The trends and outlooks of production and services sourcing
Editor’s note: The global marketplace is in a state of change, and emerging economies continue to have a great effect on supply chain and operations management. India particularly is in a time of transition, in not only its consumer sector, but also areas such as outsourcing, manufacturing, and technological development.
Here, Karthikeyan (Karthik) Natarajan of Mahindra Satyam, a global information technology (IT) and engineering services provider, speaks with APICS magazine staff editor Christopher Jablonski about the current state and future prospects of emerging markets, as well as the influences and consequences surrounding the choice of manufacturing operations location.
Jablonski: What are the major forces behind determining production location in today’s environment, particularly in emerging economies?
Natarajan: One driver is the markets are changing. Take automotive, where 50 million cars and passenger vehicles are being sold worldwide. This number is likely to increase to, say, 70 million by 2017 or 2018. This 20 million growth you are seeing in the automotive industry is going to come from emerging markets, such as China, India, Russia, Brazil, and South Africa.
Companies will need to start looking at taking a global platform [to become] significantly large in-house local players in each of these countries in order to be competitive. They need to start getting the platform design of India for India, China for China, Russia for Russia. This is a fundamental shift we are seeing. These markets are definitely seeing growth and need products that will treat the special needs of customers.
The second driver is more and more complexities are coming into products, whether in the form of advanced software or electronics. This is something not many of our customers have incubated inside their companies. Some of them are outpacing their skill sets; it’s not just about cost.
The third element is in product development. I think many mass-setup products are going to go away. Customers want to see how they can bring uniqueness in every possible product that is sold. So, you find mass customization and personalization of products. This is something that requires product development capacity, and the capacity doesn’t exist in Western markets.
Jablonski: What are the sources of capacity shortages in the West?
Natarajan: In aerospace, for example, the average age of the engineering workforce is about 55 to 60. They will start retiring in the next 10 years. There are at least 20,000 aircraft that are in service today, and this number is likely to be about 33,000 by 2025. How can we make sure they are being maintained? That there is an aftermarket itself?
[In the United States], the capacity doesn’t exist. And even where it exists today, there is going to be scarcity in the next five years. So customers start looking elsewhere. They are putting together plans for 2015 and 2020, where they will find that capacity shortages will be a serious issue for them.
What other forces are contributing to manufacturing growth in emerging economies? Natarajan:
If you want to export cars to India … it is becoming too expensive because of the duties. The Indian government is trying to drive manufacturers to start production in India and avoid the 10-to-15 percent in duties. And [the government] also wants to see some more electronics—I think that is going to be a big boost from the Indian manufacturer’s standpoint.
By 2020, India will import nothing less than $4-to-5 billion worth of electronics from the outside, whether that is smartphones, laptops, tablets, or any kind of intelligent devices. They are pushing for a lot of that to be manufactured locally. The government can at least meet local consumer demand this way, as well as charging importers additional duties.
You can pay duties of around 15 percent if you are bringing in complete products from outside of India. And if you are going to bring in components, you may still pay about 7 or 8 percent. That means, to compete with the local companies, you will find yourself falling behind unless you start manufacturing locally and start building the supply chain locally. So the government wants to give more incentives to start using components from India, assembling in India, and selling in India. Jablonski:
Traditionally, cost reduction was one of the biggest drivers for moving production offshore. Does this hold true today? Natarajan:
I think that was true in the 90s, but now, when it comes to product development, we hear that only about 2 out of 10 customers give cost as one of their top two reasons [for outsourcing]. And 8 out of 10 look for capability or for market access. They also feel that innovation and unique skill sets are important.
However, what you are saying is true when it comes to IT, which becomes more of a back office or support for existing products. Jablonski:
What helps contribute to increased outsourcing to India in IT? Natarajan:
You have, say, two or two-and-a-half million people in the workforce with more than 10 years of experience. I don’t think you can find that skill set anywhere else in the world today. From that standpoint, I think India has built a significant lead over many other countries.
I feel that India will retain these advantages … unless the field starts changing to more automated systems, which will not require as many people. I don’t see this in the near future, but it will eventually catch up, and most things will be automated with software-as-a-service, dot-com services, and other different kinds of platforms coming into play. Jablonski:
Why are we starting to see a trend toward bringing manufacturing back to the Americas and Europe? Natarajan:
Many customers say that they outsource too much—more than what they thought. What is happening is mass customization and personalization of products are becoming more and more important. The kind of efficiency they can bring to the workforce with lean manufacturing and lean product development methodologies will offset the transportation and logistics cost benefits.
Moving back to the United States, manufacturers can do a lot more to products by making operations more efficient through lean product development and lean manufacturing methodologies. Also, bringing in more intelligence to the product design so they can make more modifications to what they made earlier. Jablonski:
And bringing jobs home? Natarajan:
It’s not just about job creation. It is also about bringing out the best capabilities from companies. A lot of them are driven by [more than] selling products to customers—but can they make the products to be a platform that will give customers a lifelong experience? Apple has probably brought a lot more of these ideas to customers. Manufacturers want to make connections to products—they want to make sure they don't just sell products, but sell an experience. They want to be with customers for a long time.
Manufacturers think that a lot of these aspects can be covered through smartphones and tablets. They see that this is going to be the advantage of having products that are manufactured locally … they are not just selling a product once and then expecting customers to look for another manufacturer. They want to see that if they sell something to customers, their engagement will last for at least 10-to-15 years.
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