Outsourcing to China and India: A North AmericanPerspective

in collaboration with

Outsourcing to China and India: A North American Perspective 3

outsourcing to India struggle with themovement of goods between states dueto India's unique state-to-state taxationregulations. In addition, significantinvestments need to be made to theinternal infrastructure in order tostreamline supply chain logistics.

India holds excellent potential as a low-cost player, but state-to-state roadinfrastructure and restrictive taxes forinterstate movement of goods currentlylimit how much a North Americancompany can accomplish there. ForIndia to achieve supremacy inmanufacturing outsourcing similar to itsachievements in the field of informationtechnology (IT), and to keep pace withcountries like Vietnam and Thailand, itwill have to make substantiveimprovements in infrastructure and theability to move product state-to-statewithout significant financial penalty.

When the VAT (value added tax)replaces the multitude of state andcentral government taxes as expected,the efficiency of supply chain logisticswill be significantly improved in India.Such changes will encourage growth formanufacturing outsourcing and forthird-party logistics providers, bothsectors that have enormous potential for growth.

This study is a summary of detailedpersonal accounts of the physicaldistribution aspects of the supply chainin China and India, provided byexecutives from 12 North Americancompanies currently outsourcing inthese regions. Together, the intervieweesprovide an outline of the current state oftheir distribution operations andprocesses, the lessons they've learnedand the risks they face, and, lastly, thetrends they are observing that will createfuture changes to the outsourcing model.

Executive Overview

Manufacturing the way we see it

primary concern relates to the logisticsinfrastructure within China, which isconsiderably less developed whenmoving away from the economic hubs,which are primarily in the coastal provinces.

There is a growing need for a broaderphysical infrastructure, as well as morewell-educated, skilled human resourcesin areas outside the current businesshubs, which suffer from overcrowding,traffic congestion, air pollution andrising costs, particularly for skilledlabor and raw materials. Manycompanies have learned to leveragetheir own size across China and haveestablished partnerships to ease someof the impacts of these issues.

Many companies that have been inChina for some time have seensignificant rewards for their invest-ments, and therefore a high percentageof their overall profits is dependent onsuccessful offshoring in China. In turn,these companies are associating agreater and greater significance toguaranteed and uninterrupted productflow. Add to that the recent headlinesregarding quality and safety concernsfor North American productsmanufactured in China, and the needfor risk mitigation is quite high.

However, China has shown awillingness to address these issueshead-on both financially and withgovernment oversight. China has mademajor investments in the past 10 years,has changed laws and has encouraged abusiness culture that will continue tofoster growth. These are all positivesigns for companies either consideringChina for the first time or hoping togrow their current investments.

In India, two primary concerns arisetime and again—infrastructure andtaxation. North American companies

The quest to produce or provide aproduct at the lowest possible price,while simultaneously maintainingproduct quality and integrity, hasdriven many North Americanenterprises overseas, particularly toAsia. While outsourcing overseas is nota new phenomenon, it has now becomepossible to analyze and qualify theprocesses that have made these offshoreventures successful and profitable.

This study aims to identify the specificimpacts to the physical distributionsupply chain of North Americanbusinesses when outsourcing to Chinaand India. By interviewing high-levelexecutives from North Americancompanies currently operating in Chinaand/or India, this document provides a“lessons learned” guide focusing on thecurrent state of operations, riskmitigation and predictions for future developments.

Outsourcing manufacturing to China toreduce costs in the supply chain is byno means a new development. In fact,there are companies in North Americathat have been successfully offshoringto China for as long as 40 years. Theirunique challenges have evolved as thecapabilities within China have matured.

By comparison, the outsourcing ofmanufacturing to India is relativelynew, gaining a foothold within the pastseven years. While India has become amaster in the area of informationtechnology outsourcing, the supplychain processes related tomanufacturing outsourcing continue tobe a challenge and obstacle for manyNorth American companies.

The growth of manufacturingoutsourcing in China is having animpact on the physical distributioncomponents of the supply chain. One

Objectives and Methodology

This study, conducted by ProLogis andCapgemini, taps the extensive expertiseof major North American enterprisesthat are currently operating in China,India or both. The objective of thisstudy is to shed light on the specificimpacts to the physical distributionsupply chain of maintaining anoperational presence in China and/orIndia, two fast-growing and quicklyevolving regions for outsourcing.

This study is intended to augment,with more in-depth detail, the globalstudy entitled “Offshoring Evolution:Changing Trends in India and ChinaAcross Industries.” The global studywas conducted electronically during thespring of 2007 with 331 participantsand provided the followingconclusions:

■ Offshoring to China and India hashad limited short-term impact onWestern operations.

■ Companies are more reliant onexpatriates for managing Chineseoperations compared to Indianoperations.

■ India is diversifying scope from ITand BPO activities to manufacturingactivities.

■ Offshoring in India and China ishighly concentrated in a smallnumber of cities.

■ When offshoring to China and India,companies experience similardifficulties with regard to local rules,regulations, culture and languagebarriers.

■ Companies are more successfuloffshoring in China than in India.

The global study is available fordownload at www.prologis.com andwww.us.capgemini.com.

This North American study wasconducted during the summer and fallof 2007. ProLogis and Capgeminiselected 12 influential North Americanbusinesses that outsource services inChina, India or both and havemanufacturing operations, majorsuppliers or distribution operations inthose countries.

Interviewees were selected from a broadrange of industries and representvarying degrees of longevity in theseregions. For additional details, seeFigure 1 for study participants andFigures 2 and 3 for years outsourcingin China or India and size of theparticipating businesses.

Extensive one-on-one interviews wereconducted at the senior level within

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operational learnings as they relate toimpacts on the physical supply chain,but also explored the broader businesslessons that have impacted the successof their enterprises in China and India.Interviewees were also asked to discusshow and why they formed strategicpartnerships overseas, and, lastly, toarticulate the risks they've encounteredwhen outsourcing in China or India.

Lastly, each executive was asked todiscuss current trends developing inChina and India, and explain theirunique predictions for futureoperations overseas. More specifically,questions focused on the company'sfuture plans for expanding theiroutsourcing activities in China or India,and whether there are other countriesthat they feel are emerging as viablecompetitors. Interviewees were alsoasked to illustrate trends they seedeveloping in the near horizon and tomake predictions about the more

these organizations, with intervieweesranging from the Senior Vice Presidentof Manufacturing, Vice President ofGlobal Distribution, Vice President ofGlobal Manufacturing, President ofInternational Operations and Directorof Asia/Pacific Operations.

In addition to insight into their currentstate of operations, interviewees wereasked to share their best practices,lessons learned and the unique risksposed by outsourcing to China orIndia. Lastly, the study explores theopinions of these key decision makerson current trends that are developing,as well as their predictions on futureimpacts to the physical distributionsupply chain when outsourcing inChina and India.

Regarding the current state ofoperations, interviewees werespecifically asked to provide a detaileddescription of their current supplychain model and product flows withinChina or India. They also outlined theirkey export and import cities andexplained the decision makingprocesses within the entire supplychain organization, both in China orIndia and in North America. Answersare intended to provide a model for thereal-world impacts on distributionoperations when outsourcing to Chinaand India.

After describing the current state ofsupply chain operations, each companywas asked to share its best practices,highlighting the most important lessonslearned in the course of developingtheir business in China or India.Interviewees not only discussed

Manufacturing the way we see it

Outsourcing to China and India: A North American Perspective 5

Figure 1. Industries of participating companies

Consumer products

Electronics

Global Third-Party ServicesProviderHome Improvement

Industrial Supplies

Life Sciences Products

Maintenance, Repair andOperations Products (MRO)Ofice Supplies

Sports Footwear and Apparel

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distant future of offshoring to Chinaand/or India.

ProLogis and Capgemini wish to thankthe executives in the participatingcompanies for their generous gifts oftime, expertise and invaluable insight.

Definition of OutsourcingOutsourcing involves the transfer of themanagement and/or day-to-dayexecution of an entire business functionto an external service provider. When acompany chooses to offshore thisoutsourcing, they move any number ofkey business processes to a lower-costoverseas location. These offshoredbusinesses processes can include:manufacturing, assembly and productmovement from source to customer (viatruck, rail, ocean and air). Offshoringmay also include all aspects of aproduct’s production, intra-countrymovement, temporary warehousing ordistribution and export handling.

Third-party offshoring is the relocationof business processes from within theclient company to an outside vendoroperating at the new, lower-costlocation. This vendor then completesthese outsourced services for the clientcompany in the future.

Any decision to offshore must include aquantitative analysis of the net totallanded cost when the outsourcinginvolves the production and movementof products.

Figure 3. Revenues of participating companies

25% 25%

17%

8%

17%

8%

0%

5%

10%

15%

20%

25%

<= 5 6-10 11-15 16-20 21-25 > 25

Billion US Dollars

Figure 2. Years of experience in India and China of participating companies

8%

17%

42%

17%

8% 8%

0%

5%

10%

15%

20%

25%

30%

35%

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45%

< 2 years 2-5years

6-10 years

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> 20 years

Years

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consumer products companies hastransitioned away from using Chinamerely as a low-cost productionlocation. Instead, all of their productsmanufactured in China are now sold inChina, and North American products aresourced from other low-cost locations.

However, despite this impressive growth,there are several factors that mayhamper growth in coming years. First,most industrial development is centeredin China’s eastern coastal regions, andwages are rapidly increasing in theseurban hubs. China has now outstrippedthe Philippines and Indonesia in termsof average manufacturing wages. Inaddition, although the manufacturingcosts are lower in the central regions, theinfrastructure is not sufficientlydeveloped to allow North Americancountries to take advantage of thesesignificant savings.

An additional factor that may slowgrowth is growing economicprotectionism. Both the United Statesand Europe are monitoring China’swillingness to comply with its WorldTrade Organization obligations, whichwill negatively affect trade if Chinadoesn’t comply at the required levels. Infact, China’s trade surplus with theUnited States climbed to $233 billion in2006, making up nearly 30% ofAmerica’s total deficit. In addition,China’s trade surplus increased by 88%in the first four months of 2007 whencompared with the same period in 2006.This situation has led to a growingprotectionism movement in the U.S.,with the U.S. asking China tosubstantially increase the value of theChinese currency, the Renminbi.

In the past two decades, NorthAmerican enterprises have gone fromviewing India and China as largely rawmaterial suppliers to key players in theproduction and services industries. Inaddition, as the investments fromNorth American companies have grownin China and India, so too has theconsumer marketplace grown in thesecountries.

Economic Overview of ChinaOver the past 30 years, China hasreformed its financial market, openingits economy to foreign investors. Today,only around 33% of the economy isstate-owned. China joined the WorldTrade Organization in 2001, allowingthem to become a significant player inthe global economy. Whilemanufacturing output continues toshrink in most wealthy Westerncountries, China has doubled its shareof global manufacturing output.

China has become a primary source foraffordable labor throughout theWestern world, working to quicklyupgrade its technological abilities inorder to compete internationally.China’s Gross Domestic Product (GDP)has been growing about 10% annuallysince 2003, and growth is expectedcontinue but at a slower rate. In termsof population, China currently hasnearly 1.3 billion people, with a rapidlyexpanding consumer population ofaround 100 million. This consumingclass is growing at nearly 10% eachyear, making China one of the fastest-growing consumer markets in theworld. In fact, one the world’s largest

Current Economic Situation in China and India

Manufacturing the way we see it

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is about 50 million (compared to 360million in Europe and 280 million inthe U.S.) and is expected to grow at arate of 7.5% annually. This rapidlyexpanding consumer base will provideadditional encouragement to inter-national companies looking to developoutsourcing operations in India.

However, there are economic andpolitical factors that may hinder thisexpected growth. Poor infrastructuremay delay foreign manufacturinginvestments, and India continues tolimit foreign ownership. While overallthe government seems to be lookingmore favorably on foreign investmentin the past few years, restrictions stillremain on some of the fastest-growingindustries, such as automotivemanufacturing and pharmaceuticalproduction. However, when comparedto many of the other low-cost countriesin Asia, India, like China, has manypositive attributes, including therapidly growing purchasing power ofthe consuming class.

Current State in ChinaOf the 12 companies participating inthis study, several have been in Chinafor many years, and have seen theirbusinesses change and mature asthey’ve mastered the culture’s learningcurve. Other companies are fairly newto China, and have been motivated tooffshore there in large part to securelow-cost private label products.Together, these businesses represent abroad gamut of experiential learning.

The majority of study participantsdescribed shared planningresponsibilities between U.S. andChinese operations. Almost all of thecompanies interviewed allow the finalexecution of weekly and daily planning

Companies considering offshoring toChina must weigh these economicconcerns against the potential that liesnot only in the lower production costs,but also in the ever-expandingconsumer marketplace. When assessingrisk mitigation opportunities andcomparing China to the rest of the low-cost Asian countries, China remains avery desirable location with vastopportunity both for product exportand for domestic sales growth.

Economic Overview of IndiaRapid development of three newindustries, information technology,business process operations (BPO) andtelecommunications, has significantlyaffected the Indian economy. In fact,the services industry has become thecountry’s largest sector, overcomingmore traditional sectors like agricultureand industry. Overall, agriculture’scontribution to the gross domesticproduct (GDP) is declining whileindustry’s contribution is stable.Overall, the GDP in India has grownaround 8% since 2004 and economistsexpect similar growth in coming years.

In terms of foreign investment, India’sForeign Direct Investment (FDI) levelsare low, particularly as compared tothose in China. In 2005, India’s FDIwas $7 billion, compared to more than$70 billion in China. However, analystsexpect India’s government to continueto seek new ways to encourage andincrease FDI in coming years,particularly in manufacturing centers.

While international companies largelysee India as a low-cost offshoringlocation, the fast-growing consumermarket in India is changing that. Whilethe total population of India is close to1.1 billion people, the consuming class

‘‘We believe the economy in Chinais close to hyperventilating, andwe must mitigate our risk.’’Home Improvement ProductsManufacturer

China, many others mentioned that, astheir business has matured in China,their need to streamline and invest incontainerization and consolidation hasgrown and continues to change. Inaddition, several respondentsmentioned the need for greater end-to-end visibility in the U.S., in China andwith large customers, allowing them toshorten the overall cycle time andbetter manage production planning.

Products typically enter the U.S.through the West coast ports of LosAngeles, Seattle and San Francisco,where deconsolidation often occursbefore shipments move on to regionaland then to local distribution centers.Several respondents shared challengesrelated to container handling onceshipments arrive within the domesticnetwork.

The new Chinese policy related toforeign business owners, and theestablishment of Wholly OwnedForeign Enterprise (WOFE) status, ischanging the way new and existingcompanies are doing business in China.Several of our study participants withmore history in China have beenchanging their business model fromJoint Ventures to Wholly OwnedForeign Enterprises. As a WOFE, aNorth American company eliminatesthe need for a foreign business partnerand often gains significant taxincentives when located within a FreeTrade Zone.

Not only is China a favored low-costcountry for outsourcing, it also has arapidly expanding consumer market.Many of our interviewees mentionedthat, as the Chinese market for theirproduct grows, they are in turnstepping up production in China tomeet domestic demands.

to be performed at the local level,ideally by well-trained Chinesenationals and/or third-party logisticsproviders. However, broader annualand quarterly forecasting and planninghas been retained at a centralizedlocation, usually in North America.

Broader cultural issues also play a keyrole in successful offshoring to China.Many companies attribute their effortsto understand and respect the localculture to an increase in successfulperformance. More specifically,interviewees shared that the soonertheir staff became localized, andparticularly when the Chinese nationalswere bilingual and educated aboutAmerican business practices, the soonerperformance improved.

While cost savings are a primarymotivating factor when outsourcing toChina, most companies also citedconcerns for maintaining control overproduct quality when outsourcing.Interviewees indicated that qualityconcerns rank higher than cost savingsin their operational planning andselection of partners in China.

In terms of physical distribution, oncemanufacturing is complete, mostproduct flows out of China throughHong Kong, Tianjin, Shenzhen andShanghai. The majority of studyparticipants use ocean transport, withexceptions made for customers who uselean manufacturing models or whohave rush orders. Another challenge forphysical distribution is the lack ofofficial or unofficial industry standardsrelated to key aspects of product move-ment, including standards for palletloading, dock heights and truck size.

While some participants currentlyhandle product consolidation while in

Outsourcing to China and India: A North American Perspective 9

‘‘As a third-party provider, gettingproducts in and out is just plainpainful in India.’’Global Third-Party Services Provider

Manufacturing the way we see it

The following are the key lessonslearned from current operations forsuccess in China:

■ Invest in local people whounderstand both Chinese and NorthAmerican ways of doing business

■ Inspect products frequently forquality assurance

■ Run the operations locally by quicklytransitioning to a Chinese-nationalmanaged team

■ Understand and respect the culture.

Learnings and Risks in ChinaThe primary learnings fromoutsourcing to China focus largely onissues of dialogue, regardinggovernment regulations nationally andregionally, as well as the need fordetailed product specifications.Transportation and the supportinginfrastructure were also frequentlycited concerns by many participating companies.

More specifically, many studyparticipants expressed a directcorrelation to their success in Chinaand their reliance on crucial localrelationships, whether establishedthrough joint ventures, local offices ortheir Chinese national employees. Onekey learning was the necessity ofdeveloping a real understanding of thelocal culture and investing significanttime in building strong relationships.

In addition, participants felt that asAmerican expatriates in China werereplaced with bilingual Chinesenational employees, success grewrapidly. If these local employees weretrained in or already had a strongunderstanding of U.S. businesspractices, gains were even moresignificant. North American operations

also rely heavily on frequent, in-depthcommunications with their Chinese counterparts.

By using local resources, studyparticipants were also able to achieve adeeper understanding of and respect forthe culture of the Chinese businesspeople. This is sometimes difficult forU.S. companies to achieve. Forexample, in China, a signed contract isnot necessarily the final agreement, butis merely the beginning of thenegotiations and relationship. Gainingthis comfort with the local culture takestime and investment, but again,acquiring resources with skills andknowledge in each country’s approachhelps to accelerate the process.

Many companies learned difficultlessons about surface transportationacross China. They had to includelonger time buffers for productmovement from west to east in Chinaand have had to rely on creative localresources to overcome some of thechallenges in moving product (e.g.,engaging Chinese Army trucks). Inaddition, the small size of trucks (20feet or less) and campus layouts ofmany small buildings require detailedlogistics planning and management.These logistical challenges will continueuntil China completes the manyinfrastructure projects they haveplanned.

Returning to issues of quality andproduct safety, respondents expressedthe need for constant due diligence onquality compliance. Particularly when just beginning offshoringoperations in China, participants feelit’s easier and less risky to onlyoutsource simpler products, to limit thetotal number of SKUs at first, and toinvest in clear direct instruction onproduct specifications.

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‘‘We went through a lot ofcalamity, but clamity equalsmarket knowledge.’’Global Third-Party Services Provider

companies can take full advantage ofthe low-cost production possible whenoutsourcing to China.

Trends in ChinaInflationary control, infrastructureinvestment and educationalopportunities will be crucial for Chinato maintain its market share of theoffshoring business. The companiesparticipating in this study are alreadylooking to countries like Vietnam,Thailand and throughout Latin Americaas a way to mitigate their risks andshorten the supply chain cycle time.

Overall, interviewees foresee additionalinvestments in China’s infrastructure,particularly in preparation for the 2008Beijing Olympic Games. However, thereare significant concerns about what willhappen to the economy after theOlympics, as some previous Olympichost countries have experienced a“post-Olympics bubble,” and as thepotential for an inflationaryenvironment exists, which could leadto an overall increase in the cost ofdoing business there.

As stated earlier, China does have solidplans for investing and improving theoverall infrastructure. In order forbusinesses to be able to move awayfrom the congestion of the large cities,substantial upgrades need to be madeto water supply and wastewatertreatment, overall pollution, energyoutput and consumption andburdensome government regulations.

In addition, there is a real need forincreased investment in infrastructure,particularly in China’s interior.Respondents do note that onceinvestments are made to the physicalinfrastructure, China is doing more to

Recent headlines of poor productquality or defective products havedemonstrated that failing to meetcustomer requirements can quicklydiminish market share and eliminateprofit. To overcome this, manyinterviewees highly recommendedfrequent product inspections.Interestingly, study interviews wereconducted in advance of recentheadlines regarding Chinese productquality, showing the respondents’ deepunderstanding of the real issuessurrounding outsourcing to China.

In terms of risks, study participantsfrequently mentioned concerns aboutinflation, particularly as it relates to thecosts of labor and raw materials.Concerns also arise related to thelogistics infrastructure and availabilityof well-educated human resourceswhen moving inland beyond theeastern provinces. Other ongoing risksare piracy and communicationdifficulties.

An emerging risk among severalcompanies with a more established,long-term presence in China is theirdependence on outsourcing forprofitability. With growing profitabilityfrom China-produced or suppliedproducts, so grows the dependence on,and risk associated with, physical,political and economic stability in theregion. Any event that might close, oreven temporarily disrupt productionwill then have a significant impact onthat company’s profitability, stock pricesand entire economic sector.

Study participants cited the need toinvest time and energy up front on in-depth benchmarking of costs. Bycompleting a detailed evaluation of thetotal landed cost of doing business inChina, and by taking advantage ofWOFE status and VAT taxes,

Outsourcing to China and India: A North American Perspective 11

Manufacturing the way we see it

‘‘We found out the 3PL companymoving our product from onemanufacturing site to another sitewithin central China wasoutsourcing the actualtransportation to the ChineseArmy. This was unusual but it didprovide excellent security.’’Consumer Products Manufacturer

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protect its investment, limiting loads onnew roads, which should allowcompanies to improve their distributionmodel. As China moves towards moresophisticated distribution models, thiswill in turn support the nationalizationof trucking standards, which are justnow being formed with new regulationsand guidelines.

Concerns also exist about theenormous disparity between the qualityof labor in the eastern provinces versuscentral and western China. Studyparticipants frequently noted thesignificant gap between the availability(and rising cost) of highly-skilled laborin the major cities, and lack of skills(and lower costs) of labor in theinterior provinces. Participants see aneed for China to increase investmentin education throughout the country tolevel these concerns.

From a raw materials perspective,China is one of the largest producers ofiron, steel, aluminum and other metalsused in many everyday products. Priceincreases, which are inevitable, willhave a ripple effect across China-produced products. An additionalconcern voiced by study participants isa rapid increase in the total landed costof outsourcing to China, which will beimpacted by both the valuation of thedollar and the rate of cost increases inChina. Therefore, many companiescurrently outsourcing significantly inChina will likely mitigate this risk byinvesting in other stable, low-costcountries.

In addition, as quality controls andmarketplace production capabilitiesimprove, and as the domestic marketcontinues to expand in China, studyparticipants believe that NorthAmerican companies will soon have theopportunity to outsource a greater

variety of more complex productssuccessfully. Lastly, interviewees see arise in the number of North Americanbusinesses who will switch to a WhollyOwned Foreign Enterprise (WOFE)model in China. In fact, over 75% ofcompanies currently establishingoutsourcing operations in China aredoing so under the WOFE modelversus a Joint Venture.

Current State in IndiaSeveral notes of clarification arenecessary related to India. First, not allof the 12 North American companiesparticipating in this study have apresence in India. Therefore, theperspectives presented below are drawnfrom a smaller sample of responses.

In addition, it’s important to note that,historically, one of the central obstacleswhen outsourcing in India has beentaxation. Corporate taxation is highcompared to Europe and the U.S.—thebasic rate is about 35%. There is alsoan additional tax, determined by eachstate, for interstate product export.However, the additional cost thesetaxes add, and the effect they have oninterstate business and productmovement, is beginning to lessen, as 21of the 29 Indian states have begun orhave completed the process ofimplementing the Value Added Tax.One interviewee learned that until thenew VAT regulations were established,they could best serve the domesticIndian consumer by using domesticwholesalers and letting the wholesalersdeal with the tax issues, thus avoidingthe challenges and effort in dealingwith the current state of taxation.

In terms of overall business structure,several businesses interviewed startedin India as “joint interest” companies,

‘‘We see the infrastructure fortransportation in China changingdramatically with investment bythe government, which finally seeit as a weakness. Thegovernment also now sees thevalue in safeguarding ourinvestment by restricting theoverloading of trucks to protectthe new roads being built.’’Consumer Products Manufacturer

state to state, varying based on theoverall median income of each state.

While India does have an extensive railsystem, it has been designed largely forthe movement of people, not freight,resulting in smaller rail equipment thanthat found in North America. Thisagain puts pressure on the truckingindustry and the supporting roadinfrastructure. Currently the truckingindustry is willing, but road conditionsand access limit their capabilities.

Interviewees also focused on thechallenges of understanding andworking within governmentregulations. However, studyparticipants generally feel that India ismaking strides in terms ofimprovements to the infrastructure andthe enactment of more foreigncompany-friendly laws.

Overall, outsourcing to India comeswith a unique set of challenges thatimpact physical supply chainoperations and processes, centeringaround two primary issues: interstatetax costs and complications with andlimitations of the infrastructure. Keys tosuccess in India, then, focus onmitigating these obstacles—developinga strong understanding of state-leveltaxes, keeping facilities smaller anddecentralized in order to produce andship from the same state andunderstanding and working around thelimited infrastructure. Companies alsohighlighted the importance ofproviding detailed productspecifications and clearly indicatingwhat can and cannot be improved oraltered.

The following are the key lessonslearned from current operations forsuccess in India:

over which they gradually took solecontrol. In addition, because logisticsand outsourcing within India can be achallenge, participants mentionedhandling their own manufacturingoperations in India rather thanoutsourcing them. Production planningis also frequently handled in the UnitedStates, and then communicated tooperation centers in India, as domesticlogistics in India can be difficult.

Overall, the largest issue NorthAmerican companies currently face inIndia is the effect the current taxstructure (described above) has on theirdistribution plans. In order to complywith tax laws, all companies found itnecessary to alter their distributionmodels. For example, if exporting, acompany might consolidate theiroperations into a state that also had anocean port, so that all of the activitieswere contained within the same state.Or, if producing product for domesticsales, they would need redundant orduplicate operations in the states inwhich they wanted to sell products.This decision required them to onlyfocus on the states where they could beprofitable as a stand-alone operation.

Recurring themes in the current state ofoperations in India also centered onweaknesses in the infrastructure awayfrom the main enterprise centers andport cities. Both the interstate tax lawsand the overall poor state of theinfrastructure make the movement ofproduct within India difficult. In fact,one North American third-partylogistics provider cited the enormouschallenge of trying to get products fromthe various facilities to India’s portcities as an impediment to growth. Asignificant disparity exists in the qualityand extent of the highway system from

Outsourcing to China and India: A North American Perspective 13

Manufacturing the way we see it

■ Develop a strong understanding ofstate-level taxes

■ Provide very detailed productspecifications with modificationrestrictions

■ Produce and ship from the same state

■ Know the infrastructure limits(highway and rail) and their impacts.

Learnings and Risks in IndiaRisks associated with outsourcing toIndia focus on two primary issues—infrastructure and taxation. Thelogistics infrastructure for freight is aperpetual obstacle, and state-to-statetax complexities, while graduallyimproving, still impact the physicaldistribution supply chain on a dailybasis and significantly influence thedistribution model.

For companies outsourcing in India,many of the lessons learned deal withissues of labor and relationship. As inChina, respondents found thatemployees’ value to the businessincreased significantly if they investedin them, grooming them in bothAmerican and international businessmethodologies. Respondents also foundthat the time and energy investmentsnecessary to establish and improveregular, in-depth communication werewell worth it, and that they benefitedsignificantly from working to buildmutual understanding.

Additionally, there are concerns aboutthe availability of skilled labor,particularly in smaller, mainly northerntowns. Interviewees also found thatwhere highly-skilled labor is readilyavailable, largely in the majormetropolitan areas, costs for thisqualified labor are increasing at asteady rate.

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Most companies doing business inIndia have found customs and dutiesprocesses complex and unclear. Majorchallenges exist in terms of handlingcentral taxes, understanding stateguidelines and taxes, and maximizingthe limited logistics infrastructure.Respondents mentioned the need toestablish relationships with localresources well versed in the local andstate regulations who can help createpositive partnerships and supply readyinformation. All companies mentionedthe total cost impacts of needing tomaintain numerous smaller facilitiesthroughout the country in light of thetaxation complications.

In spite of infrastructure and taxationcomplications, study participants doexpect India to mature in its support ofcompanies who want to do businessthere. However, until changes toinfrastructure and state-to-state taxationtake place, the overall total cost ofdoing business in India will remain achallenge. One recommendation forrisk mitigation in India is a thoroughtotal landed cost analysis before makinga commitment to invest in India.

Trends in IndiaFrom a manufacturing perspective,many companies still view India as anemerging country, as compared to amore mature country like China.However, based on the highereducation levels in India and the abilityto outsource more complex products,India still holds potential as a growinglocation for outsourcing and as amarket for their products.

As study participants look to theirfuture in India, the results are mixed.On one hand, the total landed cost of

‘‘The national highways form only2 percent of the entire roadnetwork in India but handle over40 percent of the national roadfreight traffic, putting enormouspressure on the highwayinfrastructure. Also, on average acommercial vehicle in India runsat a speed of 20 miles per hourcompared to over 60 mph in themature logistics markets ofWestern Europe and the UnitedStates.’’Datamonitor, February 2007

Outsourcing to China and India: A North American Perspective

potential as a low-cost manufacturinglocation, the government will need toincrease its involvement. For example,the practice of roads that end at stateborders needs to be corrected andbrought under national control. As itstands now, India lacks the necessarylogistics infrastructure to supportsignificant domestic distribution andstruggles with a huge variability intransportation equipment (manyshapes, sizes and capabilities).

Companies currently in India see aneasing of interstate complications as theVAT becomes more commonthroughout the country. Lastly, thepotential exists for improved usage ofdomestic raw materials, including steel,assuming improvements are made tothe interior infrastructure.

Overall, the search for a reliable, low-cost source country continues, withmany study participants lookingbeyond China and India, particularlygiven the risks identified in theprevious sections of this study. Lookingahead, study participants expect toexplore other low-cost countriesthroughout Southeast Asia, in EasternEurope (particularly for automobilecomponent outsourcing) and inMexico.

Manufacturing the way we see it

doing business in India remains higherthan in China, and they also expect tosee costs grow at a slightly faster rate inIndia. In this respect, China still holdsthe advantage.

On the other hand, however, thetechnical talent in India is very strongand should stay that way for theforeseeable future. Companies report asignificant educational advantage in thepeople they employ in India and expectthis trend to continue.

Perhaps the most challenging factor forgrowth in offshoring to India is overallinfrastructure. For India to realize its

Authors’ Perspective

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China and India are the two largestnations on the globe, with populationsof 1.3 billion and 1.1 billionrespectively. The focus of our interviewswas to compare and contrastoutsourcing to each country. Welearned that these countries originallywere seen as primary outsourcingsuppliers of low-cost goods andservices. However, this perspective isshifting, and China and India areemerging as developing new markets,with an ever-growing middle classconsumer market that is an outgrowthof successful outsourcing.

The development of more modernprocesses, technologies and distributionpractices has required higher qualitylabor. North American companies nowrequire workers who are more skilledand trained in the internationalmanagement of the various componentsof the supply chain. In turn, thisdevelopment has resulted in changes to

the way global corporations developtheir people, product production andlogistics.

The common theme in our interviewswas the contrast between the respectivegovernments. It is important to notethat the central governmental in Chinahas been quicker to react and promotepro-business policies, programs andpublic investment. By contrast, thestrong democratic state government ofIndia has provided inherent challengesto an efficient logistics channel as eachstate has unique rules, regulations andtaxation policies for corporaterecognition. In India, multiple plantsand distribution facilities are requiredto comply with state regulations.

As China and India continue to matureas markets for North Americanoffshoring, the physical supply chaincorrespondingly matures and improves.Companies outsourcing in China andIndia have learned to make low-riskinvestments in technology andinfrastructure, observing the losses thatcome with overinvestment beyondwhat the overall current state ofinfrastructure and human resources cansupport. We feel that with proper duediligence and total landed cost analysis,there is ample opportunity forcontinued growth in China and India.

China has invested heavily ininfrastructure, allowing for moreefficient optimization of distribution.Larger, more modern buildings arereplacing antiquated low-cost facilitiesas technology and Western practices areimplemented for the higher throughputof goods. It was a common theme, in

‘‘We feel the West expects Chinaand India to catch up quickly towhat it took us 100 years todevelop, in terms ofinfrastructure, processes andstandards.’’Life Sciences Products Manufacturer

Manufacturing the way we see it

Outsourcing to China and India: A North American Perspective 17

concert with the comments on India’sstrong state government, that a nationalinfrastructure program is required forthe advancement of productoutsourcing. The logistics challenges ofIndia inhibit the potential growth inoutsourcing that China has experiencedover the past 10 years.

Truck transportation, a concern forboth countries, is an industry thatrequires governance, improvement andmodernization. Our respondentspointed to this industry component aslagging the modernization inmanufacturing and distributionfacilities. China is projected to respondmore quickly as this industry hasreceived governmental review and theimplementation of regulations on truckweight restrictions has commenced.

Finally, the advancement of the modernsupply chain has been developing overmany years in Europe and the UnitedStates, leading to the evolutionarycreation of new technology,manufacturing processes and logisticspractices. India and China have thebenefit of implementing new state-of-the-art components of the supply chainby studying and putting into placewhat has been proven. Ourrespondents voiced in concert theadvancement of China and India, andmore importantly, the positive rate ofchange and implementation in thesetwo countries. They largely attributedthis positive advancement to the rolethat centralized government has playedin benefiting the rate of change andfocus. With the advancement ofoutsourcing, the correspondingeconomic benefit has, and continues to,

develop a new consumerism in eachcountry, advancing both India andChina into the 21st century.

About the AuthorsCapgemini, one of the world’s foremostproviders of consulting, technology andoutsourcing services, enables its clientsto transform and perform throughtechnologies. Capgemini provides itsclients with insights and capabilitiesthat boost their freedom to achievesuperior results through a unique wayof partnering called the CollaborativeBusiness Experience. Capgeminireported 2007 global revenues of 8.7billion euros and employs more than83,000 people worldwide. Moreinformation is available atwww.us.capgemini.com.

ProLogis is the world’s largest owner,manager and developer of distributionfacilities, with operations in 105markets across North America, Europeand Asia. The company has $29.9billion of assets owned, managed andunder development, comprising 446.9million square feet (41.5 million squaremeters) in 2,523 properties as of June30, 2007. ProLogis’ customers includemanufacturers, retailers, transportationcompanies, third-party logisticsproviders and other enterprises withlarge-scale distribution needs.Headquartered in Denver, Colorado,ProLogis employs more than 1,300people worldwide. For additionalinformation about the company, go towww.prologis.com.

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Copyright © 2008 Capgemini. All rights reserved.

Capgemini, one of theworld's foremost providers

of consulting, technology and outsourcingservices, enables its clients to transformand perform through technologies.Capgemini provides its clients withinsights and capabilities that boost theirfreedom to achieve superior resultsthrough a unique way of working—theCollaborative Business Experience®—andthrough a global delivery model called

Rightshore®, which aims to offer the rightresources in the right location atcompetitive cost. Present in 36 countries,Capgemini reported 2007 global revenuesof 8.7 billion euros (approximately US$12billion) and employs over 83,000 peopleworldwide.

More information about our services, offices and research is available atwww.us.capgemini.com.

About Capgemini and the Collaborative Business Experience®

www.us.capgemini.com

Capgemini

Capgemini North American Headquarters623 Fifth Avenue33rd FloorNew York, New York 10022 Tel: +1 212 314 8000

Prologis

ProLogis Global Headquarters4545 Airport WayDenver, Colorado 80239USATel.: 800-566-2706 www.prologis.com