Rivalling India in the Global Sourcing Game - Dissertation Example

 “China: Rivalling India in the Global Sourcing Game” Introduction One of the significant changes in the global economy in the present century involves the rise of Asia as an economic superpower. This has been mainly fuelled by the economic growth of the two Asian giants namely India and China. These two nations have made enormous strides in the economy and are on the path of becoming economic superpowers. The main reason behind the astounding success of these two fastest growing economies can be linked to the policy of outsourcing by the firms in the developed nations. It should be noted that China and India are among the most populous countries on earth which provides firms with an access to a large labour force (CIA, 2011). Another interesting fact about these two nations is that the supply of labour comes at a very cheap rate which makes it more profitable for business organizations to outsource some of their manufacturing and service processes to these two nations. On one hand India has been the leader in service industry outsourcing which has been enabled due to the large number of English speaking graduates while the Chinese have emerged as a global manufacturing hub owning to some governmental policies and a large labour force. The question that now arises is to analyse the competitiveness of China and India with each other and their ability to sustain their leadership in their respective industry segments. The development of services industry in India has been largely fuelled due to the growth of some of the indigenous companies like Infosys and Wipro which have become global brands, the Chinese growth story is largely linked to the growth and development of Special Economic Zones (SEZ) across the nation that have made it the manufacturing hub of the world. Both the nations also have drawbacks that are common as well as exclusive. Common issues facing the two nations include the rate of infrastructure which is poor in both the nations as compared to the advanced economies. Area specific issues for China include a bureaucratic and dictatorship based government which makes its difficult for business to set up shop in the nation. In India problems also arise in the large scale corruption and bureaucratic red tapism (Cavusgil, Knight & Riesenberger, 2009, p.465). The present study would undertake an evaluation of these two nations on different aspects of outsourcing particularly the elements of supply chain management so as to find out the more competitive nation. Concepts of Global Sourcing and Supply Chain Supply Chain Management Concepts Supply chain management is perhaps the most crucial aspect for success of an outsourcing strategy as most of the finished product need to be sourced to a third nation. The development of an effective supply chain encompasses the most critical aspect as it determines the overall effectiveness of a location. Supply chain aspects include transfer of goods by rail air and sea. It is to be noted that both these nations have an extensive geographical area and both of them have a fairly long coastline. A study conducted by the World Bank report the cost of logistics and supply chain in India is among the highest in the world with the cost estimated at about 14 percent of the total value of a good. The Chinese score well than India in this regard with the logistics cost as a total value of the offering being estimated at 10 percent of the total value of the goods. The higher cost of logistics has been cited due to three crucial aspects namely cost of congestion, cost of transaction and finally factors affecting demand and supply. The existing infrastructure of transport logistics like ports and airports have become largely saturated and with barely few new additions the waiting time for goods to be shipped has increased that has increased the overall cost of logistics. In addition to this transaction costs that are largely derived as a function of taxes and other administrative costs have also been very high that has also augmented the cost of logistics in the nation. The picture in China has a different story with a large number of ports being developed that have tend to reduce the existing pressure on the major ports. This has led to a reduction in waiting time which has reduced the cost of logistics in China. Similarly demand and supply factors also play an important role in deciding the cost of logistics. The poor infrastructure and shortage of supply over high demand has also increased the waiting time. Poor infrastructure like absence of quality roads has also accentuated the time required for shipping goods from one destination to the other. Infrastructure in China is much better than India in this regard with better roads and port facilities. Development of high speed rails has also helped in reducing the waiting time that has led to a lowering of the logistics cost in the nation (Vaidyanathan, 2007, p.13). Global Sourcing Management Concepts Global firms outsourcing their business process to India and China largely follow a captive center based approach with third party intermediaries playing a crucial role. On one hand India is considered to be the preferred destination for sourcing of IT related businesses while China leads in the sourcing of manufacturing industries (Infosys, 2007, p.1-5). A research study conducted on the aspects of sourcing in China states that most of the firms in China especially in the manufacturing sector have adopted the elements of global sourcing. Some of the key elements that have emerged as drivers for global sourcing in China include savings on cost, better quality of procured materials, greater flexibility, reduction of supply based risks, compliance with impost based quotas and sourcing advantages in high tech goods. Challenges also exist in the form of lack of coordination between suppliers and manufactures (Jiang & Tian, 2009, p.40-49). The Indian side of the picture also shows a favorable trend especially in the area of services where the nation scores over China in terms of value addition due to the presence of a large pool of English speaking individuals. The nation scores low on the manufacturing industry sector where infrastructural and bureaucratic bottlenecks have emerged as a formidable challenge for business organizations. Analysis of Location Advantages of China Static Advantages The static advantages that China possesses in regards to global sourcing activities involve the manufacturing potential of the nation. In fact the manufacturing potential of the Chinese economy has let other developed countries of the world to outsource the operational and manufacturing activities to the Chinese economy. The Chinese economy also happens to attract the mindset of the developed nations owing to the huge abundance of manpower resources. This huge chunk of cheap labour force helps the country to produce a large volume of manufactured commodities and machineries. The Chinese economy owing to the abundance of cheap labour and large number of productive resources helps the developed nations to gain the advantage of economies of scale for which trading and outsourcing functions are enhanced. Thus many international manufacturing companies pertaining to varied sectors are greatly investing to develop their trade and operational activities in regards to China. China also happened to gain the advantage of gaining an entry to the World Trade Organization which helped the economy to gain the advantage of a free trade climate. This removal of the international trade barriers helped China to gain considerable advantage in expanding the trade activities on manufactured products. Thus China owing to the above mentioned static advantages gains the ascension of being the largest importer of manufactured products to the developed countries (Hong & Holweg, n.d., p.4, 5, 7, and 9). China also gains a huge advantage owing to the growth in regards to the gross domestic product of the country. From 1990 to 1997 the gross domestic product of the country increased by around 11 percent on a per annum basis. The growth factor has helped China in gaining a large gross domestic product of around $ 1 trillion. Static advantage gained by China owing to the above fact has helped in becoming economically active to counter large developments in trade and industrial activities. The export and import policies of the country made flexible owing to its incorporation in the World Trade Organization helped the country to gain huge advantage in international trade (Bragg et. al., 1999, p.10, 11, 14). Dynamic Comparative Advantage The most distinctive advantage of India as an offshore destination for outsourcing business processes arises from its advantages of being a cost effective location. It is widely believed that the growth of skilled manpower in India was largely unmatched with the growth of wages which makes its highly cost effective as an offshore location. The cost of employing a skilled labour in India is about one fifth of the cost required to employ an individual with the same skill set in US or other developed nations (Jelassi & Modwel, 2006, p.1-3). China unlike India has an advantage in the area of manufacturing as it has adopted a top down approach as compared to the bottom up approach of India. The Chinese boom is largely due to the huge inflow of FDI in the manufacturing sector while the growth story in India is largely based on the development of services industries like IT and ITES services (Sharma & Chen, 2008, p.204). Both the nations enjoy certain distinct advantages over each other. The Chinese score better over the Indians on the account of development of infrastructure. The Chinese economy is more liberal unlike India which is yet to open up crucial sectors like retail to the foreign investors. Bureaucratic hurdles are also more pronounced in India where government policies and procedures take longer time for execution. Crucial issues like land acquisition are also more pronounced in India where a clear cut policy is absent unlike China. However the advantages of Indian side largely emerges from its democratic government unlike China which is under a dictatorial rule. Indian employees are more skilled than China with more individuals having knowledge of English in India than China which has led to the growth of IT and ITES industry. Huge investments have been lined up in India for development of infrastructure which when implemented will give the Chinese a run for their money. In addition a good domestic demand in the nation also helps firms to get access to a good market in the nation. It is a general trend that most of the components manufactured in India are meant for domestic consumption that is unlike the Chinese story where most of the finished goods are sourced abroad. Over reliance on exports makes the economy vulnerable to the threats of external macroeconomic disturbances. Analysis of Location Advantages of India Static Advantages The static advantages which India faces in regards to global outsourcing activities are the prevalence of skilled labour in large numbers. This advantage of India helps in rendering outsourcing activities to many international companies in developed countries. Static advantage of the country lies in the sector of rendering enhanced services which thereby helps the country in gaining large amounts foreign direct investment. Enhancement of functions depending on skilled labours led to the development of specialized business functions pertaining to outsourcing knowledge sources to developed nations. Further other static advantages retained by the country consist of encouragement of research and development functions through which the Indian firms helps to serve the foreign nations by providing technological and cost efficient products. The country also possesses a large resource base of potential raw materials along with a pool of cheap and skilled labour force which helps the country to gain potential attraction from developed countries endeavouring to outsource their activities to India. The static advantages in India thus revolve around the service base and mainly in regards to information technology sector. This sector in India has earned a booming image which helped the country to render an international face to the external world. The legal environment of the country in regards to rendering protection to the intellectual properties further helps in enhancing the static dimension of the country (Rajan & Srivastava, 2007,p.39-40). Other than outsourcing functions the Indian companies also has strategic potential to render off shoring activities in foreign nations. The off shoring activities largely pursued by the Indian companies are carried out through the huge involvement of skilled human resources. The research and development activities pursued in the field of biotechnology and medicine help the country in expanding its revenue and market share in international areas. This concept of global outsourcing counts on an innovative note which does not follow the standardised set of supply chain functions. It is observed as a value enhancement in the field of value chain activities in the services framework. (Greene, 2006,p.2-4). Dynamic Comparative Advantage The Indian subcontinent earns huge amount of dynamic advantages which helps the country to earn a competitive advantage in conducting its outsourcing and off shoring activities along an international scale. Foreign firms located in developed nations like United States largely focus on India owing to a large resource base of skilled and cheap labour forces. Further the Indian subcontinent also encourages the American companies to strategically develop the supply chain management functions owing to large availability of resources which can be easily linked to the production activities. Again the companies in the developed economies largely endeavour to turn to the India for gaining the advantage of large economies of scale through ease of availability of human and other resources. The skilled labour forces in India also reflect the potential of dynamically changing in regards to alterations in the external market base. Companies in India also reflect potential dynamism in having strong resource base of technology and a highly responsive climate which helps the companies operating in foreign nations to sustain a more developed market in the country. Customer servicing parameter in respect to the Indian companies is considered as highly effective. This parameter helps the Indian companies to gain large amount of loyalty from the customer base pertaining to both the local and international markets. Large availability of resources helps the Indian companies to potentially lower its economic costs which thereby act as an advantage in which the companies can strategically lower the prices of the products to help penetrate larger market bases (Thakur, 2010,p.30-33). Sources of Competitive Advantage for Different Firms International Companies in China and India Trading activities of international companies in China gained momentum with the ascension of China to the World Trade Organization. However international companies increasingly face challenges wherein the cost of supply chain activities is increased to help protect the plight of the local firms. The manufacturing firms in China are found to depend less on the middlemen for selling their produces but can directly sell their products through the retailers. Import and export activities of the foreign firms are also highly controlled by government legislations and thus only take place through trading channels appointed by the Chinese government (Jiang & Prater, n.d.). However in context of India the supply chain management architecture is continually being innovated to help the business firms get the advantage of penetrating larger markets and thereby augmenting on its market share. The range of outsourcing activities encouraged in India has helped in transforming the nature of supply chain management functions in the country. Supply chain management functions in the Indian companies largely depend on firstly segmenting the target market and thereby assigning the right vendors to satisfy the market demand. Again the risks attached to the supply chain activities to transport commodities along the global landscape are being minimised through the use of innovative methods and scientific approaches (Deloitte Development, 2007, p.20-21). Multinational Companies in China and India Multinational companies operating in China like Wal-Mart tend to adapt to the cultural dimensions of the country to help perform in an effective manner. Wal-Mart’s Chinese operation takes into hold the potential of the local market to help penetrate better. Local suppliers are fixed by the firm which helps in gaining ease of accessibility to the produces and thereby lowers the cost of procurement. However the firm is also facing a number of challenges pertaining to the government policies regarding import and export activities of international firms (Gereffi & Ong, 2007, p. 46-49). The supply chain dimensions of multinational companies like Procter and Gamble include a variety of activities to help perform actively in the Indian context. The supply chain management functions of the company include streamlining the existing resources and processes to gain all round productivity. Further the company focuses on reducing the cost of transportation activities by rendering feasibility in the supply chain mechanism. Procter and Gamble operating in the foreign nations works on the process of continuous and automated replenishment processes to satisfy the growing needs in the market and to help in rendering high amount of flexibility (Managing Logistical Systems, n.d.). Global Companies in China and India Global companies like IKEA in its operation in China strategize to gain an expanded market base by strengthening its supply chain domain to gain an expanded market base. The firm relies on the retail community at large to gain an expanded market for the sale of its retail products like furniture. IKEA in the bid of gaining an expanded market also focuses on economies of scale by reducing the transactional and logistics costs (Jahre, 2008, p.271-272). The supply chain management activities of Heineken include strategising the accessibility of raw material sourcing centres for gaining the advantage of economies of scale. Further the company also effectively transformed the organisational and supply chain resources through the integration of technological resources which would help in fulfilling the growing needs of the consumers. Transportation networks are also effectively being managed by the company to help in reducing the lead time for gaining the adequate materials to be used in production and in meeting consumer demands. Incorporation of technology in the logistics operations helped the company to effectively manage the warehousing activities. Thus the company spread along international borders through the aforesaid functions continually gained more effectiveness which helped the firm to expand its market share and profitability aspects (Heineken Netherlands B.V., n.d., p.1-3). Conclusions The analysis of the topic of study reveals considerable strengths of the two Asian superpowers against each other. On one hand China remains a more favourable destination for sourcing manufacturing industries while India scores over China in the services sector especially in the area of offshore IT and ITES outsourcing. Both these nations large draw their advantage from the large pool of labour available at cheap costs which makes them an ideal destination for outsourcing. However both these nations also have sets of unique disadvantages which are not managed may lead to serious issues. Both these nations have been trying to get rid of these problems. This is evident from the fact that China has introduced English as a compulsory language while India has announced numerous infrastructure development projects that aim to change the face of the nation. Successful implementation of these strategies would further intensify the competition among the two nations. Therefore as a concluding remark it can be stated that both these countries have their distinct set of advantages. Going by the facts it can be stated that China is well ahead of India in the manufacturing sector while India leads in the services sector. Implementation of suitable polices can very well ensure the emergence of these two nations as potential superpowers in the future. References Bragg (et. al). Assessment of the Economic Effects on the United States of China’s Accession to the WTO. [Pdf]. Available At: http://www.usitc.gov/publications/docs/pubs/332/PUB3229.PDF. [Accessed on May 24, 2011]. Cavusgil, S.T., Knight, G., & Riesenberger, J.R. (2009). International Business. Pearson Education India. CIA. (2011). The World Factbook. [Online]. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/in.html [Accessed on May 24, 2011]. Deloitte Development. (2007). Globalizing Indian Manufacturing: Competing in Global Manufacturing and Service Networks. 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