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SOMEDAY YOU MAY REAP WHAT YOU SOW

ASIA AND DELOCATIONADVANTAGES FOR WESTERN COMPANIES

Arun MairaThe Boston Consulting Group

Barcelona22 Nov '04

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THREE INEVITABILITIESTwo Opportunities

Global Competition Technology Demographics

Pressure on Economics Digitisation and Connectivity Ageing and Booming

Deconstruction of Business Value

Chains

Emerging Sources ofCompetitiveAdvantage

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PRESSURES ON ECONOMICS IN DEVELOPED COUNTRIESDeconstruction of Business Value Chains

Intense competition between firms in developed countries in their own developed country markets

Competition between firms for customers in developing countries

Emerging of new competitors from developing countries

Pressure on prices and margins

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INCREASED COMPETITION IN DEVELOPED MARKETS REQUIRES INCREASING INVESTMENTS IN NEW CAR MODELS

Average life of new models (Europe)

14

4.6

4.5

5.1

5.1

6.0

6.7

7.2

7.2

8.0

7.5

7.2

7.4

9.7

9.1

9.2

8.07.5

0

2

4

6

8

10

12

14

16

80 82 84 86 88 90 92 94 96

Life (years)

Year of introduction

Increasing models and decreasing sales per model (US Market)

2050015000

0

10000

20000

30000

1980 1999

550

1050

0

500

1000

1500

1980 1999

Number of vehicle models(1)

Avg. total sales per model(2)

(1) Total number of models of cars and light trucks(2) Average total annual sales per modelSource: Automotive News

Case Study: Automobiles

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ELECTRONIC AND SOFTWARE APPLICATIONS ARE INCREASING IN AUTO INDUSTRY

Source: EIU

Growth in Automotive Electronics Market ($Bn)

0

25

50

75

100

1995 2005

83

4%

23%

7%

10%

8.4%

Interior

Body

Chassis

Powertrain

37

CAGR%Sales ($ Bn)

Overall Automotive electronics as much as 30-40% of cost of new model cars

IT applications are rapidly increasing in automotive business processes

•Product design•Manufacturing•Supply chain management•Customer relationship management

Increasing importance of electronics & IT in auto industry

Case Study: Automobiles

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INDIAN AUTOMOBILE INDUSTRY HAS DEVELOPED CAPABILITIES UP THE VALUE CHAIN

R&D/Product development

Component manufacture

Assembly

Low capital intensity, BEP <100k units/ annum (Global BEP is 150-200k units/ annum)

Total Manufacturing Cost 20- 30 % less than USA

Very high quality: 1 Japan Quality Medal and 5 Deming Prize Winners- largest number outside Japan

Exports growing 30% per annum; 80% to 'developed' countries

Global average development cost of new car > $600m

Tata Indica- $350 m

M & M Scorpio- $150 m

Case Study: Automobiles

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COSTS OF MEDICINES AND HEALTHCARE SOARING IN DEVELOPED COUNTRIES

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2000 2001 2002

US

$ T

rill

ion

CAGR: 10.9%

Total USA Healthcare Spending

Source: EIU, Literature Review

US

$(‘

00

0s

)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2001 2002 2003 2004

UK Germany

CAGR UK: 9.2%CAGR Ger: 6.2%

Annual Household Expenditure on Healthcare

(EST)

Case Study: Healthcare and Pharma

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R&D COSTS & PRODUCTIVITY OF US PHARMA PROBLEMATIC

Case Study: Healthcare and Pharma

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LOW COST, HIGH QUALITY MEDICAL CAPABILITIES AVAILABLE IN INDIA

Not just cost advantage:

•The success rate in the 43,000 cardiac surgeries till 2002 was 98.5%

• India's success in 110 bone marrow transplants is 80%

Quality a Key Factor

Source: IBEF, Literature Review

8000

4000

600

30000

440050000

180000

400000

50000

850

0 20000 40000 60000 80000

Salary: Doctor

Salary: Nurse

Bone MarrowTransplant

Heart Surgery

Gall BladderTransplant

USA India

Healthcare Cost Differential

US$

Cost Saving

80%

91.2%

92.5%

98.8%

97.7%

Case Study: Healthcare and Pharma

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COST EFFECTIVE AND GOOD QUALITY DRUG DEVELOPMENT AND MANUFACTURE

DRUGS IN USA

• Cost of development- hundreds of million dollars

• Amgen antibody- $10.00/ dose

• Cost of treatment- $20,000

INDIAN DRUG

• Time for development- 3 years

• Cost of development- $4 m!

• Cost of treatment- $50 !!

DEVELOPMENT(Example: Disease- Psoriasis)

5

7

9

22

25

60

61

0 20 40 60 80

Hungary

Israel

Taiwan

China

Spain

Italy

India

USFDA Approved Plants Outside USA

Case Study: Healthcare and Pharma

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EMERGING SOURCES OF COMPETITIVE ADVANTAGE

A potent combination of

1. IT capability

2. Favorable demographics

3. Domain knowledge in many industries.

OPPORTUNITIES FOR WESTERN COMPANIES IN MANY FIELDS

Case Study: The Emergence of India

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INDIA OFFERS EXCEPTIONAL VALUE AT SIGNIFICANT COST ADVANTAGES IN IT

Comparative salaries of an IT engineer

5,000

50,000

0

25,000

50,000

75,000

100,000

125,000

India US

$ pa

Source: Literature Survey

$ pa

Comparative salaries of an MBA

0

25,000

50,000

75,000

100,000

India US

7,500

80,000

55% OF THE FIRMS IN THE WORLD WITH SW CMM LEVEL 5

CERTIFICATION ARE INDIAN !

$ pa

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INDIA HAS A LARGE RESERVOIR OF HUMAN RESOURCESReaping What You Sow

Note: Potential surplus is calculated keeping the ratio of working population (age group 15 – 59) to total population constantSource: U.S. Bureau of the Census International Data Base; BCG Analysis

47M

India

0M

19M 7

M

3M

5M 3M Bangladesh

Pakistan

Iran

Brazil

MexicoPhilippines

5M

4M

Vietnam

2M

Turkey

5M

Indonesia

1MMalaysia

0M

Ireland

IsraelIraq

2M

4M

Egypt

-10M

China

-6 M

Russia

-1MCzechRepublic

-17M

U.S. -2M

U.K. -2MItaly

-3M

France

-9M Japan

Potential surplus population in working age group (2020)

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SOMEDAY REAPING WHAT YOU SOW

• Vertical integration

• Small volumes, but growing

• Logistics & infrastructure problems

INDIA'S LEGACY

•Domain knowledge

•Software capabilities

•Remote delivery possible

INDIA'S STRENGTHS

MASSMANU-

FACTURING

REMOTELY PROVIDEDSERVICES

Small volume,

high variety, low cost

mfg

INDIA'S OPPORTUNITIES

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SUCCESSFUL MNCs DEEPENING R&D PRESENCE IN INDIA

Level of expertis

e >100 MNCs in India, most moving up

1. Selected steps in product

development

2. End-to-end product development for

emerging markets

3. End-to-end product development for global markets

4. Fundamental research

TI: 900 people; 225 IPs, 20 products

GE: 1700 people; 77 patents; 2 products

Akzo Nobel: 75 of 400 in

India

Source: Literature, BCG interviews

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INDIA EMERGING AS A "KNOWLEDGE SERVICES" HUB IN THE WORLD

India already providing knowledge-based services in several sectors

Remotely delivered servicesImport of customers

to service in India

Transaction processing

Design and analysis

Research and development

Valueadded tourism

Leisure tourism

Information Tech

Pharma/Healthcare

Education Services

Auto/ engineering

Chemicals

Financial Services

Industry

Source: BCG Analysis

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INEVITABILITIES AND OPPORTUNITIES BUT....POLITICAL AND ORGANISATIONAL CHALLENGES

Global Competition Technology Demographics

Pressure on Economics Digitisation and Connectivity Ageing and Booming

Deconstruction of Business Value

Chains

Emerging Sources ofCompetitiveAdvantage

Political: For every $1 gained, $6-7 of dislocation

Organizational: Global 'networks'; not 'pyramids'; not even 'matrices'