In today’s global economy, companies are increasingly broadening corporate location searches to weigh the relative advantages a

Asia Outsourcing:

14 GLOBAL DATELINE I SPRING 2005

China vs. India

increasingly broadening corporate and disadvantages of various countries. By Bob Hess

CUSHMAN & WAKEFIELD 15

vs. India

There are many reasons China andIndia appear on the radar screens of so many companies these days. Thetwo countries have a combined popula-tion of 2.4 billion, growing domesticconsumer markets, and enjoy relativelylow costs of doing business— com-pelling opportunities for growth, market share, and cost competitiveness.Foreign direct investment (FDI) foreach country grew by more than1,500% between 1990 and 2003.

Both economies are starting to pro-duce higher value products and developnetworks to maintain competitiveadvantages beyond mere cost. In addi-tion, these countries are emerging asmarkets for consumer products.

China, for example, is now one ofthe largest consumer electronics mar-kets and recently surpassed the U.S. inits use of mobile phones. By 2030 it islikely that China and India’s combinedpurchasing power will be five timesgreater than that of the U.S. today,according to a 2004 UBS report.

The real estate market is also hot inboth countries. It’s not unusual forpotential tenants to inspect specificsites in hundreds of EconomicDevelopment Zones along the coastalregion three or four times a day, sevendays a week. Beyond these similarities,the decision gets more complex.

The Differences Make the DifferenceEach country has its own uniqueadvantages and challenges, so corporatedecision makers must have the disci-pline to gather and sift through variedand inconsistent information.

1. Government PolicyChina opened its doors to FDI in 1978;India in 1991. The two countries,though, are taking very different pathsto developing their economies. The

approaches reflect the most basic differ-ence between the two: India is a democ-racy and China remains state run.

China is taking an “outside in”approach, while India is growing moreorganically. In 2003, China received$53.5 billion in FDI, more than 10times that of India ($4.3 billion). Inaggressively seeking outside invest-ment, China has focused less on encour-aging domestic entrepreneurship.Today, nearly 400 of the Fortune 500firms have invested in more than 2,200 projects in China. Facilitiesinclude computer electronics, telecom-munication equipment, pharmaceuti-cals, petrochemicals, and power-generating equipment.

India has created a more nurturingenvironment for its own entrepreneurs,and has a number of homegrown com-panies that can compete with the bestWestern firms. As a result, India is typi-cally more service oriented and enjoysan advantage over China in talent-dri-ven and private-enterprise activities,

such as software and biotechnology. Despite being friendly to entrepre-

neurs, India still has a high level ofbureaucracy, regulation, and poor exe-cution for infrastructure development.But after the upheaval following thelast national election, there are indica-tions the government is ready to loosenthe reins. India’s Union Cabinet, forexample, recently amended a law toallow companies with up to 1,000employees to close or reorganize with-out government permission. India’slegal and judicial systems are generallymore established than China’s.

2. Monetary PolicyWhile both countries are concernedwith inflation, India’s restrained mone-tary expansion has managed to keepinflation at approximately 2% to 3%.China is trying to control its booming

economy without bringing it to a halt.In October, the government raised itsone-year lending rate for the first timein nine years, from 5.31% to 5.58%, andis under G-7 pressure to allow its cur-rency to float. The government is par-ticularly wary of lending money tooverheated industries such as buildingconstruction and automakers.

3. Wage GrowthWhile both countries offer less expen-sive labor costs than the U.S. or Europe,this cost advantage may erode as wagesrise. Rural wages in China haveincreased 14% over the past year. Someindustries already have experienced ashortage in migrant workers, whichhad seemed unlimited over the past twodecades. In the last three years, wageinflation in executive and professionaloccupations has been growing at atamer 6% to 8% per year, according toHewitt Associates.

Wage inflation in India was about13% to 14% last year in software

development and IT solutions occupa-tions. The ratio between the U.S. andmainland China wage rates for prod-uct engineers is about 10:1, while the ratio for a software developer in theU.S. versus India is about 12:1, accord-ing to a 2004 McKinsey & Companyworking paper.

This cost advantage will not last indef-initely, and companies should be waryabout placing too much emphasis on thisfactor in their decision-making process.Instead, firms should build longer-termadvantages by cultivating the distinctiveskills found in both countries and miti-gate risks inherent in each one.

Before a company makes a decision,other government policy questions need to be addressed. Here are justthree examples: Does the competitiveadvantage of the operation rest on pro-tection of intellectual property? Are

>>> China is taking a more “outside in” approach whileIndia is growing more organically.

In 2003, China received $53.5 billion in FDI,more than10 times that of India.

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there cost advantages in manufactur-ing/distribution? If cost advantage were a key driver, how much wouldinflation have to increase to diminishthose initial advantages?

4. ExportsBoth China and India have healthyexport markets and are competitive in a number of industries. This may allow new entrants to take ad-vantage of existing supplier and support networks, as well as existinginfrastructure.

China’s trade-friendly policies havehelped it grow a sizable export sector,accounting for 29% of GDP in 2002, upfrom 18% in 1990. For India, exportstotal 15% of GDP for 2002, more thandouble its 1990 total.

Many of China’s exports are in thehigh–tech industries. The country is the biggest producer of personal com-puters in the world, and at least 85 million Chinese have Internet access.China also ranks eighth in the world in exporting labor-intensive products,such as toys, baby carriages, games, andsports equipment.

India is a leader in software, attract-

ing FDI in manufacturing research anddevelopment. The chart above indicatesChina and India’s competitive positionsin a variety of export industries.

5. Real Estate and Related IssuesBig-picture factors are an importantstarting point, but much of the decisionmaking will come down to standardreal estate and site-selection issues,including infrastructure quality, laborforce availability, and skills.

China possesses a generally superiorphysical infrastructure compared toIndia. The percentage of paved road isconsiderably higher in China, makingthe cost of shipping lower. Real estate inChina is also generally newer than inIndia, so a Class A building in Indiamay be similar in quality to a Class Bbuilding in China.

India, however, is not standing still.In November 2004, India announced a$11.1 billion investment to upgrade 30of the nation’s airports by 2008. China,however, will continue to outpace Indiaover the next decade in attractingindustries that require dependable utili-ties, roads, and ports.

6. Raw MaterialsFor industrial operations, access to rawmaterials is critical. Industries located in both countries are constantly scan-ning for local sourcing alternatives.Look for domestic sourcing of rawmaterials to be a significant topic forboth countries as domestic demandcontinues to increase.

Easy inbound/outbound access isalso critical for the smooth function ofthe supply chain and can be an impor-tant factor in location analysis.

7. Labor Force SkillsLabor force characteristics are also akey driver. China has developed greattalent in the area of semiconductordesign for consumer electronics. Eachyear it graduates five times more engineers than the U.S.

China is also perceived to have aseemingly endless supply of rural laborwilling to work in low-skilled manu-facturing jobs for relatively low wages.Migration to cities and increasing com-petition among businesses appears to beeroding this advantage.

Indians generally have betterEnglish skills than Chinese. This

CUSHMAN & WAKEFIELD 17

Export Competitiveness

INDUSTRIES

Revealed comparative advantage

China India

Leather products

Clothing

Textiles

IT & consumer electronics

Miscellaneous manufacturing

Electronic components

Basic manufactures

Fresh food

Processed food

Non-electronic machinery

Chemicals

Wood products

Minerals

Transport equipmentValue greater than 1 indicates specialization Rank of 1 is highest specialization

16

31

12

11

8

22

58

127

112

39

75

88

113

52

31

34

6

60

56

64

41

84

106

59

25

108

52

56

World rank

SOURCE: ITC (2002), COMTRADE OF UNSD

India

2.25

3.39

4.52

0.08

0.61

0.23

1.29

2.55

0.7

0.32

1.07

0.18

2.07

.2

China

3.7

3.65

2.43

2

1.59

1.04

1.01

0.77

0.57

0.52

0.46

0.45

0.29

0.25

has attracted shared service center and call center business to select areas of India. The country’s entre-preneurial culture has led to its advan-tage as a software developer. India also has excellent university and post-secondary educational systems thatspecifically develop knowledge-basedindustry talent.

Find the Right FitUltimately, there is no generic “right”or “wrong” answer when it comes tolocation selection. Finding the right fitbetween business needs and geo-eco-nomic attributes, in addition to balanc-ing cost and non-cost factors, is at thecore of the location selection process.

Each company’s critical success fac-tors will be different. Each companywill have different criteria and shouldaddress those requirements within awell-reasoned process of eliminationmethodology, one that includes robustresearch and empirical observations ineach country.

China or India? It depends. Multi-country comparisons present a host ofissues, which must be layered on top ofthe issues typically considered in a single-country comparison. Access tomarkets, industry infrastructure, andrisk avoidance must always be consid-ered before a company or investorbegins a location search in China,

India, or anywhere in Asia. The com-petitive advantages for countries andcities are not fixed, but dynamic.

For example, on April 11, 2005,India and China signed a strategic pactthat called for enhanced diplomaticrelations and economic ties. Duringthe signing, Chinese Premier WenJiabao compared India’s global reputa-tion as a hub for software to China’sstrength in computer hardware. Hesuggested greater collaboration, withIndian software companies setting upoperations in China to tap the Chineseand global markets. “Combined, wecan take the leadership position in theworld,” he said.

Despite the warming trend in Sino-Indian relations, each country istrying to emulate one another’s compet-itive advantages.

To combat China’s infrastructuresuperiority, India plans to allocate sig-nificant capital to modernize its creak-ing infrastructure. But parity wouldnot be achieved for at least a decade,and this assessment assumes consistentinvestment over the period. Longacknowledged as having rigid andnon-investor-friendly labor laws, Indiaalso is seeking to introduce greaterflexibility to encourage industrial sectorinvestment.

China is intrigued by India’s rapidly developing BPO sector, noting

the sector’s migration up the valuechain into cutting-edge research capa-bilities. To capture this market, Chinahas been expanding its output of engi-neers and scientists. This has ledIndia’s IT and consulting companiesto establish operations in eitherBeijing or Shanghai.

Beijing also is trying to diversifygeographically. One current campaignunderway seeks to spread some of theinvestment and production occurringon China’s coastal strip to its majorinterior cities. Additional infrastructureinvestments, combined with attractiveincentives, are gradually encouraging a westward movement in investmentflows.

When making a corporate locationdecision of high strategic value, a well-orchestrated process to defineand compare regions and countries iskey to the competitive positioning of a company’s corporate real estateinfrastructure and its ability to executeefficiently and effectively for the long term.

BOB HESS is managing director in chargeof the supply-chain and workplace-solu-tions consulting practice at C&W. BRIAN COHEN , associate, StrategicAdvisory Services, C&W, and variousmembers of C&W Consulting Asia-Pacificalso contributed to this article.

18 GLOBAL DATELINE I SPRING 2005

Business in ChinaADVANTAGES

1. Low cost labor market (sustainable?).2. Large, growing consumer market.3. Newer infrastructure in many areas.4. Government’s pro-business stance.5. Specialized labor skills in the area of high-techindustries.

CHALLENGES

1. Possibility of banking system default.2. Impact of a potential shift in monetary policy (rising interest rates).3. Impact of a potential shift in exchange rate policy.4. Government’s ability to cool economic growth without “throwing water on the fire.”5. Likelihood that the government will target one’sindustry for growth control.

Business in IndiaADVANTAGES

1. Low cost labor market (sustainable?).2. English as common language. 3. Democratic form of government.4. Entrepreneurial culture.5. Government moving toward greater businessfriendliness.6. Solid legal system.7. Highly technical workforce in areas of software and programming.

CHALLENGES

1. High level of bureaucracy.2. Quality of aging infrastructure systems.3. Religious/caste differences overshadow political structures.