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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.
      Upcoming Events

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
China Flag
Corruption Versus Cost - Locations for Global Sourcing
Global Sourcing Risk MatrixWhether 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.

For additional detail:
Transparency International
Political Corruption
Foreign Corrupt Practices Act of 1977
Read a white paper
Global Sourcing

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.
For additional detail:
Chinese Auto Industry Starts Its Engine
An Unexpected Problem: Labor Shortages in China
China Looms As the World's  Next Leading Auto Exporter
Read a case study:
How Sumpura helped rapidly qualify suppliers
How Sumpura helped improve a supply chain
Quick Facts

 Foreign Investment In China

Survey of Major Obstacles to Foreign Business In China
Red Tape
Labor
Transp'ncy
Bankrupt
Enter Mrkt
67%
56%
43%
42%
38%
Major FDI Sources
Total
Hong Kong
Virgin Islds
Caym Islds
W.Samoa
S. Korea
Japan
USA
$561BB
$241BB
$87BB
(incl.)
(incl.)
$36BB
$41BB
$48BB
Provinces With The Most FDI by %
Guangdong
Jiangsu
Fujian
Shanghai
Shandong
25.8%
14.23%
8.75%
8.4%
7.1%

       India
India Flag
India And China Proposing Cooperation - Japan Impact

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.
For additional detail:
US, UN Warn on China, Japan
China's Hu, Japan's Koizumi May Meet As Tensions Rise
India and UN Security Council Seat
China Willing, India Shy
Gaining of India, China Cooperation

The World Is Flat 

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".  
For additional detail:
NPR: For Workers, 'The World Is Flat'
The Cluetrain Manifesto
In Defense of Globalization (1)    (2)
Feedback:
We are interested in your view of globalization and whether it is good for your company.  Do you agree with the premise of The World Is Flat or do you know of another book we should recommend?  Please write us with your thoughts, even if you have not read this book.
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
All data 2003

Source: CIA World Factrbook
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