COMPETITIVE ADVANTAGE

Dear Amitabh ,

Of course , even as , devaluation of Chinese Currency by 2 % would be a cause for worry to all of us , we must not lose our focus on :

"  How to increase our Competitive Advantage in Manufacturing ? "

My today's blog is debating this issue

regards,

hemen

0 - 98,67,55,08,08

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

COMPETITIVE   ADVANTAGES   ARE   TRANSIENT 

What is the significance behind following recent announcements ?

#  Indian company , Apollo Tyres will invest 475 million Euros , to set up a

     tyres manufacturing plant in Hungary  ?

#  Chinese company , Foxconn will invest $ 20 billion , to set up 10-12

    factories in India , in next 5 years ?

My guess :

 #  For manufacture of tyres , Apollo finds that labour-costs in Hungary are

     lower than the same in India .

     Also , that it has a huge export-market for its tyres in Europe , so it

     makes sense to set up a plant nearby in order to reduce transport costs

#   Same reasons for Foxconn , for its electronic products , sold world-wide

Conclusion :

#   Each country enjoys certain " Competitive Advantage " ( over other

      countries ) , at a given point of time , for a given product or service

     In present cases , that could be , " Labour Costs "

But " Competitive Advantages " are transient  !  Never permanent  !

And these may not be the same for ALL products or services , at ALL times !

Eg:

For a highly automated product like a " Integrated Computer Chip " , labour costs are an insignificant percentage of total manufacturing costs , whereas Capital Costs ( plant / machinery ) are a major element

For this reason , for manufacture of such chips , countries having low labour costs , cannot claim that as an advantage

Again , capital intensive manufacturing needs huge amount of finance, where India is at a " disadvantage " , vis-a-vis developed countries , due to its very high rate of interest on borrowing

So , each country , has to remain on constant look-out for its own competitive advantages , at each point of time (- and before it ceases to be an advantage )

In case of Foxconn , its Chairman Gou , even went to the extent of saying :

" In our Maharashtra-based factory , we will employ labour-intensive manufacturing processes "

What he meant ( but did not say ) :

" Only till such time , Indian labour-costs rise and catch up with the labour costs in our Chinese factories - where , we have started installing robots  "

That reminds me of the incidence ( reported in book " Steve Jobs " ) where President Obama , asked Steve Jobs to stop outsourcing Apple products to Foxconn and move their manufacture to USA , in order to create jobs in USA

Steve's answer ( - since , he never minced his words ! ) :

Over my dead body !

[ And Obama dare not ask this question to current Apple CEO , Tim Cook , who continues with the same " Competing Policy " for last 4 years ! ]

Obviously , Steve had no love lost for jobs of his fellow citizens !

It is no different with Foxconn Chairman Gou , whose only concern is to keep Foxconn , globally competitive , no matter , where it manufactures its products - any exhortation from President Jin Ping , notwithstanding !

And , I get a feeling , that if PM Narendra Modiji , were to try and persuade Apollo Chairman , Shri Kanwar , not to put up that plant in Hungary but set it up in India to create jobs in India , he might get a somewhat similar - but of course , a vastly polite - answer  !

Within past 12 months , India's trade imbalance with China has gone up from $ 36 billion to approx $ 48 billion

With yesterday's devaluation of Chinese Currency by 2 % , this may get worse

Of course , this devaluation , will not lower the labour costs in China , which will still keep rising

So , devaluation can only be a " Transient Competitive Advantage " for the Chinese Manufacturers  !

On the other hand , of the final cost of a " Manufactured Product " :

>   labour costs  =  10 % - 20% 

>   material costs ( including bought-out components ) =  50% - 60%

>   overhead costs ( selling / admin / advt / interest etc ) = 20 % - 40 %

So , how much of " Final Cost " can be reduced by a 10 % increase in :

>  Labour Productivity  ( thru mechanization / automation  ? )

>  Materials Productivity ( thru Vendor Development for better quality ? )

>  Overhead Productivity ( thru Computerization of Manual Systems ? )

It would seem to me that , as far as increasing our "Competitive Advantage " in Manufactured Products is concerned , the same lies in increasing our " Materials Productivity "

Our top most priority should be upgrade the capabilities of our 40-50 Million MSME ,from whom the organized large companies , purchase components / sub-assemblies

Large companies should focus on R&D / Design / Buying / Final Assembly and Quality Control , leaving manufacture of components / sub-assembly to MSME units

Only this can help us to continuously increase our Competitive Advantage , even as labour costs keep rising in the large exporting companies

----------------------------------------------------------------------------------

hemen  parekh

12  August  2015

B2BmessageBlaster