Sourcing – India or China ?

Off late there has been a lot of debate as to which is a better sourcing destination – India or china.Going by just volumes China is far head of India in both value and variety of products shipped ,especially to the US market, but India is emerging as a strong contender with recent changes that shift the balance in its favor.

While India will not be able to overtake china as a sourcing base  it will be able to take away a major share in low technology manufacturing such as apparel,shoes,Handicrafts and the such while China will continue to lead in high tech goods.India will emerge as an “alternate source” for those looking for a more stable,quality conscious and environmentally freindly supply source with a long term horizon.

A few compelling reasons for retailers to develop a sourcing base out of India :

1. A stable supply base governed by democratic economic policies which are linked to the world unlike China where demand is artificially created and supply is pegged to control price and consumption.

2.Almost all regions in china have raised labor wages.The rise is varied from 20 % in coastal china to 65 % in cities like Shenzhen.They now range from $150 to $300 where as they are low and stable at about $100 to $ 150 in India.At most they go up to $ 200 for skilled labor in some of The Indian Factories.

China has done this to lower the income gap which was giving rise to frustration among the working class and also to boost domestic consumption.

Being a free market economy Domestic consumption in India has always been high which is one reason for poor export outlook.Companies can make a lot more money by selling to Indians and they only go for export for engaging spare capacities or for securing bulk deals.With an increased focus on world markets this manufacturing base will drive the export growth.

3.Chinese currency Renminbi which was pegged again in 2008 to help the exporters fight recession , may be allowed to free float under pressure from IMF and other world bodies.

Indian Rupee has always been free floating and remains stable at about Rs.45 to a dollar with maximum 10 % fluctuation on either side beyond which the government may need to intervene.It has not happened so far except during the 2008 economic crisis when Rupee became too strong effecting dwindling exports negatively.

4.As customers ask for products which have been produced in more environmental friendly and sustainable manner the retailers will be forced to ask for questions such as chain of custody,effluent treatment,carbon footprint,labor friendliness etc.With strong laws governing Indian Manufacturing it will have a definite win over China which has ignored these for a long time.

If China pushes for the environmental compliances now they will most certainly scar the low cost image it has created for itself.I understand that many Chinese provinces are pushing environmental issues which is adding cost to the manufacturing bases there.Many others may follow soon.

5.Infrastructure has been a major concern for India for a long time.But the last few years have seen the strengthening of the rail road network and development of sea and air ports.Today India can boast of some of the best airports in the world and soon the number of sea ports with container handling capacities which are many times over their current capacities will be a reality.Public Private partnership model has not only brought in the required investment but has also ensured before time completion of projects as most projects have a severe penalty clause for overruns.

6.Last but not the least – India today has the largest pool of skilled English speaking manpower which is below 35 years of age.As they work hard and play harder a new consumption pattern is beginning to emerge which will fuel domestic consumption and thus attract huge investments in manufacturing of goods and services.The rise of the “Indian middle Class” which is as big as the US population is now a reality.

Manufacturing industry in both SME and large scale industries has to gear up to keep up with the rise in demand.Most of the MNC’s which were earlier importing are now having their own manufacturing bases in India now.This will help in raising the production and quality standards of Indian enterprises as they will have to compete with International competition.It will certainly help in making the “made in India” label more valuable than ever before.

NREGA – Good politics Bad business

While the government is basking in the success of the NREGA (National rural emaployment Guarentee Scheme) and the opposition is crying fowl from the rooftops,the real  impact of this scheme on the economy is something no one seems to be bothered about.

Many years ago IBM computers was in the dumps and it had to do something drastic to turn around its dwindling fortunes.They had a huge workforce which they could neither fire right away nor could keep for always in its current form.Driven to the wall the team at IBM told its employees that we would like to retain everybody so long as they can prove themselves to be employable.This simply meant that there are no free lunches and whoever contributes can be a part of the party.This simple idea turned out to be one of the most important case studies in HR history as it brought back IBM computers from the brink of bankruptcy to the centre stage of IT revolution as we know it.

Professionals like us  have no issues with sharing our destiny with our less fortunate brethren but the only worry is that can we sustain it for long.If the dog starts biting the hand that feeds or in softer words if we cut the branch on which we are perched its going to be sad tale of foolhardy for all of us.On one hand the money is being ill spent and on the other the sources from which it came are being attacked at the same time.

Lets look at some very compelling situations which I am putting here not for starting a debate but to sound a red alert for ‘fools’ who keep living in their own  paradise :

1.Today you go to any of the Industrial cities such as Ludhiana , Moradabad, Tirupur ,Kanpur,Cochin etc and there’s one thing you will find common on all factory gates – a sign declaring labour required for packing,polishing stiching,cutting,weaving and so on.So what’s new ? well there is no labour !

And where have they all gone ?? Nowhere.They have just not turned up.Who would bother to lead a harsh life of hard work when you can enjoy the fruits of someone else’s labor for free at home.A share has to be given away in bribes but that’s OK.I did not do anything do deserve it anyways.

2.NREGA may be a great scheme but its implementation is seriously flawed.Has the government come up with a white paper on how the country has benefited by keeping the nations working hands tied up to their place of origin.Displacement to urban centers could have been a problem but is this the right solution.What are the metrics applied and how the performance of the workers,supervisors and babus is being measured.NREGA is supposed to build check dams,community roads,wells etc but how have the parameters for achievement been set against the work being done by a private contracter.

3.In order to be ’employable’ by world markets our industry needs to be competitive.But we have floating exchange rates compared to China’s fixed ones,we have all kinds of industrial policies that hinder free flow of men and material,we have excise duty which encourages export of raw material and discourages export of finished goods,We have labor laws that were fit for the 1950’s but no one has bothered to change them,we have the lowest productivity of workers and highest cost of transport and duties.

4.India is touted to be on the growth path as more than 70% of its population is under 35 years of age and we have the largest pool of working population.But with schemes like NREGA we must question if the working hands are getting utilized optimally.Whats the differential when you have a skilled tailor work on a machine producing merchandise for exports vs. the same guy working in his village and digging a canal.

5.Those who earn much more that what NREGA offers and have skills which are far beyond will continue to rise on the economic path but what is the government doing to upgrade the skills of those who work for NREGA ??What about those who have under utilized skill sets.I am sure their numbers far exceed those of the few software engineers we keep talking about.

6.If the factories cannot produce goods for shortage of labour or become uncompetitive in world market place who will take the responsibility and how will the deficit in export earnings be made good.What are our options and what are we doing about mechanizing processes that are labor intensive.Is the government giving incentives to SSI’s and Exporters so they do not suffer due to lack of cheap labor which has been their competitive advantage for so long.

I am not predicting a doomsday scenario here but if you go to one of the centers of export excellence above you will be as aghast as I was when I saw half the units either closed already or on the verge of it.

When last season our supplier in Ludhiana told us that he can’t supply the goods due to shortage of labour we went to an importer and bought Chinese sweaters.I wonder what will hold the buyers in other countries to act any differently if we in India continue on this path of self destruction.

The Link below to NREGA website does not measure any of the stuff I have mentioned but interestingly shows the lowest levels of Funds utilization and sanctioned in states like Goa,Himanchal  and Uttarakhand which have done far better on the industrialization and improving quality of life for their people.