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Newsletter
       April 2005

SourceGlobal®
with presence in US, China, & India, offers global sourcing services to the Heavy-Equipment OEMs in North-America.
      CONEXPO-CON/AGG 2005

Thank you to all who attended CONEXPO-CON/AGG 2005 in Las Vegas.  Sourcing needs are constantly changing and a number of messages were clear during the show:
  • Most companies are familiar with global sourcing though not all have attempted it
  • Companies that are not in commoditized businesses are less inclined to look at global sourcing
  • There is suprisingly strong interest in sourcing from the US to Asia and South America for genuine and surplus hard-to-find parts
  • Strong interest exists for oursourced engineering services from India and China
  • Many more companies have sourced from China (Taiwan) than India or other low cost countries in Asia and Eastern Europe

    Based on your feedback at the show upcoming issues of the SourceGlobal® newsletter will feature.
  • Risks to supply chain from global sourcing
  • Different models for product sourcing using offshore/outsource
  • Global markets for service and replacement parts
  • Off-the-shelf IT tools for strategic sourcing
CONEXPO- CON/AGG 2005
Statistics

1.88 million ft2
1,968 exhibiting companies
IFPE with 111,670ft2
& 440 exhibitors.

Used  more than 45 acres (18.5 hectares) or over 41 football fields.

21,220 international attendees comprising 17% of total attendance and representing over 130 countries.
       China
China Flag
Security Concerns Affecting the Supply Chain

Since 9/11 there has been a steadily increasing emphasis on port security.  Only a small percentage of shipping containers are ever inspected which presents an enormous security concern.  Not surprisingly, over 50 transportation related bills are presently working their way through the US Congress.  Effectively balancing these security needs without unduly delaying shipping is always a problem.   It is estimated that each day a shipment is delayed can add up to 1% to the cost of a shipment.   There is a significant risk that ill conceived measures will choke off trade, either through added cost or excessive red-tape delays.  Some countries such as China are likely to be affected strongly by the increased security, despite the fact that concern about terrorism originating from there are actually rather low.

The extra port security measures might not be a problem if the cost was evenly distributed but exporters in developing nations typically bear the brunt of the added cost.  The costs aren't simply for added port security either.  Piracy continues to be a problem in some parts of the world, most notably in the Malacca Strait near Indonesia that accounts for about a third of worldwide reports of piracy.  Given that this region carries half the world's sea-borne oil and nearly a third of world trade, security is obviously of paramount importance, however the cost is borne mainly by Indonesia, Malaysia and Singapore.  Most experts recommend taking a diversified portfolio approach to mitigating shipping security concerns.  China may be the most attractive single country for manufacturing but relying solely on China exposes an exporter to significant risk should there be an incident of terrorism or geo-political instability.

For additional detail:
When National Security Chokes Global Trade
Supply Chain Security: Is Your Company Complacent or Engaged?
Maritime Terror Concerns Prompt New Initiative in SE Asia
Eastern Europe Versus China
While China gets much of the attention in any discussion involving globalization, Eastern Europe has quietly become a strong outsourcing alternative.  While labor costs are higher than in China, Eastern European countries have lower transport costs to many European and Mediterranean markets.  Eastern and Central Europe also have perhaps the highest concentration of engineering talent in any developing market. A study by Boston Consulting Group argues that  for a typical product the difference in cost between China and Eastern Europe amounts to less than 3 percent in many cases without taking into account transport costs.  Furthermore as the European Union grows, so too should Eastern Europe as they are natural trading partners. So why does China get most of the focus and investment?  Growth is the main reason.  China's population implies the potential of a vast domestic market in addition to low labor costs for exported goods for the foreseeable future.  While the collective economies of Eastern and Central European countries currently have a GDP four times larger than China, the growth potential is not the same.  While China's economy is the fastest growing in the world, the same cannot be said of Eastern Europe.  Labor costs in Eastern Europe are 4 to 10 time cheaper than in Western Europe and typically 2-3 times higher than in China or India permitting labor cost arbitrage to occur.

For additional detail:
Eastern Europe: New Emerging Market
Outsourcing: The New Phase of EU Business
Where in the World?  The Best Locations for Supply Chain Management Facilities

Quick Facts

Population Comparisons

Population
China
India
USA
1.270B
1.029B
0.282B
42% of World Pop
15% of land area
Population Density
China
India
USA
130/km2
307/km2
28/km2
World population density 40/km2
Rural vs Urban
China
India
USA
67%/33%
72%/28%
21%/79%
Life Expectancy
China
India
USA
71
64
77

Sources:
 US Census Bureau
USDA
Wharton Journal
       India
India Flag
A New Era In Indian Patent Law Dawns
For years western pharmaceutical companies have complained about Indian patent laws that prevented patents on any pharmaceutical product.  Under Indian law only a process used to make a product could be patented.  The result was a wide variety of perfectly legal (in India) and low priced generic drugs from Indian manufacturers able to free-ride the R&D efforts of western labs.  A new bill which has cleared the lower house in India's legislature will significantly strengthen product patents in order to meet WTO guidelines.  While the bill will allow more challenges to patents and be more restrictive in allowing patents on minor modifications to existing products than western laws, not surprisingly multi-national firms have largely applauded the bill.

However the bill is not without potential consequences.  Many of the drugs produced in India were sold for use in poor areas such as Africa.  Critics, including the international aid organization Doctors Without Borders, sharply criticized the new law claiming it will prevent affordable care from being delivered to people who can afford it the least.   Worldwide as much as 15% of drugs sold are thought to be counterfeit and in places like Africa the number is believed to be closer to 50%.  There is serious concern that counterfeiting problems will only increase if cheap generic Indian drugs are taken off the market.

For additional detail:
Indian Legislature Adopts New Patent Law
Adding Value to Pharma Supply Chain

The Global Threat of Counterfeit Drugs
New Patent Act

India Steel Expansion
Demand for steel has never been stronger and  the Indian steel industry is responding by investing US$27.5 billion to expand capacity and there are plans for up to an additional 65 million tons of new capacity by 2020.  India's Tata Steel alone plans to triple production to 15 million tons by 2010.  India has enormous iron ore reserves but presently lacks the local steel making capacity to make use of it all.  India it has become one of the lowest cost areas for production in the world.  Nippon, Baosteel and POSCO have all announced intention to add capacity in Chhatisgarh or Orissa.  In response to these top Asian steel firms entering the Indian market, top Indian steel companies are scrambling to become more efficient and have started to share research and technology.

The cyclical nature of steel demand and the durable nature of steel making facilities seems bound to lead to overcapacity.  Steel and ore prices are high presently but this is certainly not going to remain the case forever.  Demand is strong in the US, Japan and especially China but this demand is not expected to remain high in the medium to long term.  If too much capacity comes on line in the interim, there could be a strong shakeout among smaller players.  Nevertheless, India's low cost position and favorable location might work to its favor in an overcapacity situation provided protectionist duties can be avoided.

For additional detail:
India Steel Ramps Up
India Making Big Investments in Steel
India Steels the Limelight
Steel Majors Agree to Joint R&D
The Economics of Steel Clusters

Economic Facts

Real Growth Rate
China
India
USA
9.1%
8.3%
3.1%
GDP Per Capita
China
India
USA
$5,000
$2,900
$37,352
Labor Force
China
India
USA
778 MM
472 MM
147 MM
Industrial Production Growth
China
India
USA
30.4%
6.5%
0.3%
% of GDP Spent on Healthcare
China
India
USA
2.7%
5.2%
14%
All data 2003

Source: CIA World Factrbook
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