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SOMEDAY YOU MAY REAP WHAT YOU SOW ASIA AND DELOCATION ADVANTAGES FOR WESTERN COMPANIES

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

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  1. SOMEDAY YOU MAY REAP WHAT YOU SOWASIA AND DELOCATIONADVANTAGES FOR WESTERN COMPANIES Arun Maira The Boston Consulting Group Barcelona 22 Nov '04

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. Case Study: Healthcare and Pharma R&D COSTS & PRODUCTIVITY OF US PHARMA PROBLEMATIC

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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'

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