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Newsletter
May 2005 |
SourceGlobal® with presence
in US, China, & India, offers global
sourcing services to the Heavy-Equipment OEMs in North-America. |
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Upcoming Events
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Sanjeev Maddila, our managing partner, will be at University
of Chicago's India Business Conference on May 7th, in Chicago,
along with Gary Becker - Nobel Laureate in Economics at U of C, Mel Bergstein - Chairman
& CEO of DiamondCluster, Sam Pitroda - Chairman & CEO of World-Tel, Ajit
Nazre - Partner at Kleiner Perkins and others. Dr. Maddila will be discussing "Risks
and Realities of Doing Business in India". This conference is one of the first to specifically focus on the coming
of age of the Indian economy and its capital markets, venture capital for health care,
manufacturing, consumer retail, financial services, and infrastructure
investments.
SUMPURA and SourceGlobal will be presenting at AEM’s inaugural purchasing conference, titled “Making Purchasing Your Strongest Link” on June 13-15th in Kansas City
along with companies Caterpillar, CNH, Deere, Dana, Honeywell, Timken. Sanjeev
Maddila, managing partner of SourceGlobal will be discussing “Sourcing
from China and India” with
other industry leaders. This seminar will provide case studies as well as best practices for purchasing
or procurement functions on topics like global sourcing, managing commodity increases,
organizing effective purchasing function, and measuring supplier performance. If
you are serious about increasing effectiveness of your procurement strategy and
execution, don’t miss this two-day event.
Please let us know if you will be attending either of these events and would like to arrange a meeting. |
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China
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| Corruption Versus Cost - Locations for Global Sourcing |
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 Whether
any investment is worthwhile is a function of the expected return
compared with the risk. Corruption is one of the biggest obstacles
to global sourcing and increases the risk of investing overseas.
Unfortunately corruption is a difficult thing to measure. Though
there are no perfect measures, one reasonably effective measure are the
corruption perception surveys by Transparency International.
Using some of these surveys correlated with indexed labor rates one
can begin to get a picture of the risk/return profile for various
countries around the world. |
| In
the table to the left, the X-axis is an evaluation of the perceived
risk level from corruption for companies sourcing from that country.
The Y-axis is the typical expected savings from labor for
products sourced from that country. In both cases the United
States is the benchmark country. Countries
that are good candidates for
outsourced labor or services usually are those which carry little to no extra
risk for some cost advantage, or those that carry significant cost
advantage to compensate for significant additional risk.
Those locations on the matrix are highlighted in green.
Countries on the left carry significantly more risk and as such should be
evaluated very carefully prior to any investment. |
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| Replacement Parts or Parts to Replace? |
Given
all the excitement over China it is very easy to over estimate the
progress China has made. While labor is indeed cheap,
quality and productivity remain problems. Tenneco Automotive's Asia
Pacific Director estimates defect rates for auto parts can be 15%
to 20% higher than for suppliers in developed countries.
Certainly labor costs are low but with steel and oil at all
time high prices, labor is often a relatively small piece of the total
cost. Furthermore, with China's economy firing on all
cylinders, qualified labor is proving surprisingly difficult to find,
especially skilled labor and management. Demographic studies
indicate that China's labor force is expected to actually shrink for
the next 15 years. Workers will often go to whoever pays the
most and tend to show little company loyalty. While their are
unquestionably good suppliers in China,
the overall local supply base quality is uneven and thin and corruption
remains a significant problem.
This quality gap and tight market for skilled labor often
results in unacceptable costs or
undesirable levels of oversight of suppliers.
China's Commerce Ministry predicts automotive exports will rise from $11.8 billion last year to
over $70 billion by 2010.
Some of this growth is likely to be in assembly operations.
DaimlerChrysler is in discussions to start assembly
operations for export as soon as 2008. Nevertheless the
majority of the growth of it will likely be in the parts business.
To achieve this rate of growth there will have to be
significant
growth in the number of quality suppliers within China. Local
second and third tier suppliers are particularly a problem for firms
wishing to source from China and will remain so for the next several
years.
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Quick
Facts
Foreign Investment In China
Survey of Major Obstacles to Foreign Business In China
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Red Tape
Labor
Transp'ncy
Bankrupt
Enter Mrkt
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67%
56%
43%
42%
38%
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Major FDI Sources
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Total
Hong Kong
Virgin Islds
Caym Islds
W.Samoa
S. Korea
Japan
USA
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$561BB
$241BB
$87BB
(incl.)
(incl.)
$36BB
$41BB
$48BB
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Provinces With The Most FDI by %
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Guangdong
Jiangsu
Fujian
Shanghai
Shandong
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25.8%
14.23%
8.75%
8.4%
7.1%
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India
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India And China Proposing Cooperation - Japan Impact
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Recently
these Japan and China have come into conflict on a variety of
issues, both economic and political. Both countries
claim gas drilling rights in a disputed area of the East China Sea.
China is already exploring the region and Japan recently
announced that it would award rights to private companies.
In spite of the mutual need for energy, the tension at first
seems somewhat peculiar due to the strong trade relations between the
countries. China exceeded the US last year as Japan's largest
trading partner. As one might suspect,
many of the reasons for the tension are not directly related to trade. Japanese atrocities around the Second World War are a major source of this animosity,
though current day economic rivalry
is also a significant factor. Furthermore the political status of Taiwan also plays a role with the U.S. and Japan recently issuing a joint
statement listing Taiwan as a "common security objective" which China
regards as an infringement of sovereignty and a significant
provocation. In response China may be looking to India as a trade
partner.
Chinese Premier Wen Jiabao made
headlines recently when he said "If India and China cooperate
in the IT industry, we will be
able to lead the world IT industry." Though it
is
not clear what form such cooperation might take, the concept seems
compelling given the respective comparative advantage possessed by each country. Indian businesses so far have been
lukewarm to the idea, fearing local markets being
overwhelmed with Chinese products without a commensurate increase in
Indian exports. The
implications of China and India cooperating go
much deeper than hardware and software. While China has
opposed a permanent seat for Japan on the UN Security Council, China appears to be at least
tacitly supportive of a seat for India. China may be
interested in cooperation with India as a means to increase regional
economic influence at the expense of Japan. Undoubtedly the potential
size of the
domestic Indian market is of interest to China. reading between the lines of
Premier
Jiabao's proposal, it seems likely that China regards India as an ally
worth cultivating and perhaps a rival more easily dominated than the
Japan for the near future.
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The World Is Flat
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Competing in the global economy is the focus of Thomas L. Friedman's book The World Is Flat: A Brief History of the Twenty-First Century.
"Flat" means connected in this context and Mr. Friedman takes
a sobering look at the trends of globalization and the ever
increasingly connected world economy. Mr. Friedman proposes
that we have just entered a third industrial age; an age of the
individual that is driven by the "a
global web enabled platform". This platform permits individual
people and small
groups to "innovate without having to emigrate" and communicate and
collaborate as
never before. Mr. Friedman soberly points
out that globalization is a phenomenon which can be used for
good or ill purposes. One
of his most alarming examples of small group innovation with a
world-wide impact is Al-Qaeda. Globalization has the potential to
disenfranchise many people and the transition to this new world market
will not
come without some dislocations and pain as markets shift and ideas are
exchanged. But it is these conversations, these highly networked
markets, that will drive innovation and global trade.
The
clarity of Mr. Friedman's crystal ball is not beyond reproach as his
evidence, though compelling, is heavily anecdotal.
Occasionally he seems to overreach himself. For
example, in an interview with NPR he claims that gasoline should be taxed such that it is $4 a gallon in
the US regardless of the actual price of oil. Mr. Friedman
presents no compelling economic data to back up this assertion, merely
claiming that it would spur innovation in automobile technology and
would have beneficial behavioral effects on US consumption.
Nevertheless one should not easily dismiss the many cogent
points Mr. Friedman does make. Globalization is here now, it
enables people around the
world to communicate as never before, and those who ignore the
consequences of those facts do so at their own peril. He
rightly points out that if anyone thinks globalization is all good or
all bad they "don't get it".
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Economic Facts
| %GDP - Industry |
China
India
Pakistan
Japan |
52.9%
28.4%
23.5%
25.4% |
| %GDP - Services |
China
India
Pakistan
Japan |
32.3%
48.0%
53.2%
73.3% |
| %GDP - Agriculture |
China
India
Pakistan
Japan |
14.8%
23.6%
23.3%
1.3% |
| Labor Force |
China
India
Pakistan
Japan |
778 MM
472 MM
44 MM
67 MM |
| Largest Import Partner |
China
India
Pakistan
Japan |
Japan
USA
UAE
China |
| Largest Export Partner |
China
India
Pakistan
Japan |
USA
USA
USA
USA |
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