It could be the elephants turn against the dragon
For most of my consulting work life, the India versus China debate has gone on, and the reality is that dragon won the battle 7 times over. Both trade and FDI. I should know better. In the mid-80’s, I along with my colleagues helped major US firms enter China, doing JVs with state-owned-enterprises (SOE’s) and to source from there. While we were doing that, we kept talking about the benefits of sourcing from India or increasing FDI for the same logical reasons we have always repeated – world’s largest democracy, English speaking, reliable legal framework, and lots of engineers and plants.But in the end, you have to be able to walk the talk. And whether it was India’s policies, it’s bureaucracy, or simply it’s will, it never delivered to its full potential.
Enter COVID-19.The world has again been reminded that they have become too dependent on one country for either sales or sourcing. It does not take a rocket scientist to know that this is a bad idea and that sooner or later, this will blow up. One can become so dependent, that you lose perspective. I was hearing the CEO of Starbucks on Bloomberg, where he was being asked about future performance. He spent most of his interview talking about China, how great the opportunity was and that while the new store growth may be slightly reduced this year, it will grow next year again. I thought for a CEO of a large American corporation to be “tom-toming” China when the US has lost more people in the last 3 months to COVID-19 than to the whole Vietnam war – you have to be tone-deaf and lack utter sensitivity Or you have become so addicted to the Chinese market that you can’t see the wood from the trees.
What is being traded?
Below is a list of products most sourced from China into the US and Europe. And what could be potentially sourced from India.
What is interesting about the US and European import list is that it is almost the same product categories. Sure, specific products, volumes, pricing and sourcing will vary by country but what the list reflects is that China’s manufacturing competencies are in focused set of industries/products combined with the ability to do high volume and very low prices (often below raw material cost).
Now if you look at the last column on what is feasible from India, it is possible to do pretty much the same list of industries. Here is some quick rationale:
- Cellphones & Telecom: India is one of the world’s largest cellular markets, and a large number of cellphones are produced in India by leading global contract manufacturers. e.g. Foxconn.
- Household Goods & Appliances: India is one of the largest global markets with firms like Whirlpool, Samsung, Panasonic and all key suppliers here. They make global models in India and have the full Tier 1 and Tier 2 component supply chains here from most components.
- Computers: Same answer as #1 above. Remember India is the world’s back-office. IBM has more employees in India than in the US !
- Clothing & Textiles: India is one of the world’s leading suppliers already. To be honest India volumes have been artificially held back due to quotas and tariffs. Sure, there is some Chinese technology in fabrics but that is only a component of the market.
- Machinery: Machinery is a very broad term, and I am sure that there will be a sub-set of machinery or machinery components that can be sourced from India. Remember India has a very strong manufacturing base, and most machinery used, is made in India.
- Plastics & Plastic Products: This is a very wide range and of course China has significant competencies for large volume, low cost manufacturing here. India will be able to do some, but if you are looking for the average home plastic product to be sourced from India, it may be an issue.
- Metals: This is a function of raw material availability, but it is safe to say that in most metals – steel, aluminium, etc. Indian supplies are strong and plants are world class using global equipment.
- Pharma: This one China cannot do and is not even on the list. India has one of the largest and best-in-class pharma industries on the planet. Outside the US, India is the country with the 2nd largest number of US FDA approved plants. Sure, there is some API dependence on China, but that will be manageable.
- Select Other Electronic: This again is very wide range, but I am confident that India can do a wide range – medical equipment, test & measuring instruments to name a few.
“India can supply a lot that China does”
The bottom-line is that India is capable of being a source for many components or products. The question then is that if above is true, why has India not done better as a source compared to China in the last couple of decades?
- Negative Perception: India has always carried negative perception. Its cities have never looked like western cities or Chinese cities. My view is you need to get past this and purely focus on getting your sourcing done effectively. You aren’t in the real estate business, so why confuse the issue.
- Pricing: This is a big one. The Chinese always seem to be able to provide a product at a cheaper cost, often lower than raw material cost. There are various reasons for this. More importantly it is driven by sourcing very high volumes. However with lower global demand, and for certain products that are moderate volume and higher margin, price competitiveness will be less of an issue.
- Speed: Indian firms in spite of their English speaking skills were seen to be slow in responsiveness and delivery. Fair point, but I think that issue now in the past.
- Quality: Indian product was seen to be poorer in quality. This is no longer true. In fact, the shoe is now on the other foot. Indian firms have global quality plants and sell global quality product in the Indian market.
So, if you have stayed with this conversation so far, and are convinced that it’s time to seriously assess the opportunity of starting or enhancing your sourcing from India, here are 7 steps on how to get it right.
Effective Sourcing from India
- Your AGILE India Sourcing Team Don’t use your China team to develop India sourcing. It’s counter-intuitive but there are multiple reasons. Firstly, it’s the nationality mix. You may have team members with Chinese ethnicity for language and cultural reasons. But for Indian political and cultural reasons, this won’t work. Then the Chinese team competencies are around China sourcing – different approaches to vendor selection, negotiation, sourcing and vendor management. Very different in India. Indian executives culturally function more like western executives. Better to have an Indian origin team member but also other senior executives. Sometimes immigrants carry their own biases and life-stories that may not help in a positive way. Clearly the team must have people who have travelled extensively and enjoy interacting with other cultures.
- Pick the right products You may be manufacturing some on-shore, some in China, and some in other markets. Since this is a China discussion, let’s focus on your China sourcing. Generally speaking, I would pick a product(s) that are moderate volume, medium/strong profitability contribution, and whose raw material/component supply chain is manageable. This is going to apply for firms that have never done sourcing from India and need to get sourcing and manufacturing going for the right products. In some businesses, it will be relatively easy to shift. Take the home textile industry as a case study. As per the chart below you can see both India and China are key sources. In this case it would be easy for a company to simply shift volumes from a Chinese supplier to an Indian supplier.
- Local Advisor I'm not promoting our services, but either way, you will need assistance on the ground to make this happen. A person or firm who has done this before and knows the country and products well. Also due to travel challenges for the foreseeable future, you will need help not only to help identify and finalize arrangements but also do some level of outsourcing management. But it has to be somebody you can trust.
- The Long List
Extensive secondary research can be done at HO itself.
Understand the country, its industry, its manufacturing and
export history relevant to the product. Once the research is
done on the above themes, it’s time to build a potential long
list of targets to source from. I would obviously pick the leading
manufacturers and exporters to start, profile each of them on
the following criteria:
- Company Background
- Owners Background,including international education
- Manufacturing & Technology Assets
- Export Track Record
- Sales Organizational
- Company Trends
- Meetings and Creating the Short-List The approach I have used is to have a series of conversations with short-listed firms without sharing our international client name for the 1st couple of conversations to remove any additional biases. Once we are past that point without any additional surprises, I will share the clients name and additional details on what we are seeking to source. In the case of a global major consumer durable client, I would have even shared engineering drawings/specs under a non-disclosure agreement for specific components to allow the conversation to go to the next level before the client gets involved in detailed conversations. Conversations in the current context may have to be Zoom driven. Potentially suppliers can provide detailed relevant credentials, samples of products they have done for other clients, client references, etc. Depending on the situation, they could even potentially do a short trial run for your product if needed.
- Vendor Selection You may want to run your technical scoring process separate from your commercial selection and scoring process, and then combine the outputs to make a final call depending up the weightage you give to each. The supplier and owner’s background must be given proper weightage. If the partner is not trustworthy, everything will fall apart. Do not nickel & dime the supplier. It must be a win-win contract for both. For contracts I would recommend your legal team actively engage Indian lawyers to put an agreement into place that will work. The lawyers must be business-oriented and shouldn’t get stuck on the small stuff.
- Managing the SupplierMost organizations have a team that manages on-shore and even on-shore suppliers already. The sourcing from India can obviously be operated by that team. Just need to make sure that the executives involved are positively oriented in building the India supply chain, and they see it as a strategic opportunity/ project, not a hardship job. That won’t work. I remember a past situation where a client sent a senior executive from California to play a similar role, and all he did was complain that the wine in India was not as good as California.
In conclusion, overnight everything will not change. But remember you did not build your China sourcing in 1-2 years. Rome was not built in a day. Those that are already sourcing from India will find it much easier. They will have both skill and will. For ones doing it for the 1st time, they must have will but skill will have to be rapidly developed.
It’s time for the elephant to dance.