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Chasing the dragon

India could still make it in manufacturing offshoring.

T.V. Mahalingam        Print Edition: October 21, 2007

Here is a ray of hope for all those who think that India has lost the manufacturing race to its neighbour, China. A recently-released survey by consulting and outsourcing giant Capgemini reveals that India could challenge the position of China as the manufacturing centre of the world in the next three to five years. The survey was conducted by Capgemini and ProLogis, a global industrial real estate player, across 331 companies from various sectors like automotive, energy, life sciences, telecom, and retail. “Companies have indicated that manufacturing activities will be the primary activity offshored to India over the next three to five years, which will surpass India’s IT and BPO activities,” reads the report. Considering that India’s software exports touched $31.4 billion in FY2006-07, that seems fantastic.

The reason for this opportunity lies more in China’s problems in the manufacturing space than in India’s strengths. Like Ashwin Yardi, Vice President at Capgemini India, says: “The manufacturing activity of China is clustered around the country’s coastal region. Costs are drastically increasing here. Wages in this area are in the range of $250 and $350 per month. In some parts of the Philippines, Indonesia and Thailand, for similar skill sets they are in the region of $100 to $200,” says Yardi. Therein lies the opportunity in India which can offer competitive rates, says Yardi. Before you start dancing in the isles, here is a sobering fact—over 43 per cent of the companies that offshored manufacturing activities to India have not achieved their “initial objectives”. The reason: The absence of manufacturing and supply chain infrastructure.

Overall, 83 per cent of companies that offshored activities (including IT, manufacturing, finance and R&D) to China have achieved or outperformed their expected benefits, as compared to 69 per cent in India. But split that down individual sectors and the scenario changes sharply. “Companies that offshored R&D, finance, customer service and IT recorded greater success levels in India. Eighty-two per cent of companies that offshored R&D to India said that they have achieved or outperformed their initial objectives,” says Yardi.

Contrary to popular perception, not every job sent to India or China is a job lost. Overall, the closure rates of western facilities due to offshoring to India and China is about 10 per cent. Again, things varied according to the activity offshored. Some 32 per cent of companies shut western facilities when they offshored manufacturing facilities to China, whereas the corresponding number for India was 16 per cent. On the other hand, western companies that offshored activities like finance and R&D to China closed less than 8 per cent of existing facilities whereas operations in India were considered as additional resources. Chew on that, Lou Dobbs.

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