Click to edit Master subtitle style. 2002-10-22-MB-IIH002(BV)(LL) 1 KEY MESSAGES Manufacturing has...

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2002-10-22-MB-IIH002(BV)(LL)

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KEY MESSAGESKEY MESSAGES

•Manufacturing has been a key driver of China’s accelerated growth

•Contrary to myths that exist in India, China’s manufacturing growth is based on strong fundamentals

•These fundamentals were created by a well-planned economic reforms programme

• India must and can revive its manufacturing sector. This will require–A seven-point reform agenda from the government–Lower price points from Indian companies to stimulate

domestic demand–Targeted strategies from Indian companies to drive

exports






exports

2002-10-22-MB-IIH002(BV)(LL)

3*Adjusted for 2000 PPP

Source: World Development Indicators

CHINA HAS GROWN MUCH FASTER THAN INDIA IN THE LAST DECADECHINA HAS GROWN MUCH FASTER THAN INDIA IN THE LAST DECADE

0

1000

2000

3000

1980 1985 1990 1995 2000

GDP per capita growthPPP adjusted*, $ per person

ChinaCAGR = 9.0%(1990-2000)

India CAGR = 3.6%(1990-2000)

60%

(2,407)

(3,829)

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4

69

6268

54

Per cent employment in agriculture

IndiaChina

1981 1999

CHINA HAS SUCCEEDED IN SHIFTING PEOPLE OUT OF AGRICULTURECHINA HAS SUCCEEDED IN SHIFTING PEOPLE OUT OF AGRICULTURE


1981 1999

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MANUFACTURING WAS A MAJOR GROWTH DRIVERMANUFACTURING WAS A MAJOR GROWTH DRIVER

Source: World Development Indicators; McKinsey analysis

IndiaChina

GDP growth

Per cent, 1990-2000

3.2

5.1

7.4

5.5

4.5

12.3

10.8

10.1

Agriculture

Industry/ manufac-turing

Services

Total

Manufacturing contribution to GDP, 2000

Per cent

India China

16

35

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CHINA’S CURRENT MANUFACTURING SECTOR IS SIMILAR TO THAT OF OTHER HIGH-GROWTH ECONOMIES CHINA’S CURRENT MANUFACTURING SECTOR IS SIMILAR TO THAT OF OTHER HIGH-GROWTH ECONOMIES

35

35

31

26

24

24

22

16

Manufacturing sector size

Per cent of GDP

EraCountry

70s

70s

90s


Japan

S. Korea

Indonesia

2000India

2000China

90sMalaysia

70sSingapore

80sThailand

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exports






exports

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THERE ARE SEVERAL MYTHS ABOUT CHINA’S MANUFACTURING SUCCESSTHERE ARE SEVERAL MYTHS ABOUT CHINA’S MANUFACTURING SUCCESS

China’s growth was driven by investments, not productivity

Myth 1

Higher growth in China was also driven by rapid growth in productivity

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REALITY 1: HIGHER GROWTH IN CHINA WAS DRIVEN BY HIGHER LABOUR PRODUCTIVITY GROWTHREALITY 1: HIGHER GROWTH IN CHINA WAS DRIVEN BY HIGHER LABOUR PRODUCTIVITY GROWTH

Source: World Development Indicators, McKinsey analysis

GDP/capita growth

3.6

9

Per cent, CAGR, 1990-2000

Productivity growth

3.2

8.9

Employment per capita growth

0.4

0.05

Industry/ manufacturing

2.2

12

5.5 x

Others

3.6

7.4

1.8 x

2.8 x

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CHINA’S PRODUCTIVITY IS MUCH HIGHER THAN INDIA’S ACROSS MOST OF THE TOP MANUFACTURING SECTORSCHINA’S PRODUCTIVITY IS MUCH HIGHER THAN INDIA’S ACROSS MOST OF THE TOP MANUFACTURING SECTORS

*Includes toys and sports goods

Source: NSO, CSSO, China Statistical Yearbook, 2000 data

Top eight manufacturing sectors in India by employment

Ratio of Chinese to Indian productivity

Textiles

5.2

3.1

2.3

2.3

2.2

1.9

0.6

3.1

Beverages and tobacco

Wood and wood products

Food

Non-metallic minerals

Metal products

Machinery and Equipment

Other manufacturing

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The domestic sector accounts for most of the difference in manufacturing GDP per capita

China’s manufacturing success is driven only by exports

Myth 2


Myth 1


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TWO-THIRDS OF THE DIFFERENCE IN MANUFACTURING GDP PER CAPITA IS DUE TO THE DOMESTIC SECTORTWO-THIRDS OF THE DIFFERENCE IN MANUFACTURING GDP PER CAPITA IS DUE TO THE DOMESTIC SECTOR

Manufacturing GDP per capitaManufacturing GDP per capita

$, PPP, 2000

1322

631

310

381

Domesticdifference

Exports*difference

China

*Exports GDP calculated assuming that half of total exports are from re-exports of imported products, where value-added is 20%Source :World Development Indicators

Product

Steel

Aluminium

PVC

Beer

CTVs

Air-conditioners

Cement

Cigarettes

Ratio of Chinese to Indian domestic consumption

41.0

21.3

20.0

6.4

6.0

5.8

5.0

3.4

India

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CHINESE RETAIL PRICES ARE MUCH LOWER THAN THOSE OF COMPARABLE PRODUCTS IN INDIACHINESE RETAIL PRICES ARE MUCH LOWER THAN THOSE OF COMPARABLE PRODUCTS IN INDIA

Rupees ‘000 per unit

13.28.8

MNC 21” Colour TV

3 blade, 48” Ceiling Fans

100 cc, 4-stroke Motorcycles

MNC Desktop Computer

1.00.7

33.728.9

40.029.6

33%

India

China

30%

14%

26%

MNC WashingMachine

18.013.9

23%

Note:8.28 RMB = 1 USD, Rs. 49 = 1 USDSource: Retail surveys,2002

MNC DVD players

17.08

53%

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China’s domestic prices are driven by marginal pricing and by subsidies

Myth 3

Lower prices are driven by strong fundamentals



Myth 2


Myth 1


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REALITY 3: THE DRIVERS OF CHINA’S LOW PRICES ARE TAXES, DUTIES, PRODUCTIVITY AND INTEREST RATESREALITY 3: THE DRIVERS OF CHINA’S LOW PRICES ARE TAXES, DUTIES, PRODUCTIVITY AND INTEREST RATES

Price structure comparison across products

Indian prices indexed to 100

India Indirecttaxes

Interest costs

LabourProduc-tivity

Others** China

*Import duties drive lower margins and lower material costs

**Includes capital productivity and lower specifications for products in China

Source :Interviews; plants and store visits; data analysis; McKinsey synthesis

Import duties*

100 14-164-7 3-4 2-5 2-5 67-72

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INDIAN MANUFACTURERS FACE A HIGHER LEVEL OF TOTAL TAXATIONINDIAN MANUFACTURERS FACE A HIGHER LEVEL OF TOTAL TAXATION

*Includes excise, sales tax on the final product and sales tax on components

Source: McKinsey analysis

Product

Per cent of retail price, 2002

Average taxes*

•Motorcycles

•CTVs

•Fans

Most products

29

28

26

14

IndiaIndia

ChinaChina

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IMPORT DUTIES ARE MUCH HIGHER IN INDIA RESULTING IN HIGHER INPUT PRICESIMPORT DUTIES ARE MUCH HIGHER IN INDIA RESULTING IN HIGHER INPUT PRICES

Key raw materials Import duty on raw material

IndiaChina

Per cent, 2001•Plastic (PVC) 30

10

10

Source: CMIE, China Statistical Yearbook

•Aluminium

•Copper

•Zinc

•Phenol

•Toluene

•Diesel

Price Difference

Per cent17

11

25

30

6

15

21

25

25

15

3

8

2

25

25

155.5

5

25

206

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18*Adjusted by 20% for greater extent of assembly of components in India

Source: Interviews, McKinsey analysis

ORGANISED SECTOR LABOUR PRODUCTIVITY IN CHINA IS HIGHER BY 10-50 PERCENT ACROSS MOST SECTORSORGANISED SECTOR LABOUR PRODUCTIVITY IN CHINA IS HIGHER BY 10-50 PERCENT ACROSS MOST SECTORS

TV assembly

China

India

TV sets/operator per day

9.3

8.410%

Apparel Footwear

China

India

Shoes/worker per dayShirts/worker (8 hr-shift)

China

India

35

20 75%

11

3 3.6X

Comparison of labour productivity across products Fan assembly

Fans/operator per day*

53

3550%

China

India

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INTEREST RATES IN CHINA ARE LOWER THAN THOSE IN INDIAINTEREST RATES IN CHINA ARE LOWER THAN THOSE IN INDIA

*For five-year loans

Source:World Development Indicators

0

5

10

15

20

1990 1992 1994 1996 1998 2000

Lending rates* comparison

China

India

Per cent

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China’s exports are driven by marginal pricing

Myth 4

Apart from price competitiveness, China’s exports are driven by FDI


Myth 3




Myth 2


Myth 1


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0

50

100

150

1984 1987 1990 1993 1996 1999


Manufactured exports growth

$ billion

REALITY 4: IN ADDITION TO LOWER PRICES, FDI DROVE RAPID EXPORTS GROWTH IN CHINAREALITY 4: IN ADDITION TO LOWER PRICES, FDI DROVE RAPID EXPORTS GROWTH IN CHINA

China1990-99CAGR = 16.3 %

India 1990-99 CAGR = 8.7 %

China

FDI backed exports

Per cent of total exports

India

50.0

4.5

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Chinese products are always of poor quality

Myth 5

There are several Chinese manufacturers who make products of world-class standards

China’s exports are driven by marginal pricing

Myth 4

Apart from price competitiveness, China’s exports are driven by FDI


Myth 3




Myth 2


Myth 1


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REALITY 5: HIGH QUALITY MANUFACTURING CAPABILITY EXISTS IN SEVERAL SECTORSREALITY 5: HIGH QUALITY MANUFACTURING CAPABILITY EXISTS IN SEVERAL SECTORS

Buicks made in China are of higher quality than those made in US, probably due to college-educated workers in the China plant

- GM quality survey team

Guangzhou Honda-produced Accord is regarded as the best quality vehicle produced by overseas Honda manufacturing plants, as rated by Japanese experts

- Honda

With its good quality products and low prices, Haier could break into America the way Sony did in the 1950s- Fortune cover story on Haier

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exports






exports

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CHINA HAS UNDERTAKEN A SERIES OF ECONOMIC REFORMS OVER THE LAST TWO DECADESCHINA HAS UNDERTAKEN A SERIES OF ECONOMIC REFORMS OVER THE LAST TWO DECADES

1970s1970s 1980s1980s 1990s1990s

1979

•Creation of SEZs to attract foreign investment

1984

•Labour reforms

1992

•Lowered interest rates

1994

•Reduced indirect taxes

1

2

3

5

•Reduced import duties

4

Aspiration to pull people

out of agriculture

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SEZs OFFER WORLD-CLASS FACILITIES TO INVESTORSSEZs OFFER WORLD-CLASS FACILITIES TO INVESTORS

Fiscal benefitsFiscal benefits Hassle free processHassle free process

Access to domestic and export marketsAccess to domestic and export markets

• Income tax exemptions• Income tax exemptions

Plug-and-play infrastructurePlug-and-play infrastructure

•Fifteen days for start-up and closure

•Fifteen days for start-up and closure

•Separate books for domestic and exports sales

•Land provided with power, water, sewage, telecom, heating, etc.

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•Number of rates dramatically reduced

•WTO driving further reductions

•Uniform VAT across products/states

•Earlier system had over 250 different tax rates

TAXES AND DUTIES WERE REDUCED AND SIMPLIFIEDTAXES AND DUTIES WERE REDUCED AND SIMPLIFIED

Average import duties

1992 2000 2000

Average VAT/domestic taxes

1990 2000 2000

Source:ADB-China Country Economic Review; EIU; CMIE; World Bank discussion papers on China

Per cent, trade-weighted Per cent of retail price

China

45

1324

32

1425-30

India China India

9

2005P

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• India must and can revive its manufacturing sector. This will require–A seven-point reform agenda from the government–Lower price points from Indian companies to

stimulate domestic demand–Targeted strategies from Indian companies to drive

exports




• India must and can revive its manufacturing sector. This will require–A seven-point reform agenda from the government–Lower price points from Indian companies to

stimulate domestic demand–Targeted strategies from Indian companies to drive

exports

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SEVEN KEY GOVERNMENT INITIATIVES REQUIREDSEVEN KEY GOVERNMENT INITIATIVES REQUIRED

1. Replace all indirect taxes with a VAT, and reduce the rate to 15% of retail price

3. Reform labour laws

7. Enable lower interest rates through fiscal reforms and by modifying the bankruptcy act

4. Kick-start SEZ growth – Allow sales to DTA by paying domestic duties– Ease labour laws

2. Reduce import duties to 10% by 2006

6. Eliminate SSI reservations and fiscal concessions to small scale players

5. Power Reforms– Privatise distribution– Allow direct sales to consumers of over 0.1 MW

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INDIAN COMPANIES SHOULD STIMULATE DOMESTIC DEMAND THROUGH LOWER PRICESINDIAN COMPANIES SHOULD STIMULATE DOMESTIC DEMAND THROUGH LOWER PRICES

Source: World Development Indicators, ACMA; ICRA; Francis Kanoi

Volumes of room ACs

‘000 units

250300 325 355

451516

616713

1993 95 96 97 98 00 2001

CAGR’93-’97 = 9.2%

CAGR’98-’01= 16.5%

99

Excise duty cut from 40% to 30%

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31

17

5

83

7

16

38

INDIAN COMPANIES CAN USE SEVERAL IMPROVEMENT LEVERS – AUTOMOTIVE EXAMPLEINDIAN COMPANIES CAN USE SEVERAL IMPROVEMENT LEVERS – AUTOMOTIVE EXAMPLE

Source: MGI, India: The Growth Imperative

Shop floor improvement

Purchasing improvement

India Poten-tial

Average Post-liberation plants

Marketing

Equivalent cars per equivalent employee, Indexed to US average in 1998 = 100

Product design changes

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INDIA HAS A LARGE EXPORT OPPORTUNITYINDIA HAS A LARGE EXPORT OPPORTUNITY

Source: CMIE (India Trades); industry reports; McKinsey analysis

Labour-intensive

Skill-intensive

Raw-material based

Capital-intensive

Agricultural input-based

SectorBreakup of World Trade, 2000

Per cent of total

Indian and Chinese shares

Per cent of world trade

12

54

9

20

5

3.0

0.3

0.7

1.0

1.0

18

2

3.7

3.2

1.2

India

China

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INDIAN MANUFACTURERS CAN BE VERY COMPETITIVE ON EXPORTS IN SEVERAL SECTORSINDIAN MANUFACTURERS CAN BE VERY COMPETITIVE ON EXPORTS IN SEVERAL SECTORS

% Indian Output

Sum-mary of asses-ment

6

• Play catch-up with China

Labour intensive

• Readymade garments

• Footwear• Toys &

Sports goods

Examplesectors

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ACTIONS FOR INDIAN GARMENTS MANUFACTURERSACTIONS FOR INDIAN GARMENTS MANUFACTURERS

Key bottlenecks faced

Low productivityShirts per worker per day

20

35

India

China

Long lead timeWeeks

2-3

6-12India

China

Top three actions requiredTop three actions required

•Raise productivity

–Improve work flow–Link wages to

productivity in new plants

•Leverage upcoming private port terminals to improve delivery performance

•Focus on segments such as jerseys

*Suits and jerseys are the largest traded segments in apparelSource:CMIE (India Trades), interviews, plant visits

Low share in highly-traded segmentsPer cent

2.2

3.4

27

20

Share in top 3 segments*

Overall share

India

China

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35


% Indian Output


6


Labour intensive


• Footwear• Toys & Sports

goods

• Build IT-like dominance

Skill intensive

40

• Passenger cars/MUVs & CVs

• Drugs and pharma-ceuticals

Examplesectors

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INDIA HAS A LARGE OPPORTUNITY IN SKILL-INTENSIVE SECTORS – AUTO COMPONENTS EXAMPLEINDIA HAS A LARGE OPPORTUNITY IN SKILL-INTENSIVE SECTORS – AUTO COMPONENTS EXAMPLE

Source: IMD World Competitiveness Yearbook, 2001; Auto Business UK; Automotive News

Three key actions for Indian companies

•Strengthen OEM relationships

•Offer technical support/product development services

•Focus on China as a market through JVs

Availability of qualified engineers

IMD survey scores, 2000; 1=low, 10 = high

4.26.67.48.5

India USA ChinaGermany

Growth in auto components outsourcing

Indexed to trade in ’00=100

100170

258

2000 2005P 2010P

CAGR10%

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THERE ARE COMPANIES THAT ARE BUILDING INDIA AS THEIR EXPORTS HUB – CUMMINS CASE EXAMPLETHERE ARE COMPANIES THAT ARE BUILDING INDIA AS THEIR EXPORTS HUB – CUMMINS CASE EXAMPLE

Heavy diesel

engines

Heavy diesel

engines

Compo-nents

Compo-nents

Mid-range engines

Mid-range engines

•Cummins India is the only manufacturer of four engine models for the world market

•Cummins India is the only manufacturer of four engine models for the world market

•Significant sourcing of large-volume stable components from India

•Significant sourcing of large-volume stable components from India

• India is the lowest cost production base for Cummins engines in the world

• India is the lowest cost production base for Cummins engines in the world

Source: Interviews

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% Indian Output


6


Labour intensive



goods


Skill intensive

40



• Grow exports in sectors where India has abundant raw materials

Raw material based

24

• Aluminium & products

• Steel & products

Examplesectors

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INDIAN COMPANIES CAN WIN IN RAW –MATERIAL BASED SECTORS – TATA STEEL CASE EXAMPLEINDIAN COMPANIES CAN WIN IN RAW –MATERIAL BASED SECTORS – TATA STEEL CASE EXAMPLE

*POSCO – Pohang Iron and steel company (South Korea)Source: Analyst reports; McKinsey analysis

Operating costs (Hot metal stage)

$/tonne87

75

POSCO* TISCO

Operating costs (HR stage)

$/tonne

154

POSCO* TISCO

150-155

Key initiatives / policies

•Aspiration and mindset to become the world’s lowest cost producer of steel

•Substantial cost-reduction and productivity improvement in the last ten years

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% Indian Output


6


Labour intensive



goods


Skill intensive

40




Raw material based

24



• Evaluate sourcing from China

Capital intensive

23

• Petroleum products

• Organic chemicals

Examplesectors

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INDIAN COMPANIES CAN BE SUCCESSFUL IN CAPITAL-INTENSIVE SECTORS – RELIANCE CASE EXAMPLEINDIAN COMPANIES CAN BE SUCCESSFUL IN CAPITAL-INTENSIVE SECTORS – RELIANCE CASE EXAMPLE

Source: Analyst reports; McKinsey analysis

Refined petroleum cost, $/barrel

Indian average

RPL Jamnagar

Reliance’s current cost position

•Completed Jamnagar project in record 30 months

•Capital outlay 30% lower than other refineries in Asia

•Raised debt at international rates

3128

Skills at managing capital costs

Skills at managing capital costs

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% Indian Output


6


Labour intensive



goods


Skill intensive

40




Raw material based

24



• Evaluate sourcing from China

Capital intensive

23

• Petroleum products

• Organic chemicals

• Grow exports significantly

Agriculturebased

7

• Dairy products

• Poultry & meat products

Examplesectors

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THE SIZE OF THE PRIZE IS TOO LARGE FOR INDIA TO IGNORETHE SIZE OF THE PRIZE IS TOO LARGE FOR INDIA TO IGNORE

Sector size

1990-2000

2000-2010 (Status Quo)

Per cent of GDP

Additional employment generation

Million

2000-2010 (Reforms)

16

13

25

12

12

25

Exports

1990-2000

2000-2010 (Status Quo)

$ billion

2000-2010 (Reforms)

33

44

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