage is still the primary proposition • India’s cost competitiveness in IT reducing sector will be under threat in a few years Market structure: Consolidations, IPOs and other transactions Supply side • Global and regional offshorers catch up swiftly • Growth of Indian Multinational Service Providers • Call centre business consolidates and becomes scale driven Location Decisions • Tier II city movement – Pune, Hyderabad • Infrastructure constraints Tax and Regulatory Issues • Concerns on actual handling of transfer pricing and tax holiday cases • 2009 Sunset for tax holidays

12. Increasing Middle Class 2006 Projected 2004 2002 445 million 300 million 155 million There are now estimated to be some 300 million middle-income earners making $2000 to $4000 a year* equivalent to $15K to $20K on PPP basis!!!! • Source : Report by CIA’s National Intelligence Council 2004. • www.atimes.com/atimes/South_Asia.

13. Impact on Healthcare • Improving Hygiene • - Lesser Pollution: 4 stroke engine, lead free gas, polluting industries relocated, new modes of transport • - Lesser Infections: In last ten years share of anti-bacterials has reduced from 27% to 17% • - More Awareness: Better diagnosis. Lifestyle diseases now becoming important. Cardiovascular second largest and diabetes fourth largest therapeutic area. • - Therapeutic areas now mimic the developed world

14. Healthcare Spending Evolution of healthcare spend Evolution of healthcare spend US $ Billion 67 ~7 - 8% of GDP “ Last two years have finally seen a Sector emerge …” • 9 - 10%: W Europe 5.2% of GDP • 8 - 9%: S. America • 7.1%: S. Africa • 6.7%: Korea 22 • 5.7%: Thailand CAGR = 16% 12 3.7 % of 3.7 % of 6.2 GDP GDP 2012 1990 - 91 1995 - 96 2000 - 01 (Estimate) Source: National Accounts Statistics Back Series, 2001; CMIE 2001; Organisation of Pharmaceutical Producers, 2002; McKinsey analysis

15. Changing Healthcare Scenario • Key Facts: • Until the early 1980s, Govt.-run hospitals and those operated by charitable organizations were the main providers of subsidized healthcare. • Last two decades have seen the mushrooming of corporate and privately run hospitals. • They have invested on modern equipment and focus on super-specialties. • The private sector accounts for 70% of primary medical care and 40% of all hospital care in India. They also employee 80% of the country’s medical personnel. • Corporate organization structure for hospitals: • The Apollo Hospitals Group has pioneered this. • Wockhardt, Escorts, Fortis Healthcare and Max India are the major corporates following suit. • With the strengthening of Healthcare Insurance in India there will be an increase in number of people opting for private hospitals as affordability is no longer a barrier. Source: CII

16. DELHI HYDERABAD CHENNAI VIZAG CHENNAI-TONDIARPET CHENNAI-SPECIALITY MADURAI ARAGONDA HYDERABAD-SPECIALITY RANCHI SRILANKA ERODE BILASPUR CHENGANNUR MYSORE Corporate Organization Structure For Hospitals: Apollo Hospitals Network

17. Emerging Trends - Medical Tourism • Medical Tourism - Patients going to a different country for either urgent or elective medical procedures – is fast becoming a worldwide, multibillion industry. • India is considered the leading country promoting medical tourism. Source: CNBC News

18. Medical Tourism – Destination India Source: AHS; McKinsey analysis

19. Medical Tourism – Destination India • The large difference between the medical/hospital charges in Western countries and here is one of the main reasons why people are targeting India as a health tourism destination*. • The focus of medical tourism in the country is mainly on *: • Cardiac surgery, • Knee / hip replacement, & • Dentistry Consider the differences in charges: Treatment Costs in US $ Source: *The Financial Express 01 Jan. ’05 **http://www.ximb.ac.in/~u103121/CPProject/Trend_of_medical_tourism_DD.htm

20. Indians love the US … • 16-Nation Pew Global Attitudes Survey

21. Joke: Outsource NASA to India • WASHINGTON (IWR Satire) - - President Bush on Monday told a joint session of Congress that in order to balance the budget we will need to start outsourcing government programs and agencies like NASA to third world countries. http://www.internetweekly.org/photo_cartoons/cartoon_bush_nasa.html

22. Reality: India’s Lunar Mission • G Madhavan Nair, Chairman ISRO and Michael Griffin, Administrator NASA; signed MOU on May 9, 2006 to fly two US experiments on Chandrayaan in 2008 • Miniature Synthetic Aperture Radar • Moon Mineralogy Mapper • Mission cost to India, under $100 million • Price to the United States: free.

23. India invests heavily in R&D India makes progress in software development Penetration of PC’s in Indian households grows Significant increase in domestic air travel in India India’s Pharmaceutical companies focusing on new molecules Outsourcing goes up US exports of equipment to India up (e.g. mass spectrometer) India uses computers made by US companies Intel – Microsoft all over India Boeing receives largest ever order to supply aircrafts All want to collaborate with US Pharma’s for global development and commercialization US unemployment goes down India / U.S. – “A Win-Win Partnership”

24. Conclusion • India: An attractive outsourcing destination AND an attractive market for products • For Pharmaceuticals ….. • Therapeutic areas now aligned with research initiatives of major Pharma MNCs • Growth of Specialized private hospitals • Introduction of Product Patents

25. From Indiana to India – the Emerging Economy Marketing Services Products Talent Indiana India Offshoring Outsourcing Out-licensing In-sourcing Manufacturing Research & Development