India: Scm Hub?
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Global pioneers are peeking around Chinas corner
and beyond the Himalayas into Asias next major logistics hotspot — India.
As Chinas economic dynamo continues to spin circles with near double-digit annual GDP growth, reinvestment in infrastructure closing in on 50 percent of GDP, and U.S. offshore interests expanding, the horizon looks discernibly red for many U.S. outsourcers.
But some cautious observers look at the current trade imbalance between the United States and China through a more objective lens. Concerns about relying too much on one country have many U.S. businesses eyeing India as the next frontier for global outsourcing.
China remains a strong area of opportunity for U.S. companies looking to expand globally, but important questions about its long-term benefits and risks still need to be addressed.
“What happens to the global economy if there is a hiccup in China? What will be the political and economic ramifications if a downturn occurs?” asks Brooks Bentz, associate partner with Accentures supply chain management practice.
Its only natural for executives to play out “what-if” scenarios in corporate boardrooms, especially given the recent SARS scare, the 2004 tsunami that ravaged the coasts of southeastern Asia, and the threatened Asian bird flu pandemic.
Manufacturing activity along Chinas developed coast has also become increasingly expensive due to growing demand, compelling businesses to seek out locations further inland or outside the country to find the lowest total landed cost.
When global consumer products manufacturer MASCO Corporation first began outsourcing in China, it saved so much on the production end — up to 50 percent — that transportation and logistics costs were a secondary concern.
“Now, the logistics piece is becoming important as we source from suppliers across the country and margins become skinnier,” says MASCOs Brian Smith.
Strategically, logistics-savvy enterprises are moving toward multi-source strategies, pre-distributing product at point of origin to bypass congested U.S. ports and potential disruptions, and proactively managing the inbound movement of cargo to create a more flexible and reactive transportation and distribution network.
But they are also looking beyond the here-and-now challenges of managing their supply chains in established areas such as China and exploring new frontiers where they can make inroads for the future.
Many are leveraging the resources and expertise of global 3PLs and transportation service providers to help navigate potential expansion opportunities elsewhere in Asia.
If these global pioneers are any indication of shifting sourcing trends — as they often are — U.S. businesses will be following their lead and peeking around Chinas corner and beyond the Himalayas into Asias next major global logistics hotspot: India.
A Rising Star
Since gaining its independence from Britain in 1947, India has grown up in the shadow of the Red Dragon. Its population and labor force rank second in the world to China, and it is fourth globally in terms of GDP purchasing power parity — $3.7 trillion — trailing only the United States, China, and Japan.
But as Chinas aggressive economic policies and government control over infrastructure investment command the attention of global businesses looking for abundant cheap labor and sourcing opportunities, India is taking a different tact. The government has been quietly building a foundation for its own economic revolution with a laissez faire, “wait-and-see” approach to reform — for better or worse.
Indias measured strategy reflects its historical and cultural transformation from a British colony to a republic — one that eschewed violent upheaval for passive reform.
The very colonialism that Mohandas Gandhi resisted so ardently in the 1940s has paradoxically given India a cultural edge as its global economy evolves. While Hindi is the countrys official tongue, English has become the language of commerce and trade.
Many U.S. companies outsource telecommunications and business processes to India because of its well-educated, English-speaking labor pool. Industry experts anticipate this trend will continue.
Cutting Red Tape
“By 2015, 30 percent of traditional professional IT services jobs will be delivered by people who come from emerging markets.
Increasing demand for Indias coveted talent pool will drive prices, and by 2008, labor rates for application-related services in India will rise 40 percent to 60 percent above 2004 rates. However, through 2008, differences in pricing for professional services between developed and emerging markets such as India will remain and be a factor in more than 70 percent of deals,” according to Gartner Inc.s Five Hottest IT Topics and Trends in 2005.
As Indias infrastructure and transportation capabilities evolve, U.S. interests are primed to expand activities there beyond software and IT to manufacturing and distribution as well.
“India holds great potential to replicate for manufacturing the outsourcing success it has had in software,” says Divay Goel, senior executive at Drewry Shipping Consultants India office. “But it will take time because of restrictive labor laws and large-scale bureaucracy in germinating industries.”
Even still, 56 percent of respondents to an Inbound Logistics reader poll confirm they are involved with some type of procurement or export activity in India. Many U.S. businesses have already developed a comfort zone there, making it easier to extend that existing footprint into other industrial activities, despite the impediments.
“India is fast becoming world-renowned for biotech, financial, accounting, and medical care expertise,” says Jacques Creeten, managing director, sales and marketing for India, Middle East, and Africa, FedEx. “And the growth doesnt stop at the service sector. Engineering goods, chemicals, and gems and jewelry are the fastest-growing sectors; manufacturing in India is expected to grow by 9.4 percent in coming years.
“Thanks to the Internet and the growing