Sourcing in India: Strategies and Experiences in the Land of Service Offshoring

Sourcing in India Strategies and Experiences in the Land of Service Offshoring

Guido Nassimbeni and Marco Sartor

Sourcing in India

Also by Guido Nassimbeni and Marco Sartor SOURCING IN CHINA: Strategies, Methods, Experiences

Sourcing in India Strategies and Experiences in the Land of Service Offshoring Guido Nassimbeni and

Marco Sartor Foreword by

Emma Bonino

ª Guido Nassimbeni and Marco Sartor 2008 Foreword ªEmma Bonino 2008 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published in Italian in 2006. English translation published 2008 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–0–230–20536–9 ISBN-10: 0–230–20536–4

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Contents List of Figures List of Tables Foreword by Emma Bonino Notes on the Authors Introduction

1

Service Offshoring: the Literature 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9

2

3

vii xi xiii xv xix

Premise Service offshoring: some clarifications about the term Service outsourcing/offshoring evolution Sourcing of goods and services Services destined to out and international sourcing Determinants and benefits of service offshore outsourcing Risks of service offshore outsourcing Service offshoring in India Criteria for the location

1 1 1 4 6 8 11 15 16 17

India: a Geo-economic Overview

22

2.1 2.2 2.3 2.4 2.5 2.6 2.7

Introduction Historical facts Some aspects of Indian society Macroeconomic profile Foreign direct investments in India Industrial geography of India Conclusions

22 22 32 36 50 60 78

India: the Land of Service Offshoring

84

3.1 3.2 3.3 3.4 3.5 3.6

Introduction ITO and BPO markets Advantages offered by India The development of the IT sector in India The IT market in India Conclusions

v

84 84 87 95 97 104

vi

Contents

4

Planning and Starting an Offshore Project in India

105

4.1 The research: objectives and main sample features 4.2 Provisioning of services: from strategy to implementation 4.3 Stage 2: Selection of the suppliers and definition of the contract 4.4 Implementation and control 4.5 Relationship and negotiation dynamics

106 110

5

6

126 129 132

Foreign Investments in India: Modes and Legislative Constraints

136

5.1 5.2 5.3 5.4 5.5 5.6 5.7

Introduction Entry modes into the Indian market Corporate typologies Procedures for foreign direct investments approval Some other aspects of FDIs in India Facilitated zones and governmental incentives Intellectual Property protection (IP)

136 137 140 141 143 144 146

Transport and Communication Infrastructures in India

150

6.1 6.2 6.3 6.4 6.5 6.6

150 151 154 158 162 166

Development of transport in India Air transport Sea transport Road transport Railway transport Indian communication infrastructures

The Case studies

173

Accenture Strategy and configuration of a "service global delivery network"

175

GlaxoSmithKline International rationalization and delivery of the service portfolio

193

Finmeccanica 213 Innovating the approach to the global sourcing of engineering services IDS A small enterprise offshoring software development

235

Stonefly An example of sourcing of material goods in India

243

Notes References Index

253 259 271

List of Figures 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 3.1 3.2 3.3 3.4 3.5 3.6

Relationship between offshoring and outsourcing Evolution of offshoring services Waterfall model of software development Actual and future levels of outsourcing Determiners of service offshore outsourcing Offshoring cost advantages Trend of trade exchange of India from 1990 to 2006 Graphic representation of India’s shares for the first ten commercial partners in the fiscal year 2006 Graphic representation of India’s export composition for the years 2006–2007 The FDI flow directed towards India and to developing countries during the 1991–2006 period Graphic representation of the main investing countries that contributed most to total FDI inflow Localization of active and approved or in process of approval SEZs in India, situation summer 2006 Software Technology Parks in India Bio Technology Parks in India Maharashtra Major clusters in Maharashtra West Bengal Clusters for industrial activities Karnataka Clusters for industrial activities Main IT services and BP exporting countries A. T. Kearney offshore location attractiveness index for main location of Asia ITO and BPO neoIT Offshore Attractiveness Index Actual and future attraction of main offshore services destinations Evaluation of some offshore locations Annual average salaries in the Information Technology sector

vii

2 6 9 11 12 14 39 40 47 53 57 66 67 68 69 71 72 75 77 79 86 87 88 90 91 93

viii List of Figures

3.7

3.8 3.9 3.10 3.11 3.12 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 5.1 5.2 5.3 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9

IT Indian market dimensions in fiscal years 1998–2004 – in rupees and dollars – and percentage value compared to GDP of the country IT Indian market composition in 2002–2003 and 2003–2004 Value of the software and services export in 1996–2004 and its percentage on the total export amount The growth of ITES-BPO activities Main destinations of software and services exports in 2003–04 Main destinations of software and services exports Sourcing areas of the sampled companies The macrophases of the Monczka et al. model Phase 1: analysis and strategic planning The iterative process of preventive analysis Overall view of the strategic and planning stages and their timing Forms of sourcing for core activities Forms of sourcing for non-core activities Examples of core activities in the sample investigated Examples of non-core activities in the sample investigated Offshore insourcing Focusing on offshore outsourcing Process of research and selection of the suppliers Importance of the criteria in the selection of an offshore supplier Activities carried out during the processes of implementation and control Main entry modes Export Processing Zones in India Main solutions for the protection of intellectual property Trend of cargo transport in Indian international airports Locations of the main Indian international airports Sea transport: cargo traffic Localization of the Indian ‘‘major ports’’ Localization of the Indian national waterways Development of the road transport system Density of the road network on the country Composition of the Indian road system National Highways Development Project

98 99 100 102 103 103 111 112 112 113 118 119 120 121 122 123 125 127 128 129 137 145 147 152 153 154 156 159 160 161 162 163

List of Figures ix

6.10 6.11 6.12 6.13 6.14 6.15 6.16

Evolution of the railway network Loads of railway transport Indian railways Number of licences granted from 1998 to 2003 Cities served at least by one Internet Service Provider Indian tele-density Relationship between land telephones and mobile phones

Accenture Accenture Accenture Accenture Accenture Accenture

1 2 3 4 5 6

Accenture 7 Accenture 8 Accenture 9 Accenture 10 Accenture 11 GSK GSK GSK GSK

1 2 3 4

GSK GSK GSK GSK GSK GSK GSK

5 6 7 8 9 10 11

Accenture revenues’ geographical breakdown Accenture operational model Accenture Global Delivery Network Accenture Strategic Delivery Model Key factors in the choice of the delivery model Onshore vs. offshore localization of the activities in a process of development and maintenance of IT applications Trend of Accenture consulting and outsourcing revenues Accenture outsourcing services classification Accenture delivery method for service transition Example of activities involved in the revision of the supply base Accenture in India

GlaxoSmithKline in Italy GSK Italy spending for materials and services in 2004 Global pharmaceutical employment by region Offshoring potential in the pharmaceutical value chain Procurement organization in GSK Galaxy portal screenshot GSK questionnaire for outsourcing decision Internal dimension in offshoring choice GSK supplier selection process GlaxoSmithKline in India GSK current and potential Indian suppliers by spend category

Finmeccanica 1 Finmeccanica 2

Finmeccanica global revenues Finmeccanica worldwide workforce distribution

164 164 165 169 170 171 171 176 177 179 180 181

183 184 184 186 189 191 194 195 195 198 199 200 202 203 205 207 207 214 215

x

List of Figures

Finmeccanica 3 Finmeccanica 4 Finmeccanica 5 Finmeccanica 6 Finmeccanica 7 Finmeccanica 8 Finmeccanica 9 Finmeccanica 10 Finmeccanica 11 Finmeccanica 12 IDS 1 IDS 2

Expected Finmeccanica Group orders’ intake pattern The Shared Services companies of Finmeccanica Group The ‘‘standard’’ sourcing process Finmeccanica Group high level purchasing map Relative positioning on an offshore market Alenia Aeronautica’s extended enterprise concept Alenia Aeronautica DMU environment The offshore project main approval workflow The global sourcing revisited ‘‘source/ procure/deliver’’ process The ‘‘virtual hub’’ concept

Sourcing and production strategies Software development process with the Indian supplier

Stonefly 1 Stonefly 2 Stonefly 3

Suppliers’ selection process Conception and creation process The process of quality control

216 218 219 221 222 224 226 227 230 231 239 241 246 248 250

List of Tables 1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 3.1

3.2 3.3 4.1 4.2

Main differences between material/good and service sourcing Categories of the A. T. Kearney offshore location attractiveness index The neoIT Offshore Attractiveness Index Evolution of GDP between 1990–2006 The outlook for PIL of India based on sectors of activity for the fiscal year 2006 Trend of commerce from India in years following liberalization of the market, fiscal years 1990–2006 India’s major trade partners in the fiscal year 2006 Indian imports: main supplying countries (2002–2006) Composition of India’s imports from the world Indian exports: main destination countries (2003–2006) Composition of products of Indian exports: most important items FDI directed towards developing countries, in percentage of total FDIs The countries that most contributed to FDI inflow in the period August 1991–July 2007 Main FDI destination industries, period August 1991–August 2004 Output of production per worker in the main Indian states The operational SEZs The main industrial parks in West Bengal The certificates obtained by a sample composed by the 300 biggest Indian companies working in service and software development sectors IT Indian market composition in 2002–2003 and 2003–2004 Main product lines offered by Indian exports in the IT sector The sample Factors determining the level of outsourcing propensity and level of offshoring propensity xi

7 19 20 37 37 38 41 42 43 45 46 54 55 58 62 65 74

94 98 101 107 114

xii List of Tables

4.3 5.1 6.1 6.2

Types of offshore insourcing enterprises in India Advantages of JV and WOS Goods moved in the main Indian airports Goods traffic in the main Indian ports

Finmeccanica 1

Alenia Aeronautica product range

123 139 154 157 224

Foreword by Emma Bonino India proposes to be one of the protagonists in the economic and political scene of future decades. With an average growth rate (in the last decade) of about 7%, this country represents one of the most dynamic economies in the world and one of the most interesting social contexts among the nations which are nowadays attracting the attention of the international economic, commercial and cultural operators. Some could say that there is nothing new. In India are found some of the roots of western civilization; India is the country which was at the centre of economic, cultural and religious developments for many centuries. Now – thanks to liberal economic reform – this giant of over a billion people is again starting to have a central role on the international chessboard; it again has a strong economic power; it again is one of the favourite places to localize production and service developments from developed countries. But this nation also presents difficulties and contradictions. India is a country which still faces strong political instability from all its neighbouring nations and which, within, must face potentially dangerous situations. It’s characterized by a society based on traditions and habits which, sometimes, are humiliating for human beings and that could be a check on social, political and economic development. It has a government which must ensure balanced development for all the different areas of the country, facing the serious problem of poverty and of lack of infrastructures. But India is also the greatest and most populated democracy of the world. And its economic performances are attractive. It is obvious that it represents a great opportunity for new investments, for companies that want to enter new markets, for countries – like Italy – which want to find new areas for investments. For all these reasons including the need to give a more systematic approach to the Italian companies’ internationalization process, India was defined by the Italian government as a country of primary interest and 2007 was considered as India’s year. The Italian ministry of International Commerce addressed its attention to this country. We know that the strategies for entering (in particular) Asian markets ask for an accurate preventive analysis, the establishment of a trust-based relationship with foreign partners, and an adequate educational and xiii

xiv Foreword

political action supporting in particular the SMEs (which characterize the Italian productive structure). The purpose of this action is to intensify the Italian presence in India and the commercial exchanges between the two countries, increasing the investments in the nation that has become the fourth economy in the world, and in which Italy is ranked 23rd as foreign investing nation (in a progressive loss of importance). It is necessary to lead this action supporting internationalization processes (Italy has sectors – such as agro alimentary or tool machine – that could be interesting for Indian economic growth) and services. India doesn’t have to be perceived only as a nation characterized by low cost production factors, but also as an opportunity to develop a scientific, technological and productive collaboration able to improve the operation skills of our companies and to activate jointly developed research initiatives, joint-ventures and start-ups in many strategic industrial sectors. Only well-focalized alliances, stable relationships, reliability and trust can allow increasing companies’ competitiveness. But to do that, it is necessary to know the country in which we invest, and to have a comprehensive ability to determine the place where we want to develop economic partnerships. For this reason I give my support to this publication which – like the previous one on China – aims at providing some useful guidelines to the companies which want to face the challenges of globalization and which judge the Indian context as a priority nation for future investments. This way, entrepreneurs and managers can have a further tool to understand the potential of this nation. Our economy depends strongly on the ability of our entrepreneurs to increase commercial flows and investments in areas – as the Indian one – which are rapidly growing. We cannot wait long. Nowadays there are favourable conditions to become again the merchants which once controlled the Asian markets and were the main protagonists of these exchanges. Emma Bonino Italian Ministry for International Commerce and European Policies

Notes on the Authors The authors of the book Guido Nassimbeni has a Masters Degree and Ph.D. in Managerial Engineering, and is Professor of Economics and Business Strategy at the University of Udine (Italy). He is Associate Editor of the Journal of Operations Management, Area Editor of Operations Management Research and a member of the Editorial Review Board of the Journal of Purchasing and Supply Management. His research interests are related to new production models and advanced buyer–supplier interactions, subcontracting models with small firms, vendor rating/ranking, supply chain network management, and international sourcing. On these topics he has published more than 80 scientific works, most of them in international journals or books. His research has been funded by several national and international institutions. He has published in a number of leading journals, including Journal of Operations Management, Research Policy, International Journal of Production Research, OMEGA, and International Journal of Operations and Production Management. With Palgrave Macmillan he has already published Sourcing in China: Strategies, Methods and Experiences (2006) with Marco Sartor. Marco Sartor has a Masters Degree and Ph.D. in Managerial Engineering and is Assistant Professor at the University of Udine (Italy). His studies concern international sourcing and manufacturing. He is analysing in particular these issues in the Chinese and Indian contexts. He conducted his researches working with several leading companies including Accenture, Agusta Westland, Black&Decker, Danieli, DHL, Fincantieri, GlaxoSmithKline, NCR, and Safilo. He was project assistant of the EU Project ‘‘International Sourcing Strategies for China’’ (collaborating with the Universita¨t of Magdeburg and the National Center for Science and Technology Evaluation – Beijing) – and of the EU Project ‘‘Asia Link’’ (working with the University of Hong Kong, Valencia, South China University of Technology and Xi’an Jiaotong University of Technology). He has also published papers in leading journals, including I.J. of Production Economics, Production Planning and Control, and Supply Chain Forum.

xv

xvi Notes on the Authors

The authors of the case studies Paolo Falletti is CIO of Alenia Aeronautica, a company of the Finmeccanica Group that he joined in 2006, following significant experiences in ICT and Process Management in the Fiat Group (Automotive) where he operated from 1984 to 2002 in the IT System area, initially supporting the manufacturing and supply chain and then as Head of IT systems in the area of metallurgical products. From 1987 he was a member of the Executive Board of the IT services company of the Fiat Group with responsibility for services supporting the contracts sector and the metallurgical products sector. Since 2002 in the Toro Assicurazioni Group (Insurance) he has led the IT and Process Department, supporting the company in the industrial transformation and process harmonization of the subsidiaries of the Group. Diego Michielan joined Agusta Westland, a Finmeccanica company in 2006: he is the Head of AW Italy Procurement Governance & Control in charge of the materials and services budget plan, price variances and saving monitoring, new procedures and guide-lines development and implementation. In addition he is responsible for KPI’s design and management, Supply Chain business development and process improvement initiatives, processes automation and e-business tools promotion with a strong focus in process harmonization of the different sites of the company. During his university and working period he deepened his interest for sourcing opportunities in low cost countries. Giorgio Mosca joined the Finmeccanica Group in 2004; he is Finmeccanica Group Services SVP Group Purchasing and ICT, in charge of Group Sourcing activities, adoption of e-procurement tools and methodologies and of ICT Governance and Strategy at Group level. In 1991 he entered Sirti (TLC engineering), initially as Head of the International Subsidiaries ICT and Organization, developing experience in M&A, BPR and integration, and then (1996) as Corporate Industrial Controller. In 1999 he moved to Merloni Elettrodomestici (Household appliances), managing Business Development and Consumer Services Innovation. He then served in the same Company as President and CEO of a Commercial and Services startup in the US. From 2002 to 2003 he was Managing Director of an innovative ICT, web and multimedia company of Softpeople Group in Italy.

Notes on the Authors xvii

Massimo Nelci joined Fincantieri – Cantieri Navali Italiani S.p.A. in 2006. Initially he operated as business analyst in the Merger & Acquisition and Business Development Organization. Since 2008, he has served the same company as financial analyst, supporting the FOREX risk management team and being involved in financial planning and budgeting activities.

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Introduction If globalization means the international mobility of goods, services, knowledge, and capitals, India can be considered the first globalized economy in history (Kumar, Sethi, 2005). Herodotus described the intense commercial activity of India, once importer of gold, silver, copper and wine, and exporter of textiles and precious stones. Alexander the Great invaded India in the 4th century BC, attracted by its blooming economy. Jointly with the interest for the knowledge deriving from the (ayur)Vedic tradition, Indian commercial dynamism – and the linked problems of changes of currency, taxes, interests – propelled the development of mathematics. Here, a very important innovation originated: the positional value of zero, that is the basis of our decimal system. Here, important progress in the fields of algebra, trigonometry, and astronomy were achieved. And this knowledge spread all over the world. History has a habit of repeating itself. After many invasions, which determined its politic fragmentation, after the colonial experience and Independence in 1947, India today again has a central position in the world scene. With an average growth of GDP of 6.2% (in the last decade), an international exchange 7 times larger than in 1991 and a value of investments more than 30 times greater, India is the second economy in the world (after China) for its growth rate. It is fourth on the basis of GDP calculated on pair purchasing power. It is more difficult to calculate its scientific profile, but it is sufficient to have a look at engineering and informatics journals to see India’s supremacy in many fields. The industry that mainly propelled this rise is that of Information Technology (IT). It includes a vast range of activities: cataloguing, design, development and maintenance of software. This industry also includes IT enabled services, which are services available through the web. They refer to many functions: accountancy, human resources, marketing, and security. During the last few years, the outsourcing and international sourcing of these services has become more and more frequent. What was, at first, the externalization of single activities, has become a phenomenon involving entire processes: business process outsourcing (BPO). India knew how to take this chance, emerging as the preferred destination for several kinds of processes. xix

xx Introduction

Since 1991, the Information Technology Outsourcing (ITO) and BPO sectors grew with an annual rate of 50%, reaching today a turnover of more than 30 billion dollars. The Indian Association of these industries (NASSCOM) for 2010 calculates an export value of 60 billion dollars. Software corporations talk about extraordinary developments: Tata Consultancy Service, Wipro and Infosys are multinationals which give work to hundred thousands of employees, and their hiring plans calculate many others. In order to understand the genesis of this industry, we must take a look at ancient and modern Indian history. The ancient Vedic tradition promotes lateral thinking and abstraction in order to fulfil oneself. It is worth noticing that many of the first entrepreneurs of IT belong to the Brahman caste. Their attitude for speculation and emphasis on knowledge favoured their entrepreneurial activity. Entrepreneurial attitude is a characteristic of this country, as shown by the dynamism of this market since Gupta and Moghul dominations and, today, the Indian Diaspora in the Silicon Valley in California. The rapid development of the IT service sector is linked to two positive heritages of the colonial period. British colonials founded the first universities and scientific institutes. On these, the Indian government established Indian Institutes of Technologies, for Information Technologies and Management, from which two millions graduates every year come out. The second heritage is the language this labour force can use perfectly to communicate with western countries (at least the English speaking part of it). Language is an advantage for India when compared with other destinations: language in services – if it is not a constitutive element (like in call centres) – is anyway more relevant than in the sourcing of goods. The development of IT and BP offshoring in India depends also on some specific characteristics of these businesses: they are high intensity knowledge activities, focused on human resources; they need less financial resources and no physical infrastructures for transport. This way India could take advantage of some of its strengths (especially the large availability of the labour force and a qualified educational system) facing at the same time its weaknesses, such as the lack of infrastructures. In addition, IT was the sector favoured by the Indian government before 1991, the year of the opening of the economy. Finally, India knew how to exploit some important moments in the development of this sector. A big chance was that of the millennium bug, when many western companies needed to quickly adapt their software. Many Indian providers came out in this moment. Another chance was the so-called

Introduction xxi

‘‘dot-com bubble’’, which reduced the margins of many companies and solicited low cost sourcing in order to recover efficiency. This way India demonstrated it was possible to offshore the management of (till then unthinkable) services, enhancing their internationalization. Today, the Indian core business is ADM (application, development and maintenance) of software, but the supply of more value added services is already relevant. In many cases, the economies of scale and scope reached by the Indian companies allow a proactive behaviour with customers and the improvement and innovations of processes. But India is not only IT. Other sectors have grown too: automotive and electronic, food and steel, chemistry and distribution sectors are clear examples of this. These sectors provided a growth of 20% of Indian manufacturing exports in the last year. During the last 25 years, the composition of Indian exports radically changed: if in the past this country was mainly a supplier of raw materials, today the incidence of finished products and industrial goods is dominant. Together with the development of IT centres, many multinationals established or developed partnerships with local institutions or research centres that are among the most advanced – for instance in the biotechnology and pharmaceutical fields. The presence of foreign investors is growing in India, but so is the Indian presence in the rest of the world. It is the eighth-largest investing country in the USA: seven Indian companies appear on the NYSE list, three in NASDAQ. Indian companies are starting up processes of merging and buyout of European companies (for example in the iron and steel industry), provoking worries in our financial and political community. India is also a growing market. Purchase power is increasing, fuelled by an expanding middle class. This development didn’t happen without contradictions. In fact India is a young country made of many territorial, religious and linguistic entities. There are nuclear arsenals and hungry shantytowns, ancient handcraft laboratories and factories with sophisticated technologies, rural regions and modern metropolitan areas. Besides the just mentioned middle classes that work in software and service companies, a quarter of the population live under the poverty threshold. There are hundreds of millions of illiterates, but also millions of engineers and qualified technicians. The heterogeneity among the 29 states is evident. The GDP of Maharashtra is three times bigger than that of Orissa. The 5 more reactive states to reforms (Andra Pradesh, Karnataka, Maharashtra, Tamil Nadu and Gujarat) received two thirds of all investments. The Federal

xxii Introduction

system offers freedom of action of any single State in terms of economic policy, in particular as far as regulations and incentives to investors are concerned. We must add to these considerations a level of infrastructure not uniform and the different effectiveness of regional administrations in order to understand the heterogeneity among territories and their different specializations. Bangalore and Hyderabad are the hubs in the IT and biotechnology fields. Tamil Nadu and Maharashtra are the preferred locations for automotive companies. There are also entire states almost untouched by this progress. These few elements make us understand the long path to be trodden along the way of reforms started in 1991 by Manmohan Singh, once Indian Minister, and today premier. Even if the economical resurrection of India cannot be doubted, the country must still free itself from the past, in particular from a nationalist and bureaucratic approach, that is the consequence of the economical model adopted after Independence. Public administration must be more agile and effective. Impediments to foreign investment must be decreased. Work policy is a serious obstacle, in particular in the labour-intensive manufacturing sectors, which has many chances of growth, for example in textile or food industries. The infrastructural improvement – at present the most important bottleneck for growth – is an urgent necessity. Even the educational system needs more investments, in particular at first levels and in rural areas in order to limit illiteracy, but also at university and post-university levels, as the growth of knowledge intensive industries has caused a deficit of the offer compared to the demand of graduates. Agriculture must be modernized, because it remains the first source of nourishment for the nation. Above all, it is important that this development continues. Together with China, India is the only country with more than one billion inhabitants. The difference is that while in China there is a birth control policy, India has abandoned any kind of enforcement. The Indian Premier recently stated again that if economic development becomes steady and stable, it will have a relevant impact in terms of poverty reduction. It must be – he added – a development with a ‘‘human face’’, the slogan he used in the last election he won. Only with this ‘‘human aspect’’ (i.e. a quite big electoral support) can important political projects manage the country. India is in fact a democratic country, as Indians proudly declare. It is the biggest democracy in the world with a percentage of voters superior to that of many industrialized countries and in which there have been (at least in recent years) real government alternations. During the first 50 years of Independence, the country was governed by the Congress Party, which led the country to Independence. Recently

Introduction xxiii

the majority was gained by the Indus nationalist party (i.e. the Bharatya Janata Party) that conquered the support of the economic community and of the middle classes originating from economic development. The last elections gave the leadership back to the Congress coalition, thanks to the promise of a more distributed social and territorial development. To get this result the Congress had to reach an agreement with other parties, including the Marxist-Communist one. This fact generated in the international economic community worries about the possibility of continuing the same reform paths. Worries disappeared when Manmohan Singh (i.e. the author of the 1991 opening) was called to manage the coalition. The international community knows that the path of a democratic country like India has to be slower and more difficult than the Chinese one, which was managed by an authoritarian government. In any case if we look at the diplomatic initiatives of the last periods (from the visit of President Bush to the summits with the European Community), we can see that India is already considered a powerful nation. Many times in these pages we make a comparison with China, the other Asian giant. The two countries are often compared (‘‘Chindia’’) for their geographic and demographic dimension, for their ancient cultural and scientific traditions, for the rate of expansion of their economies, for their ability to attract foreign investments, for the opportunities offered by their internal markets. It is worth summarizing this comparison, which will be deepened in following chapters. The premise is that the economic dimension of China cannot be (at the moment) compared to the Indian one. Its GDP is more than double the Indian one; direct foreign investments at least ten times bigger; its incidence on international commerce six times bigger; its commercial balance is positive, while the Indian one is negative. As far as the effectiveness of administration, of business environment receptivity and infrastructures development rate is concerned, the two countries are really different one from the other. The 12 years which separate the opening policy of Deng Xiao Ping from the action of reformation of Manmohan Singh, explain the reasons for this gap. But in our opinion, in this gap we can find the first and most important advantage of India. This country represents a chance which is becoming more concrete in these years. It’s an area on which it’s easier to find opportunities because development has just started. India is a more familiar and encouraging context for a western operator who finds here rules similar to his own and a State which (structured on the English common law) seems to offer more guarantees. The Indian

xxiv Introduction

interlocutor, who as far as negotiation is concerned is not more flexible than the Chinese one, has behaviours similar to the western ones (for instance in the free criticism of government, of inefficiencies, of democracy degenerations) and this allows defining an agreement in an easier way. Another point is the closeness of India to western culture compared to oriental Confucius. Sanskrit (i.e. the language of the Arii who invaded India in the second millennium BC) is tightly linked with Greek and Latin. The Indian man is analytic, sometimes aggressive, and different from the Confucian one. Other Indian strengths are the language, the Diaspora (several Indians have high positions in western institutions), a development path socially and environmentally more sustainable, a young population, and a geo-political profile that makes this country privileged by the US ‘‘containment policy’’ against China and by those nations that prefer a multi-polar Asia. This quick comparison between China and India does not suggest alternative choices of sourcing. We are not talking about choosing between the Elephant and the Dragon; on the contrary, we want to suggest a global strategy that considers both the strong and weak points, the chances and threats of each quadrant of the international chessboard. A chessboard in which the economic hierarchies put (considering the purchasing parity GDP) China and India respectively at the second and fourth place and whose centre has moved from the Atlantic to the Pacific. A global strategy cannot ignore these countries; it’s important to decide which pawns move on them. As already stated, the two nations present different specializations: one is the ‘‘world factory’’, attracting a relevant part of global manufacturing. The other is the privileged destination of offshore services. This study continues and integrates a previous one on China. International sourcing in developing countries is already a relevant phenomenon that will grow more and more in the future. The attractiveness of the Chinese market is already known in the western world: many companies transferred some sourcing activities here in order to have access to its localization advantages. The Indian market is surely less known, but very interesting and for many aspects complementary to the Chinese one. International sourcing is a subject which is not much studied in literature and is not much explored in managerial practices. On the basis of literature analysis and of research on a sample of companies, the book underlines the opportunities, threats and problems of sourcing in India, especially looking at the IT and BPO service sectors (that is the strong point of this context), but without ignoring the sourcing of goods.

Introduction xxv

Starting from the sampled companies’ experiences, the study offers references for sourcing in India, delving into the key steps that characterize this activity (from the identification of the aims of the collaboration, to the writing of the contract and the management of the relationship). The text also deals with some related themes: the Indian macro-economic scenario, the industrial geography, the analysis of the location, the main features of the legal discipline on foreign investments, and transport and communication infrastructures. The theme is complex, because it comprises many complex interrelated topics. India has more than 1 billion inhabitants, 18 main languages and 1600 minor languages, many castes and sub-castes, and about 6 ethnic groups. Speaking about India some authors assert that it’s possible to say everything and its opposite. It’s a country which is experiencing a step forward from the shadow of its history to the glow of globalization. This variety disorients those who approach this world and challenges them to find the underlying rationality. In order to make up the pieces of this mosaic and recognize its composition, it is necessary to accept that the Indian character Rampini is defined as ‘‘spacious and assimilative, wide and inclusive’’. Another complexity is linked to the typology of sourcing here considered: IT services and business processes. Buying services is something different from buying goods or components. Generally speaking, it is easier to circumscribe the tasks associated with the production of a physical good than those associated with a service. In the first case, we have a clear product bill from which it is possible to separate the constitutive components; it’s an essential step for the allocation of the corresponding responsibilities. In the second case, this step (even if possible) is more dissimilar from the usual modus operandi of our companies. In any case this (first of all cultural) change is becoming familiar. Today (even no-core) functions and processes once considered much too dependent on others in order to be transferred without compromising companies’ metabolism are being outsourced or internationalized. In any case, the identification of the item, the definition of inputs and outputs, the delivery modes, the transfer modalities, and the forms of coordination can be really different in the two sourcing kinds. These complexities are the limit of this study. Anyway, we believe it provides one of the first structured contributions to the study of offshoring in this geographic context. In detail, the structure of the book is as follows: Chapter 1 proposes a synthesis of the studies concerning service offshoring. It describes the adopted terminology, the main research

xxvi Introduction

fields, the evolution path of the phenomenon, the differences between the sourcing of services and the sourcing of goods, the various service typologies involved in international outsourcing/offshoring projects, advantages and threats, factors used in the choice of the location, and organizational solutions. Chapter 2 is dedicated to India. Its history and some characteristics of its society are here summarized, together with industrial geography and a macroeconomic description (through data such as the GDP, the interchange, the commercial balance, etc.) of the country. Chapter 3 deals with the theme of service offshoring in India. Data on the dimensions of this sector are provided; strengths and weaknesses of IT and BPO offshoring in this country are discussed; the factors that justify the rapid growth of the sector are analysed. Chapter 4, after describing the aims of the research project and the adopted methodology, illustrates stages, determinants, advantages and threats of a project of service offshoring in India (from the strategic analysis to the choice of the organizational solution; from the establishment to the management of the supply channel). The chapter was written on the basis of companies’ experiences, integrated with considerations provided by the literature focused on this issue. Chapter 5 and Chapter 6 develop two relevant themes: legislation that regulates direct investments in India and transport and communication infrastructures. The second part of the book contains an in-depth description of five case studies analysed in the research project.

1 Service Offshoring: the Literature

1.1.

Premise

In this chapter we will propose a synthesis of literature on service offshoring. The definition of ‘‘offshoring’’ will be the object of the first section. Next we will propose a synthetic analysis of its temporal evolution, together with some considerations about the characteristics that distinguish material/goods from services sourcing activities. The following sections will draw a picture of the main obstacles of service offshoring services and the determinants that influence their location choices.

1.2.

Service offshoring: some clarifications about the term

The literature fails to provide a definition of the term Offshoring widely shared inside the scientific community (Kroll, 2005). Various authors (Monczka et al., 2005; Kroll, 2005; Rutherford and Mobley, 2005) observe that this term is often confused with the term ‘‘outsourcing’’. Actually the meaning of the two terms is different: the first one exhibits a geographic connotation, while the other one refers to the ownership of productive assets (Huws et al., 2004). This consideration suggests a first key to reading: using both the geographic dimension (offshoring) and the assets ownerships dimesion (outsourcing), it is possible to identify a useful scheme in order to characterize offshoring services and classify the correspondent literature (Fig. 1.1). The scheme individuates four situations: 1.

Domestic Service Insourcing: services generated and supplied within the company or by branches located in the domestic territory. 1

2

Sourcing in India

Geographical dimension Activities in domestic market

Activities in foreign market 2

Domestic service insourcing

Offshore service insourcing

3

4

Provider

Domestic service outsourcing

Offshore service outsourcing

Ownership

1 Firm

Service outsourcing

Service offshoring Figure 1.1: Relationship between offshoring and outsourcing

2.

3.

4.

Other term used in literature are: ‘‘Onshore’’ (Deloitte, 2004b; WTO, 2005b) and ‘‘Domestic In-House Production’’ (GAO, 2004); Offshore Service Insourcing: services provided by foreign branches of the company. Synonymous of the term Offshore Insourcing are Captive Outsourcing (WTO, 2005b), Captive Offshoring (Evaristo et al., 2005) or Offshore In-House Production (GAO, 2004); Domestic Service Outsourcing: services are provided by independent suppliers located in the same country of the buying company’s headquarters (Kelly and Nolle, 2003; Amiti and Wei, 2004); Offshore Service Outsourcing: services are provided by independent suppliers located outside domestic (headquarter’s) country of the buying firm. This situation combine both Offshoring and Outsourcing choices (Monczka et al., 2005).

In order to complete this terminological overview, we also mention other terms sometimes adopted as synonyms of offshore: ¨ rg and Hanley, 2003; Amiti and Wei, 2004; Niederinternational (Go man, 2005); • cross-border (Kelly and Nolle, 2003); • inter-continental (Huws et al., 2004); •

Service Offshoring: the Literature 3

global (Carmel and Agarwal, 2002; Bajpai et al., 2004; Kotabe and Murray, 2004; Gupta and Nachum, 2003; Soliman, 2003); • overseas (Finkel and Brown, 2003). •

As synonyms of domestic we can find these terms: • •

local (Arora et al., 2001; WTO, 2005b; Ono, 2003; Huws et al., 2004); onshore (Deloitte, 2004b; WTO, 2005b; Sourcing Interest Group, 2003).

Some studies mention still another term: Nearshoring (Gupta et al., 2003; Ganesh, 2004; Baldwin, 2003; Bajpai et al., 2004). It refers to offshoring activites in countries close to that of origin. For example, some American companies recurring to services provided in Canada, as well as the de-location (transfer) of processes from European industrialized countries towards other European recently developed countries (such as Romania and the Czech Republic) are sometimes defined as Nearshoring (Bajpai et al., 2004; Huws et al., 2004; Gupta and Nidhin, 2003). Going back to Fig. 1.1, we can recognize two macro areas of Service Offshoring (quadrants 2 and 4) and of Service Outsourcing (quadrants 3 and 4) that correspond to streams of studies that sometimes intersect. Some contribute focus on service outsourcing (Fixler and Siegel, 1999; ¨ rg and Hanley, 2003; Monczka et al., 2005; Kirkwood, 2005) but do Go not ignore its possible offshore solutions, i.e. they deal with the international articulations of the sourcing processes. And some works (Kumar and David, 2003; Irving et al., 2003; Gupta et al., 2003, Gupta and Nachum, 2003) focus on service offshoring while considering outsourcing as one of its possible declinations. A further literature classification deals with the typology of outsourced services. The prevalent distinction is between Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO). It is quite easy to distinguish the literature associated with these two forms, while it is more difficult to rigorously circumscribe the two corresponding types of sourcing. According to Willcocks et al. (1995), on the same line as Hignet et al. (2003) and Dharmawat (2003), ITO refers to the outsourcing of activities linked to the management of technological infrastructures (terminals, servers, etc.) and software (Willcocks et al., 1995), while BPO refers to the outsourcing of activities/processes ‘‘supporting the organizational mission’’ (staff management, accountancy and finance, assistance to users). It is easy to see possible overlaps: many organizational processes can make use

4

Sourcing in India

of a pc support, indeed they can be provided from remote locations thanks to IT applications. The IT service itself can be considered an organizational process that can be externalized. However, we can share with Willcocks et al. (1995) a quite clear distinction: while for IT services the informatics component (management of technologic platform or software development) represents the object of externalization, in BPO it is the instrument supporting the service provision. Some authors distinguish between ‘‘IT sourcing’’ and ‘‘IT enabled services sourcing’’, two categories that recall the difference between informatics platforms/pc network and the services that circulate through it. From a methodological point of view, our survey will use ‘‘IT/BP services’’ as a unit of analysis, so it will not separate the two forms. Therefore, and according to much of the literaure, we will maintain this distinction in the following sections.

1.3.

Service outsourcing/offshoring evolution

Nowadays a wide number of activities/processes are becoming the object of out and international sourcing. This section offers a brief evolutionary picture of this phenomenon. 1.3.1.

IT outsourcing (ITO)

The ITO historical evolution has been traced by many contributors (cf. Loh and Venkatraman, 1992; Barthe´lemy and Geyer, 2001; Kern et al., 2002). The first phase is commonly dated back to the 1960s, when the first companies offering services of data elaboration were born (EDP – Electronic Data Processing). They were as yet very expensive services, both in terms of investment and managerial costs. Therefore the resort to outsourcing allowed the achievement of important economies (Barthe´lemy and Geyer, 2001; Rohde, 2004). Twenty years later a new form of ITO arose and found its first realization in what many researchers consider a very important milestone of the phenomenon: IT outsourcing by Eastman Kodak in 1989 (Johansson, 2004; Khalfan, 2004; Barthe´lemy and Geyer, 2005; Monczka et al., 2005). It was the first time that a company belonging to Fortune 500 outsourced IT activity, previously considered a ‘‘core’’ activity. To the Kodak effect is attributed the rapid growth of IT outsourcing development within the large-sized companies. Then the market rapidly expanded (Loh and Venkatraman, 1992; Rohde, 2004; Aubert et al., 2004). The model of IT outsourcing introduced by Kodak was characterized by three elements (Cheon et al., 1995; Barthe´lemy and Geyer, 2001): a) the

Service Offshoring: the Literature 5

wide range of outsourced services; b) the partnership relationship with the service providers (who accepted to share risks and responsibilities); c) also large sized companies recurred to IT outsourcing (not only small and medium companies because of the lack of inner competences and infrastructures). In the third evolution stage, in the 1990s, strategies of selective outsourcing in addition to traditional practices of full insourcing and full outsourcing began (Rohde, 2004; Willcocks et al., 1995; Kern et al., 2002). This was the period in which studies focused on strategies of outsourcing (DiRomualdo and Gurbaxani, 1998; Offodile and Abdel-Malek, 2002; Lacity and Willcocks, 1995), risks (Blackley and Leach, 1996; Willcocks et al., 2000; Bahli and Rivard, 2004; Khalfan, 2004), contracts (Willcocks and Choi, 1995; Barthe´lemy, 2003; Shepherd, 1999) and organizational aspects (Willcocks et al., 1995) rapidly developed. Finally, from the end of the 90s on, a new ITO typology arose, named netsourcing (Kern et al., 2002), which found its realization in the birth of the Application Service Providers (ASPs). This kind of sourcing is based on the concept of payment of the application compared to effective use. This periodic rent allows the company to use the applications stored in the servers owned and managed by the providers (Pasini, 2002). ASPs are a topical subject even if their use is as yet limited, and they are likely to increase especially within small and medium companies (Johansson, 2004; Smith and Kumar, 2004; Pasini, 2002). 1.3.2.

Business process offshoring (BPO)

In recent times, together with the ITO evolution, we have witnessed the diversification of services typologies and the extension of the geographic sourcing basin (Offshoring). Its first evolution stage (Fig. 1.2) which happened during the end of the 80s and the beginning of the 90s, deals with the transference to low-cost locations of some IT activities (Deloitte, 2004b; Irving et al., 2003). The second stage – that can be defined as ‘‘growth’’ – involved some simple back office services (such as call centres or invoicing processes) as well as more complex IT activities. In the successive stage, that of ‘‘consolidation’’, services associated to human resources management, administration and finance become candidates for offshoring. Finally, in the current phase, processes destined to offshoring seem more complex and numerous and involve still other functional areas, from legal consultancy to sales (Irving et al., 2003; Bajpai et al., 2004; Smith and Kumar, 2004).

6

Sourcing in India

Introduction

Growth

Consolidation

Maturity

New services involving other functional areas HR, financial and administrative services Major value added IT services. Simple back office services

Low value added IT services

Time Figure 1.2: Evolution of offshoring services Source: Deloitte, 2004b. Reprinted with permission.

1.4.

Sourcing of goods and services

We will here briefly describe some characteristics that distinguish service sourcing from that involving material/goods and some prerequisites for its achievement. 1.4.1.

Key features of service sourcing

Stating in advance that the distinction between the purchase of goods and that of services is often very high (since the former is generally accompanied by some service content), it can be useful to identify some specific characteristics of services that affect their outsourcing possibility (Lovelock, 1988; Negro, 1992; Fitzsimmons and Fitzsimmons, 1994) (Tab. 1.1). The first characteristic is intangibility. Difficulties in establishing ex-ante and measuring ex-post the performances required and problem in intellectual property protection are linked to it. In addition, services are (often) realized, distributed and consumed simultaneously. This aspect has many managerial consequences, for example the impossibility of storage service in order to face possible demand fluctuations. In services the skill intensive component tends to prevail, offshoring, while the purchase of goods is characterized by a major labour and capital component.

Service Offshoring: the Literature 7 Table 1.1: Main differences between material/good and service sourcing Material/Good

Service

Tangible Fewer difficulties to protect intellectual propriety Higher accountability and easier performance evaluation Physical and time separation of production, distribution and consumption phases Storage possibility Higher labour and capital intensity

Intangible Greater difficulties to protect intellectual propriety (More) complex accountability and performance evaluation Simultaneous production, distribution and consumption Limited storage possibility Skill intensive Dependent on communication infrastructure

Dependent on physical (transport) infrastructure

Another element characterizing the purchase of services is the infrastructures network supporting them. The sourcing of materials/goods seems more influenced by the quality and capillarity of the physical transport net, while service sourcing seems more dependent on the presence of communications infrastructures. As we will see in the next chapters, the specialization in service activities, together with strong investments in data transmission network, allowed the Indian basin to overcome some evident infrastructural lacks that still limit the international exchange of materials and goods. 1.4.2.

Factors influencing the service (out)sourcing choices

Factors that influence the service (out)sourcing choices are many (Loh and Venkatraman, 1992; Lacity and Willcocks, 1995; Ganesh, 2004; Aubert et al., 2004): Importance: the more a service is considered ‘‘core’’, the more is the propensity to avoid its externalization; • Specificity: the presence of characteristics of uniqueness (or the correspondent and reverse standardization possibility) render its offer more expensive on the supply markets; • Difficulties in the definition of input-output parameters and value: complexity in the management of an outsourcing process is enhanced if the input-output parameters and value of what must be outsourced cannot be precisely defined; • Frequency: the more a transaction is recurring, the more it is convenient to keep it inside the company; •

8

Sourcing in India

Number of possible suppliers: a concentrated supply market reduces the available alternatives and diminishes the contract power of buyers; • Fixed costs and investments: high investments, particularly when accompanied by a relevant ‘‘fixed’’ component, introduce rigidities and shift the break even point; • Availability and possibility to convert internal resources and competences; • Profile of the external offers compared to the internal capacity and competences: the existence of excellent external offers evidently promotes ‘‘buy’’ choices. •

1.5.

Services destined to out and international sourcing

Services destined to outsourcing and international outsourcings are becoming more and more numerous. This section offers a brief list of them. 1.5.1.

ICT services

The main services that undergo outsourcing in the field of Information and Communication Technology are: 1. 2. 3. 4. 5. 6. 7.

LAN and desktop management; Data centres; Help desk and call centres; Network outsourcing; Web services; Software development; Safety management services.

Before introducing each one of these, it is opportune to premise that these services point out evident intersections, individuating a sort of continuum that moves from elementary forms to ones in which the intensity and content of the exchange is more and more complex. LAN and Desktop management services (1) include data management activities at a single position or within a local network (LAN1). The objective of these services is that of creating and maintaining a rational structure of files and data bases, in order to facilitate data retrieval and avoid duplication (Cioffi, 2001). Outsourcing can even involve the supporting physical structures for data cataloguing and storing (server farm, data centre). In this case, information is stored and managed by the providers’ servers, who make them available for the client according to the clauses defined by the contract of data centre (2).

Service Offshoring: the Literature 9

Help desk and call centre (3) services guarantee to the customers a support (via telephone or web) for the solution of problems related to supply (Takano et al., 2000). In Network outsourcing (4) the service providers receive a periodical rent for the maintenance and governance of the customer information web. Network outsourcing includes the transference of responsibilities (and often of physical assets too) from the customer to the provider, who guarantees a range of services on the basis of the specific needs of the customer. Web services (5) include the realization and management of the website of the company and of some activities supported by it; among these web marketing, web design, web development and maintenance and web hosting. Web marketing refers to the strategies that are used to market a product or service online and include search engine optimization and online promotions. It is a virtual extension of the physical market and it can be set as a service supporting e-Commerce (Frey, 2003). Web design is the process of creating a website and may involve both the aesthetics and the mechanics of a site’s operation. Some of the aspects that may be included in web design are graphics and animation creation, content creation, HTML/XML authoring, and JavaScript programming. Web development and maintenance deals with problems of the continuous update of information and data contained in the website. Software development (6) includes a variety of possible activities. The literature proposes a series of models illustrating its stages. Figure 1.3 shows the well known waterfall model (Royce, 1979, in Arora et al., 2001) that describes the temporal evolution of the software development process in six levels. Among these, the processes that appear to be more easily outsourced are those at the low stages: basic analysis, programming, testing

Specifications analysis High level design Low level design Design Verification Maintenance Figure 1.3: Waterfall model of software development Source: Royce, 1979, in Arora et al., 2001.

10 Sourcing in India

and maintenance. Steps related to the specifications analysis and to the high level design should be maintained inside the company. Finally there is safety management (7). Among services that can be supplied by a IT security provider it is possible to identify the management of firewall and virtual private networks, the analysis of vulnerability, anti-virus protection and anti-intrusion (Khalfan, 2004). In some cases the outsourcing of IT services can deal with the implementation and management of the entire security system (Khalfan, 2004, Grance et al., 2003). 1.5.2.

BPO services

As highlighted in section 1.1, the Business Process Outsourcing refers to the transference of a process to an external provider. Using the value chain model of Porter (1985), we will illustrate the range of activities that can be subject to outsourcing: •

•

•

•

•

Infrastructural activities. Besides IT services already described in the previous section, we can recognize in this field Finance & Accounting activities – such as financial analysis, tax compliance, VAT returns and invoices management (Ghose, 2003; Irving et al., 2003) – and some categories of legal services (Patents and IP analysis, litigation support, contract drafting). Technology development activities. In this area, many activities of research and development can be outsourced (Ono, 2003; Huws et al., 2004; Gupta, 2003). As an example, India represents a solid offshore location for R&D activities in the field of pharmacy and biotechnology. Procurement. Outsourced activities destined are, for example, the analysis of the supply market, support to negotiation, evaluation of supplier performance, contract review (Monczka et al., 2005; Dharmawat, 2003; Ghose, 2003). Marketing and sales. Outsourcing of activities linked to marketing and sales is an aspect often mentioned in literature (de Lucas and Rodriguez, 2003; Ono, 2003; Schoeniger, 2002; Irving et al., 2003). Many studies underline how activities like telemarketing and market researches are more and more subject to outsourcing (offshore too) (Irving et al., 2003; Rajawat, 2004). Human resources management. Many activities can be outsourced in this area: payrolls (Gargiulo, 2004; Monczka et al., 2005; Kirkwood, 2005), writing of hiring documents (Ghose, 2003; de Lucas and Rodriguez, 2003), education and e-learning (Ghose, 2003; de Lucas and Rodriguez, 2003) are some examples.

Service Offshoring: the Literature 11 Current

• Manufacturing/Operations • Procurement/Supply management

Supply-side activities

Distribution/Fulfillment

Growth 39% 35% 20%

• Information technology

• Human resources

49%

Corporate support

Legal/Regulatory

29% 23%

• Finance & Accounting

Research • Product & Service development

Marketing Field service Sales • Largest growth areas for outsourcing

Demand-side activities

• Customer call centre

Research & technology

• Engineering/Detailed design

19%

0

30% 17% 19%

33% 17% 19% 8% 10

20

30

40

50

60

Per cent of respondents currently outsourcing more than 25% of the activity

Figure 1.4: Actual and future levels of outsourcing Source: Monczka et al., 2005; Copyright A. T. Kearney, 2005. All rights reserved. Reprinted with permission.

Figure 1.4 (Monczka et al., 2005) shows the level of externalization of a series of activities/processes in a sample of 1000 companies of different nations. This and other researches (Gupta and Nachum, 2003; Gupta et al., 2003) document a significant growth of BPO.

1.6. Determinants and benefits of service offshore outsourcing Motivations for offshore outsourcing can be classified according to four dimensions: strategic, operational, organizational and economic. Figure 1.5 proposes a series of drivers referred to these dimensions, composing motivations linked to outsourcing and those linked to offshoring.

12 Sourcing in India

Strategy 1. Focus on core business (Irving et al., 2003; Hignett et al., 2003; Monczka et al., 2005; Pinnington and Woocock, 1997; Kakabadse and Kakabadse, 2002; Kern et al., 2002) 2. Strategic flexibility (Irving et al., 2003; Ganesh, 2004)

3. Access to local sales markets (Ghose, 2003; Evaristo et al., 2005)

Technology/Operations 1. Access to technical skills (Barthélemy and Geyer, 2001; Willcocks et al., 2002; Fixler and Siegel, 1999; Bahli and Rivard, 2005)

2. Quality improvement (Ghose, 2003; Gupta and Nachum, 2003; Barthélemy and Geyer, 2001; Evaristo et al., 2005) 3. Time to market reduction (Hignett et al., 2003; Evaristo et al., 2005) 4. Access to new technologies (Kakabadse and Kakabadse, 2002)

Organization 1. Reduction of inner complexity (Barthélemy and Geyer, 2001)

Costs 1. Costs saving (Carmel and Nicholson, 2005; Kern et al., 2002; Ganesh, 2004; Monczka et al., 2005; Barthélemy and Geyer, 2001; Ghose, 2003)

2. Management of a definite cost centre (Pasini, 2002) Figure 1.5: Determiners of service offshore outsourcing

1.6.1.

Strategic motivations

The focus on core business is a motivation underlined by several authors (Pinnington, Woolcock, 1997; Kakabadse and Kakabadse, 2002; Willcocks et al., 2002). The research for flexibility, a decisive driver in the current competitive scenario characterized by the increased intensity of technological and market changes, is linked to it (Shepherd, 1999). Outsourcing shifts to the supplier the fixed costs and the duty of

Service Offshoring: the Literature 13

guaranteeing the manufacturing capacity requirements in order to absorb demand fluctuations (Ganesh, 2004; Huws et al., 2004). This way it is also possible to avoid over-sized internal departments and divisions (Carmel and Nicholson, 2005). Some studies underline the importance of offshoring as a door-opener of local (foreign) markets. Under this point of view, however, the local sourcing of good seems much more effective than the local sourcing of services. 1.6.2.

Economic motivations

Reduction of costs is widely quoted in the literature as a primary motivation for outsourcing choices (Carmel and Nicholson, 2005; Willcocks et al., 2002; Ganesh, 2004; Monczka et al., 2005). In the case of domestic ITO/BPO, cost benefits derive from the scale and scope advantages of the supplier (Barthe´lemy and Geyer, 2001; Willcocks et al., 2002). As far as offshoring choices are concerned, cost advantages offered by low cost countries add to these benefits, in primis linked to the cost of the labour force (Ganesh, 2004; Willcocks et al., 2002). The literature provides some studies that try to quantify the economic advantage of offshoring choices. Results depend on the object of the transaction (kind of service considered), location and period of analysis. Anyway the economical benefits documented by these studies ranges from 25% to 35%. This value, which seems quite small at first glance, can be explained by the fact that offshoring implies a series of added expenses, like the cost of coordinating geographically and culturally different realities, of managing the internal organizational change, and of developing the external sourcing channel. Figure 1.6, taken from a neoIT survey in the Indian context, proposes a qualitative evaluation of the relevance of the main cost drivers and the obtainable benefits (neoIT, 2005). 1.6.3.

Operational motivations

Outsourcing (domestic or offshore), especially in industries where technology evolves very rapidly, facilitates continuous upgrading, sparing companies the duty of following the change directly (Barthe´lemy and Geyer, 2001). Focusing on specific activities, the provider can deal with the technologic frontier better. In addition, the market choice gives to the customer several supply alternatives, and therefore the possibility to resort to the most technologically updated sources (Willcocks et al., 2002). Specialized providers make the improvement of the quality level easier (Barthe´lemy and Geyer, 2001; Ghose, 2003; Gupta and Nachum,

14 Sourcing in India

Offshore

Other costs

Onshore

25–35%

Other costs

Salaries

Physical infrastructure Change management, resource redundancy, etc. Offshore Communication, travel costs

Figure 1.6: Offshoring cost advantages Source: neoIT, 2005. Reprinted with permission.

2003). This potential advantage seems more relevant in small companies, which have greater difficulties in collecting an adequate mass (scale) over an activity/service. Literature reports several examples of big companies (i.e. DuPont, British Petroleum Exploration, Lufthansa, Swiss Bank Corporation, J.P. Morgan) that, thanks to the availability of financial resources and qualified staff, could develop internally very updated applications (DiRomualdo and Gurbaxani, 1998). Another motivation, even if more complex and questioned, is that linked to the reduction of time to market. On one side, insourcing allows a more direct planning and monitoring of the activities and, so, the reduction of time. On the other side, the access to external productive capacity and specialized competences allows a quicker response to rapidly changing market requests. 1.6.4.

Organizational motivations

Outsourcing implies the reduction of direct controls over the activities/ processes involved, with the consequent risk of knowhow weakening or loss (Grittner, 2003; Monczka et al., 2005) or excessive dependence on the provider (Adler, 2003). Some authors observe that the need for analysis, rationalization and modularization of activities solicited by

Service Offshoring: the Literature 15

outsourcing programs often determines significant effectiveness improvements. Finally, outsourcing generates a cost centre that can be (more) easily identified and monitored, besides allowing a reduction of internal organizational complexity.

1.7.

Risks of service offshore outsourcing

Service offshore outsourcing (SOO) exhibits some risks too, associated to outsourcing choices, to their international location (offshoring), or both. Among these risks there is the danger of subtraction of confidential data (Khalfan, 2004; Willcocks et al., 1995; Smith et al., 1996) and of violation of intellectual property rights (Smith et al., 1996; Carmel and Agarwal, 2002; Monczka et al., 2005). It is evident that these problems, even if existing in any context, are more relevant in offshore locations where the interests of foreign operators may be not adequately safeguarded by local industrial policies and legislative systems. Another critical aspect is the geographic and cultural distance (Carmel and Agarwal, 2002; Espinosa and Carmel, 2004; Ganesh, 2004; GAO, 2004). This distance must be carefully controlled since it influences the effectiveness and costs of the negotiation processes and of communication and organizational coordination (Carmel and Agarwal, 2002). A related risk is that of the foreign country system, whose political, legal and financial profile can be radically different from the domestic one. In countries like India this profile is evolving and forces companies to rapidly adapt to changes. Limits to foreign direct investments, changes in fiscal policies, and obstacles to international commerce are just some of the problems that companies must face when sourcing internationally. SOO, especially in underdeveloped countries, can require supplier training and assistance: specific investments that can be lost in the case of switching of the relationship. The knowledge and information exchange that develops in buyer–supplier interactions makes the customer vulnerable to suppliers’ opportunist behaviours, for example becoming vulnerable to the expropriation of intellectual property. As far as the risks of outsourcing are concerned, the loss of knowledge is the most cited in literature (Grittner, 2003; Monczka et al., 2005; Barthe´lemy and Geyer, 2001). This risk can be limited when the company is able to precisely evaluate the strategic valence of the activities to be outsourced. A very common problem, that seems to arise especially when the SOO focuses on costs, is the reduction of service quality (Willcocks et al., 2005; Ganesh, 2004; Adler, 2003).

16 Sourcing in India

Other pitfalls are linked to the demotivation of the internal staff (after the dismantling of the internal structure), the difficulties of monitoring and controlling the service level, the loss of direct contact with the final customer. When the outsourced processes require strong interactions, an excessive dependence on the supplier may arise, with heavy consequences in the case of switching of the relationship (Adler, 2003). Other risks are related to the modular architecture that may be adopted in order to distribute the responsibilities and task to external sources. Modularization can limit architectural innovations (Henderson and Clark, 1990; Fleming and Sorenson, 2001; Ethiraj and Levinthal, 2004) or make problems or defects visible only in the stage of composition of modules. Finally, as far as Application Service Providers (ASP) are concerned, there is the risk of fruition of general services (Carmel and Agarwal, 2002). The ASP mode is based on the concept of payment of the application according to the real use. This application, especially when one to many modelled, can obstruct the possibility of customizations (Willcocks et al., 2002). The client must generally accept the application as provided since ASPs can only afford a customized solution for the largest clients.

1.8.

Service offshoring in India

Inside the corpus of the studies cited above, it is possible to identify some contributors specifically addressed to the Indian context. The labour cost advantages (Dossani and Kenney, 2004; Edgell 2003; Makhijani and Thacker, 2004; Brody et al., 2004; McManus and Floyd, 2005; Scott, 2006; Kumar, 2006), the large availability of qualified human resources and appropriate language competences (Edgell 2003; Fairell et al., 2004; Nair and Prasad 2004; Makhijani and Thacker 2004; McManus and Floyd 2005; Wright, 2005; Scott, 2006), the presence of an institutional system able to attract foreign investments (Dossani and Kenney, 2004; Nair and Prasad, 2004, 2005; McManus and Floyd 2005), the presence of appropriate infrastructures (Edgell 2003; Bajpai et al., 2004; Dossani and Kenney, 2004) are the most important factors that motivate the Indian location choice. Some authors (Nicholson and Sahay, 2001; Dossani and Kenney, 2004; Brody et al., 2004; Makhijani and Thacker 2004; Valanju 2005; Wright 2005; Scott 2006) highlight some weaknesses of this country: the high turnover (especially in low added-value services), the limited workforce offer for recently developed industries (such as health services), the complexity of the administrative system, the problems of energy shortages,

Service Offshoring: the Literature 17

the cost of soils, and the complexity of human resources managements due to their caste and social differences. Other works (Kurien, 2003; Valanju, 2005; Wright, 2005) point out the critical success factor of Indian offshoring projects. Among these are the creation of long term supply relationships and the selection of providers able to offer integrated services. Finally, some authors focus on the legal and fiscal aspects of offshoring project in India (Koch, 2001; Mukherjee, Sengupta, 2001; Oslnad et al., 2001; Alvarez, 2003; Eapen, Hennart, 2004; Ekeledo, Sivakumar, 2004), offer a picture of investments modes and legal bonds.

1.9.

Criteria for the location

The literature on service offshoring location choice is quite limited, with some notable exceptions (Graf and Mudambi, 2005; Carmel, 2003; Arora et al., 2004; Bajpai et al., 2004; Ge et al., 2004; Heeks and Nicholson, 2002). Anyway, a series of studies carried out by consultancy firms or IT leading companies can be considered to complement the scientific bibliography. Analysing this literature it is possible to point out macro- categories of location factors: Labour force. The analysis of the human resources in the country of destination is a very relevant aspect (Graf and Mudambi, 2005; Carmel, 2003; IBM, 2004; Deloitte, 2004a). The evaluation criteria of the human capital should be defined according to the specific aims of the company and the characteristics of the outsourced process (Graf and Mudambi, 2005). In the case of offshoring services justified by the need of reducing costs, the main driver of the choice will be the wage level of the supply basin (Carmel, 2003; Graf and Mudambi, 2005; Bajpai et al., 2004; Arora et al., 2004). Other relevant aspects are the technical profile (Carmel, 2003; Graf and Mudambi, 2005), the linguistic competences (Bajpai et al., 2004; Heeks and Nicholson, 2002), the numerosity (Carmel, 2003; Graf and Mudambi, 2005) and the cultural distance (Bajpai et al., 2004) of the labour force. • Institutional system and country risk. The risk linked to political stability and institutional system is widely discussed. The institutional structure can also be a factor facilitating foreign investments, through programmes of industrial support (Carmel, 2003; Heeks and Nicholson, 2002), favourable taxes (Graf and •

18 Sourcing in India

Mudambi, 2005; Deloitte, 2004a), creation of special economic zones or other forms of incentives (Graf and Mudambi, 2005; Carmel, 2003; Ge et al., 2004). • Industrial context and commercial opportunities. The presence of related industries and the attractiveness of local markets can influence the location choices. Even if when local sourcing is not imposed (Nassimbeni and Sartor, 2004), the business penetration in a foreign market can be favoured by suppliers working within the considered market (Bajpai et al., 2004). • Infrastructures. The presence of appropriate infrastructures and their costs are relevant factors too (Graf and Mudambi, 2005; Deloitte, 2004; Bajpai et al., 2004; Deloitte, 2004a; IBM, 2004). Infrastructures availability must be distinguished according to the kind of sourcing: communication infrastructures reveal decisive for several service activities. • Geographic and time zone distance. While the distance of the time zone can be positive as it facilitates the continuity of the service provision, the impossibility of a direct contact can be a serious problem. (Bajpai et al., 2004; Graf and Mudambi, 2005). The increase of geographic distance reduces the possibilities of interaction. Activities like the control of the supplier’s activity and its training become complex. When a direct interaction with the supplier is needed, companies may prefer to move to countries with a higher level of costs if this facilitates the direct control of supply activities (Bajpai et al., 2004). Several location models can be found in the literature that exhibit several analogies. In this section we will describe the main characteristics of two models chosen for their completeness, diffusion (A.T. Kearney and neoIT) and their specific application in the Indian context (which will be presented in Chapter 3).

A. T. Kearney offshore location attractiveness index The evaluation is articulated along many steps. An initial screening of possible offshore locations is made, using information such as the current presence of offshore projects, the existence of regional and national incentives, the availability and profile of the labour force. This first analysis selects the group of locations considered appropriate for offshoring projects; the attractiveness of selected locations is then measured through a more detailed screening.

Service Offshoring: the Literature 19

This second analysis considers three categories (cost structure, availability and quality of labour force, market environment), any of which is divided into metrics and drivers (Tab. 1.2). A synthetic index of attractiveness is so identified. According to A.T. Kearney, the reduction of costs is the most important factor for offshoring projects; therefore the index is calculated giving the highest weight (40%) to drivers related to costs benefits. neoIT Offshore Attractiveness Index Similarly to the previous model, the determination of the neoIT Offshore Attractiveness Index (2005) starts with the identification of a short list of countries selected according to the current dimension and the potential growth of the service offshoring industry.

Table 1.2:

Categories of the A. T. Kearney offshore location attractiveness index

Category Financial structure (40%)

Sub-categories Compensation costs

Infrastructure costs

Tax and regulatory costs

People skills and availability (30%)

Cumulative business process experience and skills

Labour force availability Education and language Attrition rates

Metrics – Average wages – Median compensation costs for relevant positions (such as call centre representatives, IT programmers and local operations managers) – Includes occupancy, electricity and telecommunications systems – Travel to major customer destinations – Relative tax burden, costs of corruption and fluctuating exchange rates – Existing IT and BPO market size – Contact centre and IT-quality rankings – Quality rankings of management and IT training – Total workforce – University-educated workforce – Scores on standardized education and language tests – Relative BPO growth and unemployment rates

(Continued )

20

Table 1.2: (Continued) Category Business environment (30%)

Sub-categories Country environment (includes economic and political aspects)

Country infrastructure

Cultural adaptability

Security of intellectual property (IP)

Metrics – Investor and analyst rating of overall business and political environment – AT Kearney’s Foreign Direct Investment Confidence Index – Extent of bureaucracy – Government support for the information and communications technology (ICT) sector – Blended metric of infrastructure quality (telecommunications, IT services) – Personal interaction score from AT Kearney’s Globalization Index – Investor ratings of IP protection and ICT Laws – Software piracy rates

Source: A. T. Kearney 2004a. All rights reserved. Reprinted with permission.

Table 1.3: The neoIT Offshore Attractiveness Index Level 1 Factors

Level 2 Sub-factors

Financial benefit (30%)

– Labour cost – Cost advantage – operating and capital expenditures

Service maturity (25%)

– Process maturity and competency of suppliers – Industry size and growth – Security/IP protection

People (25%)

– – – –

Labour pool and skill level Language proficiency HR Educational system

Infrastructure (5%) Catalyst (15%)

– – – – –

ICT & physical infrastructure Governmental support Geopolitical environment Physical and time zone displacement Cultural compatibility

Source: neoIT, 2005a. Reprinted with permission.

Service Offshoring: the Literature 21

The index is based on a country’s aggregated rating on five factors that are considered critical to the success of an outsourcing initiative; these factors are weighted according to their relative importance in the determination of an outsourcing project’s success or failure. It elaborates 5 level 1 factors (financial benefits, service maturity, people, infrastructure, catalyst) considered relevant for the success of offshoring strategy. These macro-factors are then further divided in sub-factors (see Tab. 1.3) rated on a 5 stages scale. The NeoIT model, unlike A.T. Kearney’s one, includes the elaboration of different indexes according to the attractiveness of ITO or BPO projects. Scores are obtained in any sub-factor and weighted according to the typology of the project considered. Comparing the two models it is evident that many of the drivers considered for the evaluation of attractiveness of a location are common. Both models carefully analyse the cost of offshoring initiatives, considering the potential benefits but also the additional expenses (coordination and communications efforts, fixed investments, pc infrastructure etc.). The labour pool, its education and experience in offshoring, its language proficiency, its turnover, are parameters common to both approaches. Both models, finally, consider the market environment. They evaluate the risks of political instability, tax and duties, incentives, projects for infrastructural development and the level of protection of intellectual property.

2 India: a Geo-economic Overview

2.1.

Introduction

During its history India rarely was a unified entity: local dynasties, foreign invasions, colonial possession have followed one another, creating cultural, linguistic and religious specificities. However, in the past some unifying elements developed, which have helped to form Indian society since the Medieval Ages. Gathering these elements is important not only for the researcher who intends to analyse the sourcing phenomenon, but also for western companies that intend to establish production and sourcing activities in this market and who are confronted with a social and institutional context quite different from the domestic one. In the next sections a short presentation of the history of India is reported, in order to briefly justify its current complexity factors and their historical reasons. Then, the main macro-economical data of the Indian economy are pointed out, together with some information about its varied industrial geography and a description of the main elements that still limit its economic development.

2.2.

Historical facts

In this section we will analyse some facts related to the history of this country, from the civilization of the Hindus River Valley, through the period spanning the Persian and Macedonian invasions, to Independence from the British Empire (1947) until today. In writing this we have often referred to the works of Sen (2005), Metcalf and Metcalf (2004), Basile and Torri (2002), D’Orazi Flavoni (2000) and many other institutional sources reported in the References section. For further in-depth study we would recommend these works. 22

India: a Geo-economic Overview 23

2.2.1.

From India’s origins until Independence in 1947

Indian history spans over several millennia. Here was developed one of the first major civilizations of the world, the Hindus valley civilization (2500 BC), whose most flourishing centres were the cities of Happapa and Mohenjo-Daro, nowadays in Pakistan. This civilization disappeared in 1500 BC due to the invasion of an Indo-European tribe moving from the broad plains of Central Asia, the Aryans. Aryans imposed themselves thanks to their military superiority and established their residences in the Ganges river valley, where they abandoned their semi nomadic habits. Aware of their military superiority, the Aryans refused to mix with the native populations of darker skin, this way creating a form of racial segregation that formed the basis of the ulterior castes division. After the invasion of the Aryans, many others followed, in particular the Persian and Macedonians invasions under the command of Alexander the Great, in the north-western part of the country. India flourished again in the 4th century AD, a period of unification under the thriving Gupta Empire, but afterwards the Huns, the Turks and the Mongol invasions overthrew this prosperous period. In 1526 India was again invaded by the Uzbek Muslim population that gave birth to the Mogul Empire, put an end to a long period of partition and reunited almost the entire Indian peninsula. The Mogul Empire reached its highest splendour between the 16th century and the first half of the 17th, in which period the empire was consolidated and arts and culture achieved their pinnacles. During the 1700s the Moguls’ policy of religious pacification weakened and contrasts between the two main religions reappeared: the autochthonous Hinduist and the Muslim religion that was already present in India and that was strengthened under this dynasty. These historical introductory features already highlight a characteristic of Indian history: fragmentation. The periods of unity were an exception, while local rule and foreign domination represented the typical situation. Fragmentation was encouraged by the conformation of the Indian territory: a subcontinent divided by mountainous regions and rivers that have circumscribed distinct lingual and cultural entities. As an example, the mountainous relief that separates the eastern from the western region justifies a specific linguistic separation. The numerous current idioms have their origins in two completely different language groups: the Indo-Aryan one in the northern part of the country and the Dravidic one in the south.1 Although for long periods of its history India did not have a political centre, India has nevertheless put together a basis of mutually accepted

24 Sourcing in India

values, which are not referable only to the Hindu religion (D’Orazi Flavoni, 2000). In other words, in its ethnical and linguistic pluralism some common characteristics can be recognized, which allow us to talk about an ‘‘Indian civilisation’’ since the Middle Ages (Metcalf & Metcalf, 2004). European governments had strong interests in India for the important spice trade, and took advantage of the decline of the Mogul Empire. The Portuguese in 1510 were the first to establish a commercial base, followed by the Dutch, the French and the Danish. Nevertheless, the most important trade company operating in India became the British East India Company, which transformed India as the heart of the British Colonial Empire. The rights of the Company were transferred to the British Crown in 1858. At the end of the 19th century the highest educated strata of the population began to claim a more active participation to public life. In 1885, about seventy Indian citizens – lawyers, journalists, teachers and businessmen – established the Congress in Bombay. This movement came to steer the country towards independence and became the most important party of the political scene. Initially the Congress followed a moderate strategy, which was focused on asking for major participation in the colony administration. After the First World War the nationalist movement gathered force and the fight against British rule found a leader in Gandhi. Its political action was based on non-violence and forced the British to more and more important concessions. The fight for independence ended on the 15th of August 1947, with two independent states born from the Colonial Empire based on a religious base: Pakistan – with a Muslim majority – and India – with a Hindu majority. 2.2.2.

The consequences of British Colonialism

While during the pre-colonial period India was considered an advanced country, after Independence in 1947 the country was poor and underdeveloped. It is important to mention some of the consequences of the Raj:2 the British heritage contributes to explaining some of the current strengths and weaknesses of India. Both the British East India Company and the British Crown put into action an intensive exploitation process according to a typical colonial model based on the import of manufactured goods and the export of raw materials and of commercial crops (cotton, indigo, rice and tea) (Basile and Torri, 2002). Villages were self-sufficient in food, trade was limited and the flourishing Indian urban civilization of the previous

India: a Geo-economic Overview 25

centuries was isolated. While other nations were developing industrially, India was stuck in an out-dated rural economy subordinated to the exigencies of the British colonizer (Metcalf & Metcalf, 2004). According to Sen (2005) and Basile and Torri (2002), the English created an ‘‘oriental vision of India’’, in which there was restricted space just for three elements: the caste system, a subsistence economy based on villages, and Hinduism (as a religion and a lifestyle). In this context is the famous sentence of the English Governor T. Macaulay (1843), who affirmed that ‘‘a single shelf of a good European library was worth the whole native literature of India and Arabia’’. The resulting image of India was of an immobile society with poor cultural roots, ruled in all its aspects by the religious ideal. This is not the right context to reflect on the extraordinary and highly original Indian scientific tradition, for instance in the fields of mathematics and astronomy. However it is important to underline that this vision, obviously related to the colonial subordination policies, weakened the ‘‘trust in their own strength’’ of the Indian people and conditioned ‘‘the type of acknowledgement and contribution that they could provide to the cultural and scientific development of the country’’ (Sen, 2005). Another relevant heritage of the colonial era is related to a government inspired by the principle of divide et impera, i.e. a government that accentuated the divisions of Indian society to better control it. As an example, if we consider the current plague of caste division, it is often argued (see Basile and Torri, 2002; Metcalf & Metcalf, 2004) that castes did not have any organizational, economical or political role, although the four hierarchic orders (varna) and the many ‘‘sub-castes’’ (jati) were a typical feature of the Hindu tradition. During the British dominion the caste hierarchies became rigid, and thus the high castes could consolidate a system of privileges. Moreover, in the relationship between Muslim and Hindu, the English used the minority to limit and control the majority. They underlined the differences between these two communities, granting privileges to the Muslims – like rights to vote separately as well as distinct civil codes – to secure their support. Thus, the division between the Hindu and the Muslim during the fight for independence that led to the partition would be at least partially a result of the colonial heritage. The term partition refers to the subdivision of the colony in the two independent states of India and Pakistan. This event generated an exodus of about 12 million people, characterized by great violence. Moreover, the delicate question of

26 Sourcing in India

Kashmir is still open, since this region continues to be reclaimed by both of these countries. However the colonial period also left some positive heritage. The British developed the communications system, they introduced the telegraph, the postal service and the transport systems, constructing a rail network that favoured the birth of the industries. They created the Indian Civil Service (ICS), the elite civil service that became the frame for future Indian administration, an efficient military apparatus and a unified legislative system. The English dominion also improved the educational system, by creating the first universities and public scientific institutes and by introducing the teaching of the English language. The leaders of Independence were also aware of this positive heritage and decided to keep it. For example they preserved the bureaucracy apparatus of the ICS and English was chosen as second official language. Moreover, the choices of the political structure of independent India was inspired by British institutions, for example the governance system and its power distribution between different constitutional organs.3 Moreover, after Independence India followed the example of European tradition on individual rights and the social role of the State. 2.2.3.

The establishment of a stable democracy

Indian democracy was born in a complex and contradictory social situation. One of the most evident contradictions was the contrast between the principle of equality of all individuals in front of the law – the fundamental concept of a democratic government – and a social system modelled on a rigid division into castes (D’Orazi Favoni, 2000). The Hindu tradition justifies this division through the different ‘‘purity’’ of the castes, therefore this inequality accompanies Indian people from their birth and cannot be modified during their lifetime. In addition there were potential centrifugal forces that came from ethnical, linguistic and religious minorities. How was it possible to guarantee the unity of such a heterogeneous country in which millions of people lived in misery and strong social disparities survived? Indeed many people feared during that crucial dawning phase a revolution or an authority involution of the new political system. Vice versa, India proved to be a solid and stable democracy. What were and still are the elements that support this stability? One of the most important choices was that concerning the federal structure of the young Indian nation. Since the first years of the new era, the government sought the correct equilibrium between the need for centralization and the requirement of decentralization. Inserted

India: a Geo-economic Overview 27

into a democratic frame, federalism allows the valorization of regional specificities while containing the centrifugal tendencies. Thus, India has chosen a federal frame that composed individual states according to linguistic and cultural homogeneity criteria. After the dramatic experience of the partition India refused criteria based on religion or race.4 The choice of the federal system is coherent with the history of the Indian people characterized more by fragmentation than by unity. In order to protect the religious minorities,5 India was constituted as a laic State (while Pakistan was born as an Islamic Republic). The heterogeneity of the country and of its inhabitants suggest a structure that guarantees a basic parity and an effective separation of the State from any given religion. The effectiveness of the Indian State in this field is questioned. There is no doubt that discrimination episodes and even cruel disputes take place even nowadays, and that the laicism is highly criticized by activists of the movements Hindutva and the BJP.6 However, Sen (2005) remarks that India is a country in which the Hindu majority is living with 140 million Muslims, with a numerous Sikh population and with a relevant Christian presence that dates back to the 6th century. Moreover there are Hebrews that settled here over two thousand years ago, and Parsees living in India ever since their escape from Iran in the 8th century, and millions of Jainists and Buddists whose faith was the official religion of many Indian Emperors. Finally, we should not forget the atheist or the agnostic tradition that has many followers and that also dates back to ancient times. Lastly, as Sen (2005) observes, today India has a Muslim President, a Sikh Prime Minister and a Christian leader of the major party. The most important action in the fight against social injustices was the abolition of ‘‘untouchability’’,7 and the practices that flow from this, followed by the adoption of the Reservation Policy – a positive discrimination measure that reserves a certain number of positions in the public administration and education system to ‘‘disadvantaged’’ 8 groups. This way the participation into public life of more numerous strata of the population was encouraged, even those groups that were traditionally excluded. It is worth noting that in 1997 an ex-untouchable was elected President of the Republic. Summarizing, it is a widely shared opinion that Indian democracy has demonstrated itself to be able to defend the minorities and to integrate the sub-nationalisms in the context of a real federalism. India is a country where the Supreme Law-court has proven to be accurate and efficient and where the press and other media confirm their

28 Sourcing in India

independence (D’Orazi Favoni, 2000; Metcalf & Metcalf, 2004). What keeps the Indians united, Rampini (2006) observes, despite their enormous social disparities, their casts and religions, the linguistic and ethnical differences? ‘‘Democracy holds them united . . . a political system that is coherent with that Indian identity, which is spacious and assimilative, pluralist and receptive, ample and inclusive.’’ Last but not least, democracy is a fundamental relief for the social tensions that the last years’ economical process has accentuated. 2.2.4.

The economic policy of the government before 1991

The Indian Constituent Assembly followed Anglo-Saxon liberalism and its pattern when defining the institutional frame. In the economical context, vice versa, it opted for the soviet model. After analysing the industrial progress of the USSR, Prime Minister Nehru9 introduced in India an economic and industrialization programme based on a centralized, planned system. A Planning Commission was created whose task were to set the guidelines for five-years plans, to identify the priority industrial sectors, to set the goals for production and decide the allocation of resources. Economic planning was set up in 1951. The Industries Act established State control over industrial production through the so-called ‘‘licence Raj’’: the creation of a new company required a licence from the State, as well as any increase of the productivity or modifications of products (Fisman & Khanna, 2004). The second five-year plan (1956–1961) is linked to the Declaration on the Industrial Policy that identifies the industries under the State (17), those under mixed control (12) and the remaining left to private initiative. Thus the State ensured itself an absolute control over key sectors (for example: the railways, aviation, and energy). The five-year plan aimed at self-sufficiency, i.e. the substitution of many imported goods with local production. This Indian policy allowed the development of an industrial basis and achieved independence in some sectors, for example in cereal production, which was essential in the campaign against famine. The limits of the centralized economic system, perhaps justifiable in the difficult period that followed Independence, but afterward crystallized into a ‘‘state funded capitalism’’ (D’Orazio Flavoni, 2000), became more and more evident over the following decades, when India became progressively isolated from the international community. However the main element defined by this plan remained essentially unchanged until 1990s (Debroy, 2004). The socialist approach of the economical

India: a Geo-economic Overview 29

aspect was indeed confirmed by the daughter of Nehru, Indira Gandhi, who became Prime Minister in 1966 and who dominated the Indian political scene until 1984. Indira Gandhi started the nationalization of the country’s major banks, of the insurance companies and of the coalmines. During the Eighties Rajiv Gandhi made some signal changes. Indira’s son became Prime Minister and reaffirmed the importance of private initiative and of technical development. He tried to open India up to international markets, thus overcoming economical isolation. Rajiv Gandhi took the very first step towards liberalization: some norms that limited the dimensional growth of companies were revoked, tax on goods and inheritances reduced, the licensing procedures simplified (Metcalf & Metcalf, 2004). The reforms of Rajiv obtained some results, however the radical change took place in the Nineties. 2.2.5.

The Nineties’ evolution: towards a free market economy

At the beginning of the Nineties the economical situation was difficult: the autarchic socialist model, which should have made India an economically advanced country, didn’t produce the expected results. The good targets for national progress pursued by Rajiv Gandhi (on average over 6% during the five-year plan 1985–1989) relied on a too generous policy of public investment, that generated a balance deficit, inflation and foreign debt. India was therefore on the brink of disaster: the foreign currency reserves were almost exhausted, the credit capacity was very low, the government resorted to the transfer of the gold reserves, and inflation flared to 14% (Economic Survey 2003–2004). In addition, the Soviet model was falling down. This situation forced the Indian government to adopt some emergency measures, including the 20% depreciation of the rupee. It also applied for a loan from the International Monetary Fund (IMF), who conditioned this loan on an introduction of a series of structural reforms. The New Industrial Policy (NIP, 24th July 1991) marked the shift in the Indian economical policy. This law and its successive amendments set forth the policies and procedures for direct foreign investment (FDI). The licence system was re-dimensioned with the exception of a certain number of sectors. The acceptance procedure of FDI was made more transparent, and it created an automatic system to approve some types of projects and launched a package of incentives for companies located in the Export Processing Zones (EPZs) and for production units that are completely export-oriented (UNCTAD, 2003).

30 Sourcing in India

The Government assumes the task of limiting the influence of the State in the economy, which was the biggest ‘‘hindering’’ feature of the centralized model. Numerous sectors – like mining, banking, insurance, telecommunications, and aircraft – opened up to privately owned companies. The share of ownership approved for the foreign companies reached almost 100% in most of the manufacturing sectors; in some cases authorization was granted automatically. Investors positively welcomed these changes: FDIs riose from 455 million dollars (the average value over the years between 1985–1995) to 5.335 million dollars in 2005 (UNCTAD 2005b). Foreign trade increased progressively thanks to the reduction of import taxes, the removal of quantitative restrictions and the cut of export taxes in numerous industries participated in by foreign capitals, and the simplification of trade procedures (The Ministry of Commerce and Industry – The Department of Commerce, 2002). In the following section we will look in detail at the evolution of import-export and of FDI over the years that followed economic liberalization. However it is important to observe here that these reforms allowed the country to achieve economical growth: in the five-year plan 1992–1997 the GDP grew at an annual rate of 6.8%. In these years the most encouraging signals of recovery came from industrial production and from the evolution of exports that between the years 1993 and 1996 achieved an annual increase of around 20% (Economic Survey, 2003–2004). The liberal development of 1991 received not only approval but also criticism. The reforms brought about an elite development and the ulterior deepening of the disequilibria: between the rich and poor people, but also between industry and agriculture, between State and State, between regions on the coast and inland regions. This is undoubtedly a well documented objection but is unlikely that a fast growth like the one India experienced in those years, considered in an already very heterogeneous context, could avoid these disparities. As we will show later on, India needs other important reforms to support the economic development process. In a democracy this decision belongs to the electorate. This is why the economic community, both Indian and international, follow closely the political events of these years, especially the last general elections. 2.2.6.

The general elections of 2004

The last elections from May 2004 witness the surprising defeat of the governing party, the Bharatiya Janata Party (BJP), and the victory of the coalition governed by the Congress Party, that after spending

India: a Geo-economic Overview 31

10 years in opposition was again called to form the government. Under the guidance of the BJP, India has achieved during the fiscal year 2004 an þ8.1 increase of GDP that made it the country with the fastest economical expansion in the world after China. BJP has built its electoral campaign based on this success, reunited under the slogan ‘‘shining India’’, therefore an India that shines with economic growth and modernity. Instead, the poor rural population of the country felt excluded from this economical boom, celebrated by the ruling government, and prefer the opposition led by Sonia Gandhi, who has dealt with problems that still afflict it: hunger, lack of drinking water, lack of hygiene, epidemics and the unemployment (Uninews, 2004). The popular vote opts for the coalition guided by the Congress (United Progressive Alliance – UPA) and its programme of reforms ‘‘with a human perspective’’, a programme that promises investments in the area of education, health, infrastructures and agriculture. Despite its victory, UPA does not achieve the majority of representatives, and therefore has to rely on the Marxist Communist Indian Party (PCI(M)). The results of the elections are therefore welcomed apprehensively by the financial markets, which are preoccupied by a possible change both in the internal policy, for example in the area of economical reforms and privatization, and in the external policy, in particular in the relationship with Pakistan. These fears were diminished by the appointment of Manmohan Singh as Prime Minister of the new government. Singh is a recognized international economist with a well known liberal orientation, he was the artisan of the reforms that have allowed India to achieve the liberalization of 1991. The Singh Government elaborated a Common Minimum Programme (CPM) that sets as a goal a rate of annual GDP growth of 7–8 %, reducing poverty, sustaining agriculture, increasing spending over education and the health sector. These objectives are maybe too ambitious, since the Indian fiscal deficit is approaching almost 10%, but which the Government still claims to be able to achieve by increasing the fiscal tax and by increasing foreign investment. The Indian Prime Minister M. Singh therefore announced the government’s effort to improve the Indian business environment by simplifying the bureaucratic procedures, reducing the level of corruption and going ahead with the privatization processes (WSJ, 22 September 2004). Finally, with regard to the problem of the lack of infrastructure that afflicts the country, the government proposes the ‘‘food for work’’ programme, in order to sustain the infrastructural development and the

32 Sourcing in India

employment rate. The programme offers employment for at least 100 days per year with a minimum salary to members of the poorest families.

2.3.

Some aspects of Indian society

As we have already seen, the Indian population is characterized by a high ethnical, linguistic and religious pluralism Therefore this is a multiform society with various factors of social complexity. In this section we will introduce some of them. 2.3.1.

The demographic issue

Based on the March 2001 Census, India had 1027 million inhabitants (51.7% men) that is equivalent to 17% of the world population. More recent estimates report almost 1100 million inhabitants. India is the second country after China that has crossed the boundary of one billion inhabitants. However the Indian demographical growth is much higher than the Chinese one; in the country of the Dragon, this has been regulated by the one-child policy while India, after a failed attempt made by Sanjay Gandhi, has abandoned any coercive forms of control. Since the ’80s the population growth rate has begun to slow down, however the absolute incremental still remains very high, almost 20 million per year. As far as the two factors that determine the demographic trend, aka birth rates and mortality, the statistics included in the Economic Survey 2003–2004 and in the CIA World Fact Book 2005 prove how the corresponding rates have both started to dwindle over the years. However while the birth rate remains high, equal to 2.2% in 2004–2005, mortality rate has diminished from 2.28% in 1960–1961 to 0.83 in 2004–2005. Life expectancy is definitely higher: from 32 years in 1954 to 64 nowadays. These figures refer to India as a whole but in reality there are strong differences between the various States. According to the results contained in the economic survey of 2003–2004, the States that have the highest birth rates (above 3%) are the poor rural states of Bihar, Madhya Pradesh and Uttar Pradesh. Above all when people’s nourishment is based on agriculture, children are an irreplaceable support for the work on the fields. On the contrary, states that are politically or socially more advanced, like Kerala and Tamil Nadu, show much lower birth rates. However the demographic factor is ambivalent: it is the cause of enormous problems but also one of the strengths of India. The workforce pool is immense and thus labour costs will remain low for a long period of time. Furthermore

India: a Geo-economic Overview 33

half the population is less than 25 years old. Contrary to the ageing population of the so-called developed countries, India can count on its young and numerous workforces. 2.3.2.

The poverty issue

Poverty is the worse structural problem that plagues India. According to the ‘‘Report on Human Development’’ drafted by the United Nations Development Program and updated in 2003, 47% of children below 5 years are underweight, 21% of the population is malnourished, and 16% don’t have stable access to drinking water. Various statistical sources propose estimates regarding the percentage of the population living below the poverty line. The estimates may vary considerably if we use the international poverty threshold (1$/day at constant prices 1985), the real purchasing power of rupee compared to the dollar, or other parameters. The percentages vary between 25% and 40% of the population (Debroi, 2004; Collier & Dollar, 2003; Economic Survey 2003–2004). However the statistical sources agree over the fact that the level of poverty has been lowered in the last years, a confirmation to the fact that economic growth had positive consequences even for the poorest strata of the population. Poverty afflicts first of all the villages where sanitary and scholastic structures are often absent, where the drinking water network is heavily deficient, where there is lack of infrastructures (electrical energy, streets, etc.), and where they are still waiting for a radical agricultural reform (Debroy, 2004). Beside huge differences between rural and urban areas, there are considerable disparities between the various States. In order to tackle the poverty problem the Indian government has developed a series of programmes administered at central and peripheral level, that include the National Rural Employment Guarantee Act, which provides a legal guarantee for one hundred days of employment in every financial year to adult members of any rural household willing to do unskilled manual work at the statutory minimum wage, and the Indira Awaas Yojana (IAY), that aims to offer a house to family groups that are particularly disadvantaged or to restore decadent buildings. 2.3.3.

The labour market

The Indian labour market is divided in two well-defined sectors: the organized one and the non-organized one. Several observers note that the first suffers an excessive regulation and tutelage of the worker, which translates in to a lack of flexibility and a reduced level of attractiveness

34 Sourcing in India

for foreign investors. The non-organized sector represents the largest section of the entire work force (92% according to the Ministry of Labour, 2005), this is not governed by regulations and achieves better performances as far as productivity and efficiency are concerned (Economic Survey 2005–2006). The Ministry of Labour has launched in 50 districts a pilot project named the Social Security Scheme for Unorganized Sector Workers regarding the registration of the workers, their legal assistance, the regulation of wages and work hours, maternity funds and pension funds, insurance, etc. (Ministry of Labour, 2005). The data regarding the level of unemployment is provided by the National Sample Survey Organization (NSSO) using research that was carried out on a five-year basis. The last available data referred to the period of 1999–2000 and estimated a rate of unemployment of 7.32%. More recent estimates (EIU, 2004) give an unemployment rate of 9.5%. Again we find strong regional variations: data reported in the Economic Survey of 2003–2004 show a 3% unemployment rate for Himachal Pradesh, up to 30% in Kerala. In all the states the unemployment level is increasing: evidently the economic growth is not yet sufficient to enhance the employment rate of a growing population. For information regarding legislation on minimum wages, taxes, sick pay and holidays, insurance and sacking procedures we recommend the work of Manzato & Associates (2005). 2.3.4.

Illiteracy and higher education

Another very important social issue is the illiteracy one, a problem that the Indian government has faced since the first years of Independence. The literacy level of the population has risen from 18.33% in 1951 to 64.84% in 2001. Significant results were achieved between 1991– 2001 with the level of illiteracy falling 12.6% (Economic Survey, 2003–2004). Also during the same ten-year period the increase of the literacy level was greater among women (þ14.9%) than among men (þ11.7%). Basic education is still raising many problems that need solving: the high percentage of primary school drop outs, the difference of school access between girls and boys and the absence of teachers (it’s estimated that every day about 25% of the teachers don’t come to work). Therefore India has still a long way to go especially when compared with other developing Asian countries. For example, in China and in Sri Lanka the literacy level of the population is higher than 90% (UNDP 2003).

India: a Geo-economic Overview 35

Even in the education field India displays striking differences between the rural areas and the urban areas, as well as between the various states of the Union. The 91% literacy rate achieved in Kerala overlaps the 48% rate from Bihar (47.53%). As far as Higher University education is concerned, the balance is definitely positive. Between the years 1950–2001 the number of universities has increased from 27 to 272, the number of higher education institutions from 370 to 8737. Between 2002–2003 there were more than 9 million applications for university studies of which 40% were women (Economic Survey, 2003–2004). India has developed a high-quality university education, especially within the field of technical education (engineering and technology, architecture, urban planning, management, pharmacy and applied arts), build on the centres for technical education that were founded in the colonial period and creating the Indian Institutes of Technology (IITs),10 The object of these Institutes is to provide a high level of technicalscientific training and to promote advanced scientific research. To this purpose the IITs offer university courses in various branches of engineering and technology, masters degrees and Ph.D. programmes (Annual Report 2002–2003, Department of Education, 2003). Side by side to the IITs there are numerous universities and colleges (among which are 1265 Engineering Colleges and 1034 Institutes that allow the pursuit of a Master of Computer Application) in order to provide an adequate scientific education. Therefore the Indian labour market offers a high number of graduates in engineering and Information Technology (IT) (Economic Survey 2003–2004). The very development of IT which as we will see is one of the most promising sectors of the Indian economy, has recently led to the creation of the Indian Institutes of Information Technology (IIITs), specializing in education and research in the domain of IT. Within these institutes it is possible either to obtain a degree or to frequent short-term courses. The first IIIT was created in Hyderabad in 1998, to whom are affiliated today a lot of different Indian and foreign multinational companies among which are IBM, Microsoft, Oracle, Stmicroelectronics, Intel, Cisco Systems, and HP (National Association of Software and Service Companies – NASSCOM, 2004). There are also types of institutes that have earned a good reputation at international level: the Indian Institute of Management (IIMs), dedicate to the formation of managers and administrative staff. Side by side to these there are 958 other recognized Management Institutes, where it is possible to frequent MBA courses (Economic Survey 2003–2004).

36 Sourcing in India

The validity of the technical education developed in India is attested by many elements such as: Its success in the industry of software, that has revealed what excellent analysts and programmers the Indians are, the results achieved in the domain of nuclear research, aerospace and missiles and in the end the strong Indian presence in Silicon Valley (Pai, 2000). It is estimated that one in three engineers in this district is of Indian origin. Their good training, the high level of English command, all at low costs, make India an attractive pool as far as staff is concerned. This is a competitive advantage that numerous foreign companies like IBM, ST, Intel, Microsoft, Oracle, Cisco, Sun and HP have made use of for some time already.

2.4. 2.4.1.

Macroeconomic profile The GDP

Over the fiscal year 200611 India achieved a GDP of 873,65 billion dollars, a value that situates it on the twelfth place on the world economies list. However if we consider the value of the GDP derived from Purchasing Power Parity (PPP) calculation, India occupies third position after the USA and China (International Monetary Fund – IMF, 2007). According to the data reported in Tab. 2.1, beginning with 1990 there are periods of sustained growth alternated with periods of lower growth. The average growth of GDP over these years was about 6%. The best results were achieved during the last two fiscal years 2005 and 2006, with a complex growth of almost 9.0%. If we analyse the composition of the GDP and its evolution over time we notice a growth of the secondary and tertiary sectors to the detriment of agriculture. The tertiary (service) sector that in 1980 accounted for less than 40% of GDP, in 2006 had surpassed 55% while industry evolved from 21% in 1980 to 26% in 2006 (World Bank and Economic Survey 2006–2007). Even though agriculture employees are the majority of the active workforce, these count only for 18% of the overall GDP (Tab. 2.2). 2.4.2.

The trade exchange

The reforms of 1991 promoted foreign commerce, favouring a better integration of Indian economy in the global market (Ministry of Commerce and Industry – Department of Commerce, 2002). Data in Tab. 2.3 refer to the transaction of goods and show how the trade exchange grew significantly over the last 16 years, even if without a linear trend. The trade exchange decreased in 1988, the year of financial

37 Table 2.1: Evolution of GDP between 1990–2006 GDP current prices*

GDP pro capita (current pricesa)

Fiscal Year

(Rs Crore)*

(Bil USD)

(Rupee)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

568,674 653,117 748,367 859,220 1,012,770 1,188,012 1,368,209 1,522,547 1,740,985 1,936,831 2,089,500 2,271,984 2,463,324 2,760,025 3,105,512 3,567,177 4,100,636d

316.90 264.90 258.40 273.90 322.50 355.20 385.40 409.70 413.80 447.00 457.40 476.40 509.00 600.60 691.20 764.70 873.65d

6,777.998 7,629.871 8,582.19 9,632.511 11,129.34 12,801.85 14,463.1 15,794.06 17,710.94 19,348.96 20,505.4 21,909.2 23,349.04 25,722.51 28,464.82 30,740.34 35,563.75d

(USD)

378 310 296 307 354 383 407 425 421 447 449 459 482 560 634 695 784.96d

Real GDP growthb

Exchange ratec

5.6 1.3 5.1 5.9 7.3 7.3 7.8 4.8 6.5 6.1 4.4 5.8 3.8 8.5 7.5 9.0f 9.2f

17.94 24.65 28.96 31.37 31.4 33.45 35.5 37.17 42.07 43.33 45.68 47.69 48.4 45.95 44.93 44.27 45.24e

* Data in million (crore) of Rupee (Rs). a Source: Elaboration of CSO data update 7th February 2006; b Source: The Economic Survey 2005–2006. The growth for the years 1990–1999 was calculated based on the prices of the period 1993–94, for previous years we have used the prices of 1999–2000; c Source: Elaboration of Economic Survey 2005–2006; Reserve Bank of India – RBI; d Source: Elaboration of International Monetary Fund data; e Source: Export-Import Data Bank of the Ministry of Commerce and Industry – Department of Commerce; f Source: Elaboration of Economic Survey 2006–2007; Reserve Bank of India – RBI.

Table 2.2: The outlook for PIL of India based on sectors of activity for the fiscal year 2006 Services Industry Agriculture Source: Elaboration of Economic Survey 2006–2007.

55.1% 26.4% 18.5%

38

Table 2.3:

Trend of commerce from India in years following liberalization of the market, fiscal years 1990–2006

Fiscal year

Export (mld USD)

Var. % annual

Import (mld USD)

Var. % annual

Interchange (mld USD)

Var. % annual

Balance (mld USD)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

18.1 17.9 18.5 22.2 26.3 31.8 33.5 35 33.2 36.8 44.6 43.8 52.7 63.8 83.5 103.1 126.4

9.3 1.1 3.4 20 18.5 20.9 5.3 4.5 5.1 10.8 21.2 1.8 20.3 21.1 30.8 23.4 22.57

24.1 19.4 21.9 23.3 28.7 36.7 39.1 41.5 42.4 49.7 50.5 51.4 61.4 78.1 111.5 149.2 185.7

14.4 19.5 12.9 6.4 23.2 27.9 6.5 6.1 2.2 17.2 1.6 1.8 19.5 27.2 42.7 33.8 24.53

42.2 37.3 40.4 45.5 55 68.5 72.6 76.5 75.6 86.5 95.1 95.2 114.1 141.9 195.1 252.3 312.1

12.2 11.6 8.3 12.6 20.9 24.5 6 5.4 1.2 14.4 9.9 0.1 19.9 24.4 37.5 29.5 23.7

6 1.5 3.4 1.1 2.4 4.9 5.6 6.5 9.2 12.9 5.9 7.6 8.7 14.3 28.0 46.1 59.3

Source: Economic Survey 2005–06, Reserve Bank of India – RBI and Export-Import Data Bank of Ministry of Commerce and Industry – Department of Commerce.

India: a Geo-economic Overview 39

Export

Import

Exchange

300

Bil USD

250 200 150 100 50

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0

Year Figure 2.1: Trend of trade exchange of India from 1990 to 2006 Source: Economic Survey 2006–07, Reserve Bank of India – RBI.

crisis of South-East Asia, the atomic tests of Pokhran that provoked USA and other countries’ economic sanctions, and the rekindling of tension with Pakistan in the region of Kargil. It stopped growing again in 2001, after the 11th of September event. Figure 2.1 shows how the increase of export has been accompanied by a proportional increase of import, so the commercial balance remains negative. Comparing the data of 1999 and of 2006, we observe that the import’s and the export’s values quadrupled. The liberalization of commerce led to a bigger opening of the Indian economy, however, its ‘‘weight’’ on global trade is still small. According to the data contained in WTO (2007), the Indian exports in the calendar year 2006 represented only 1% of the global export, while the Indian imports represented 1.4% of the global imports. In the ranking of the exporter/exporting countries, India has the 28th position, while in that of importing countries, it occupies the 17th. More involved in the international commerce now are other Asian countries, such as Korea, Singapore and Malaysia – whose exports at the global level weight more than 1.3% (World Trade Developments in 2006, WTO) – and especially China, which in 2006 attested itself at 8.0 % (World Trade Developments in 2006, WTO). Figure 2.2 and Table 2.4 indicate India’s ten major commercial partners, the trade exchange flow, and the share held by each of these on the total value. India’s first trade partner is the Unites States, weighting 9.80% of the total trade exchange; the increase of this value (14.15%) is

40 Sourcing in India

United States 9.80% China 8.25%

United Arab Emirates 6.63% Singapore 3.70% Others 54.59% Germany 3.69% Switzerland 3.14% United Kingdom 3.07% Hong Kong 2.30%

Belgium 2.44% Japan 2.39%

Figure 2.2: Graphic representation of India’s shares for the first ten commercial partners in the fiscal year 2006 Source: Elaborated by Export-Import Data Bank of Ministry of Commerce and Industry – Department of Commerce.

however inferior to the average registered by other nine states, specifically China (46.11%), United Arab Emirates (59.82%), Singapore (63.68%) and Germany (19.94%). This data confirms that India’s trade strategy aims a geographic diversification and a bigger interaction with Asian countries (especially with the ASEAN12 members). In second position is China, with a trade exchange in the fiscal year 2006 equal to more than 25 billion dollars (the double the 2004 exchange) and a share of 8.25%. The trade balance with the United States, the United Arab Emirates, Singapore, United Kingdom and Hong Kong is positive, while the trade with China, Germany, Switzerland and Belgium is negative. 2.4.2.1.

Import

As Tab. 2.5 illustrates, China is India’s main supplying country, with a share of 9.40% of total imports. China passed from seventh position in 2000 to first, this way tripling it’s own share. Note that the shares held by most of the countries are low: imports demonstrate a wide geographical distribution. The product composition of imports is indicated in Tab. 2.6. The main products are raw materials: oil fuels, mineral oils and their

Table 2.4:

India’s major trade partners in the fiscal year 2006 (Data in millions of USD) % Share

Total Trade

Country TOTAL United States China United Arab Emirates 4 Singapore 5 Germany 6 Switzerland 7 United Kingdom 8 Belgium 9 Japan 10 Hong Kong Others 1 2 3

2004

2005

2006

Trade Balance 2006

% Growth 05/06

% Growth 06/07

2004

2005

2006

195,053.38 20,767.10 12,713.86 11,988.98

252,256.27 26,807.81 17,627.15 12,945.87

312,110.76 30,602.30 25,754.62 20,689.71

59,387.85 7,130.04 9166.69 3374.63

29.33 29.09 38.65 7.98

23.73 14.15 46.11 59.82

10.65 6.52 6.15

10.63 6.99 5.13

9.80 8.25 6.63

6,652.01 6,841.60 6,480.81 7,247.29

8,779.06 9,609.75 7,035.32 8,989.58

11,558.49 11,525.87 9,589.97 9,792.50

579.37 3584.79 8656.93 1443.55

26.49 40.46 8.56 24.04

63.68 19.94 36.31 8.93

3.41 3.51 3.32 3.72

3.48 3.81 2.79 3.56

3.7 3.69 3.07 3.14

7,098.61 5,363.04 5,421.95

7,596.37 6,542.36 6,678.30

7,616.28 7,458.31 7,164.43

667.39 1732.89 2196.73

7.01 21.99 23.17

0.26 14.00 7.28

3.64 2.75 2.78

3.01 2.59 2.65

2.44 2.39 2.3 54.59

Source: Elaboration by Export-Import Data Bank del Ministry of Commerce and Industry – Department of Commerce.

41

42

Table 2.5:

Indian imports: main supplying countries (2002–2006) (Data in millions of USD) Fiscal Year

Country

1 2 3 4 5 6 7 8 9 10

TOTAL China Saudi Arabia United States Switzerland United Arab Emirates Iran Germany Nigeria Australia Kuwait

% Growth

2002

2003

2004

2005

2006

04/05

05/06

% Share 2006

61,412.13 2,792.04 504.72 4,443.58 2,329.88 956.99 258.3 2,404.53 78.13 1,336.79 179.5

78,149.61 4,053.23 737.77 5,034.86 3,312.75 2,059.85 266.83 2,918.58 75.64 2,649.24 142.48

111,517.44 7,097.98 1,301.15 7,001.35 5,939.93 4,641.10 410.21 4,015.35 48.4 3,824.53 305.94

149,165.73 10,868.05 1,632.34 9,454.74 6,555.80 4,354.08 702.46 6,023.63 72.46 4,947.91 461.85

185,749.30 17,460.66 13,383.90 11,736.13 9,123.45 8,657.54 7,627.81 7,546.33 7,026.93 7,008.01 5,992.15

33.76 53.11 25.45 35.04 10.37 6.18 71.24 50.02 49.72 29.37 50.96

24.53 60.66 719.92 24.13 39.17 98.84 985.87 25.28 9,597.26 41.64 1,197.41

9.40 7.21 6.32 4.91 4.66 4.11 4.06 3.78 3.77 3.23

Source: Elaboration by the Export-Import Data Bank of the Ministry of Commerce and Industry – Department of Commerce.

Table 2.6:

Composition of India’s imports from the world (Data in billion USD) Fiscal Year

Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes (cod. 27) Natural or cultured pearls, precious or semiprecious stones, pre-metals, clad with pre-metal and articles thereof; imit jewellery coin (cod. 71) Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof (cod. 84) Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts (cod. 85) Iron and steel (cod. 72) Organic chemicals (cod. 29) Ores, slag and ash (cod. 26) Aircraft, spacecraft and parts thereof (cod. 88) Opticak, photographic cinematographic measuring, checking precision, medical or surgical inst. And apparatus parts and accessories thereof (cod. 90) Plastical and articles thereof (cod. 39) Others TOTAL

2005

2006

% Growth 05/06

% Share 2006

50,310.06

61,858.65

22.95

33.30

20,690.51

22,596.91

9.21

12.17

13,915.05

18,614.18

33.77

10.02

11,898.86

14,569.18

22.44

7.84

5,446.45 5,144.21 1,544.46 4,979.41 2,656.07

6,130.87 6,039.79 5,740.33 5,263.92 3,112.33

12.57 17.41 271.67 5.71 17.18

3.30 3.25 3.09 2.83 1.68

2,556.46 28,019.19 149,165.73

2,958.44 36,858.70 185,749.30

15.72 31.55 24.53

1.59 20.92 100.00 43

Source: Export-Import Data Bank of the Ministry of Commerce and Industry – Department of Commerce.

44 Sourcing in India

derivatives (33.30% of the total), pearls and precious stones (12.17%). Relevant is the incidence (10.02%) and the growth (33%) of nuclear reactors, machinery and mechanical appliances and other parts (code 84). Other important growths are those of the ores and slag (þ272%), articles of iron and steel (þ94%) and specially cereals (þ18,734%). 2.4.2.2.

Export

After the standstill in 2001–02, Indian exports began to grow again and in 2003 registered a rise of 21.10%, which proved either the capacity of Indian exports to withstand pressures determined by the appreciation of the rupee on the dollar, or the increasing competitiveness of the Indian manufacturing industry (RBI, 2004). The positive trend also proceeded during the 2006, when the growth was 22.57%. In Tab. 2.7 are indicated the main destination countries. The most important outlet market is still represented by the United States with a share of 14.93 %, followed by the United Arab Emirates (9.52%) and by China (656%). The United Kingdom is in 4th position corresponding to the first European outlet market, followed by Germany (7th), Italy (8th) and Belgium (9th). China’s ascent should be noted, which has climbed up various positions in the last five years and nowadays is positing at the 3rd one. The value of its current imports from India is 8.3 billion dollars: the growth in 2005 and in 2006 has been respectively 20.36% and 21.71%. Noteworthy also are the exports developments towards Singapore, which increased 35.61% in 2005 and 11.86% in 2006 to further demonstrate the shift of the Indian commercial centre from Europe to Asia. The commodity composition of exported articles in Tab. 2.8 highlights the importance of mineral fuels, gemstones and jewellery, textile and mechanical and electrical tools. By analysing the trade exchange, the RBI (2005) highlights the growing competitiveness of the manufacturing sector whose exports grew 20% in 2004 thanks especially to the good performance of the gemstones and jewellery sectors, of chemical and engineering products (among these last ones especially the automobile division and iron and steel). This fast expansion is an indicator of the growing level of the sectors’ technological sophistication. Even the exports of petrol-based products have considerably increased, a proof of the maturity level reached by now in the oil-refining activity (beyond the enhancement of oil prices in international markets). As far as the textile industry is concerned, the light decrease noticed in the previous years should quickly be inverted as a consequence of the abolition (January 2005) of the quota

Table 2.7:

Indian exports: main destination countries (2003–06) (Data in billions of USD) Fiscal Year

Country

1 2 3 4 5 6 7 8 9 10

TOTAL United States United Arab Emirates China United Kingdom Singapore Hong Kong Germany Italy Belgium Japan

% Growth

2003

2004

2005

2006

04/05

05/06

% Share 2006

63,842.97 11,490.11 5,125.61 2,955.10 3,023.27 2,124.84 3,261.83 2,544.57 1,729.41 1,805.73 1,709.30

83,535.94 13,765.75 7,347.88 5,615.88 3,681.09 4,000.61 3,691.82 2,826.25 2,285.99 2,509.71 2,127.91

103,090.54 17,353.06 8,591.79 6,759.10 5,059.28 5,425.29 4,471.32 3,586.12 2,519.04 2,871.23 2,481.26

126,361.46 18,866.17 12,032.17 8,293.97 5,618.03 6,068.93 4,680.58 3,979.54 3,582.90 3,474.45 2,862.71

23.41 26.06 16.93 20.36 37.44 35.61 21.11 26.89 10.19 14.41 16.61

22.57 8.72 40.04 22.71 11.04 11.86 4.68 10.97 42.23 21.01 15.37

14.93 9.52 6.56 4.45 4.80 4.70 3.15 2.84 2.75 2.27

Source: Elaboration by Export-Import Data Bank of the Ministry of Commerce and Industry – Department of Commerce.

45

46

Table 2.8: Composition of products of Indian exports: most important items (Data in billion of USD) Fiscal Year

Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes (cod. 27) Natural or cultured pearls, precious or semiprecious stones, pre-metals, clad with pre-metal and articles thereof; imit jewelry; coin (cod. 71) Organic chemicals (cod. 29) Iron and steel (cod. 72) Articles of apparel and clothing and clothing accessories, not knitted or crocheted (cod. 62) Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof (cod. 84) Ores, slag and ash (cod. 26) Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts (cod. 85) Cotton (cod. 27) Vehicles other than railway or tramway rolling stock, and parts and accessories thereof (cod. 87) Others TOTAL

2005

2006

% Growth

% Share

11,866.60

18,904.52

59.31

14.96

15,857.96

16,085.07

1.43

12.73

4,857.09 3,813.47 5,435.50

5,734.79 5,599.42 5,283.72

18.07 46.83 2.79

4.54 4.43 4.18

4,187.55

5,091.44

21.59

4.03

4,452.61 2,767.55

4,875.08 4,108.47

9.49 48.45

3.86 3.25

2,984.23 3,293.28

3,923.91 3,765.91

31.49 14.35

3.11 2.98

43,574.70 103,090.54

52,989.13 126,361.46

21.60 22.57

41.93 100.00

Source: Export-Import Data Bank del Ministry of Commerce and Industry – Department of Commerce.

India: a Geo-economic Overview 47

Pharmaceutical products 3%

Copper 2%

Vehicles 3%

Plastic and articles 2% Cereals 2%

Cotton 3%

Others 27%

Electrical machinery 3% Ores and slag 4% Nuclear and mechanical appliances 4%

Chemical Products 5%

Oil products 15%

Clothes 7%

Iron and Steel 7%

Pearls and jewels 13%

Figure 2.3: Graphic representation of India’s export composition (with relative quote) for the years 2006–2007 Source: Export-Import Data Bank del Ministry of Commerce and Industry – Department of Commerce.

restrictions of exports to Canada, the United States, the European Union, and Norway (Multi-Fibre Arrangement). Fig. 2.3 provides a graphic representation of Indian exports. According to the data contained in the Economic Survey 2003–2004, we can observe how India’s export basket has noticeably changed: if in the past it qualified mainly as a raw materials supplier country, the share associated to finite products and industrial goods rose from 25% in 1980 to 80% in 1998. 2.4.3.

Commercial relations

An aspect to be emphasized is related to the reinforcement of the relationships with other Asian countries. Besides the SAARC13 agreement, the data collected in UNCTAD (2004) points out the existence of other agreements – some of them already ratified, other in the negotiation stage – with the ASEAN states, China, and the countries of the Gulf

48 Sourcing in India

region. As we noticed, relations with China intensified: the other Asian giant’s foreign policy is dictated by the need to develop new markets and to find adequate energy sources to sustain the current impetuous economic development. Therefore China naturally approached India putting aside ‘‘old’’ territorial issues (Tibet). Beside this attention for neighbouring markets, India manifested the will to establish more solid and stable commercial relations with the West. In this perspective can be evaluated the agreement between India and the European Union – its main economic partner – for the achievement of a ‘‘strategic partnership’’. The first summit EU–India took place in Lisbon in 2000 followed by other meetings that have prepared the Hague agreement in November 2005. Such agreement will lead up to the stipulation of a treaty meant to facilitate reciprocal investments, and to remove some bureaucratic obstacles and limits to foreign participation in (Indian) sectors such as financial services and aerospace. In reality this treaty has a more ample valence and confirms India’s new status of high power in one of the most important economic and politic boards of the global chessboard. Another aspect, which generates a series of implications in international relations, concerns the growing energy need. India shares with China this strong requirement, therefore important collaboration between the two countries has developed in recent years. In 2005 India consumed 2.5 million petroleum/oil barrels a day (þ13% in comparison to 2004), from which about 70% was imported. In order to ensure a stable oil supply, India planned investments of about one billion dollars a year for new acquisitions. Moreover it signed an agreement with Iran for the construction of a pipeline which will provide India, across Pakistan, with 5 to 7.5 million cubic metres of molten gas a year. Relations between India and Iran aroused Washington’s reaction, which at the end of 2005 convinced New Delhi to clearly pronounce itself against the Iranian nuclear programmes. This action scratched the solid relation between India and Teheran born during the Taliban regime (strongly opposed by both of them) but recovered and strengthened thanks to the energetic agreements previously described. The United States obviously does not like this relationship, however they look at India as a power to privilege according to China’s ‘‘containment’’ and a multi-poled Asia construction policy. In this perspective should be viewed the visit of the American president George Bush in India, in March 2006 and the recent agreement in the nuclear field between the two countries. This is the first USA agreement of this kind with a state that is not an historical ally. These agreements underscore

India: a Geo-economic Overview 49

further the importance assumed by India on the international chessboard. And finally, regarding India’s position inside the WTO – in which, unlike China, it is one of the founder countries – the new government’s policy will most likely be oriented to maintain a conduct contrasting possible unfavourable choices to new developing countries. 2.4.4.

Other aspects

To complete this description of India, we provide some elements regarding the country’s financial situation. Inflation is a parameter that should be carefully supervised: during the fiscal year 2006–2007 it registered an oscillating trend. In the fiscal year 2005–06 the annual inflation increased by 4.4%, while in 2006–07 it rose 6.2%. The main reasons for the rise in prices are the unceasing growth of crude oil’s price, since India imports 70% of her oil requirements (ICE, 2007), and the increase in the primary food articles and manufactured products (Economic Survey, 2006–2007). Inflation is also related to the exchange rate of the rupee with the dollar; after a trend of revaluation of the rupee the fiscal year 2006–07 is characterized by a devaluation (2.7%) of the rupee against the dollar (Economic Survey, 2006–2007). The WPI (wholesale price index) registered a 4.4% of average value for 2005–2006, and rose to 5.4% in 2006–07 (RBI, 2007). In particular it is influenced by the rise in prices of wheat, pulses, milk, oilseeds, raw cotton, metals, cement, electrical machinery and edible oils (RBI, 2007). The CPI-IW (consumer price index for industrial workers) has seen a considerable increase during the 2006–07 (6.8% average value for 2006–07, 4.2% in 2005–06). Also the growth of CPI-IW is affected mainly by food and fuel products (RBI, 2007). The balance deficit is a critical aspect of Indian public finance. The public debt is equivalent to 84% of the GDP (ICE, 2007). Foreign debt reached 15.8% of GDP in the fiscal year 2005–06. While in 2004–05 the rate was of 17.3%, in this fiscal year the foreign debt resulted for the first time as inferior to the monetary reserves detained by the country. The reduction of the interest rate and the lower use of borrowing have contributed to reduce the debt service, which amounted 35.3% in 1990–91, 15.8% in 2002–03; while in the fiscal year 2005–06 it reached the share of 7.9% (ICE, 2007). A final aspect to consider is that related to the situation of the balance of payments. In the section relative to the current account balance – owing to the growing negative difference of the trade balance

50 Sourcing in India

(28.7 billion of USD in 2004–05, 59.4 billion of USD in 2006–07) – in 2004–05 was registered a tendency inversion with a deficit of 6.43 billion dollars (RBI, 2005), while in 2005–06 it reached the share of 9.2 billion of USD; and 11.7 billion of USD in the first half of 2006–07 (in the period of 2001–2004 the balance was positive) (ICE, 2007; Economic Survey, 2006–2007). The trend is however opportune as far as the capital account is concerned, whose positive balance rose (27.97 billion of USD in April– December 2006–07; RBI, 2007). Moreover, the foreign-exchange reserves of the Reserve Bank of India increased in the fiscal year 2006–2007, they reached the share of 176,105 billion of USD in 2006 (ICE, 2007), a significant result taking into account the severe fiscal and currency crisis from 1990 which had almost reset to zero these reserves and had constrained India to apply to FMI for an emergency loan. In 2003–2004, India instead became a creditor for the FMI and had moreover cancelled the debt of seven poor countries. 2.4.5.

India as a sales market

The data of the last census (2001) reported in ICE (2004) indicates a number of family nucleuses of over 191 millions, of which 72% live in rural areas. The National Council of Applied Economic Research (NCAER) elaborated a classification system of family nucleuses according to consumption capacity. According to this survey, there are about 32 million nucleuses who can afford purchases of average and upper middle targets when compared to the local standard. It’s a market of almost 200 million persons. The development of this middle class is proved by the increase of ‘‘branded’’ products’ sales and by the diffusion of western tastes and fashions. A significant change in consumption behaviour has manifested since the Nineties, with the reduction of purchases of ‘‘necessities’’ – which obviously remain the main consumption voice – and an increase of ‘‘non essential’’ services and products. The consumption of ‘‘first necessity’’ alimentary products passed for example from 50.4% of the percapita income in 1994 to 43.4% in 2004 (Ace Global Pvt. Ltd., 2001e KPMG – on EIU data 2004–2005).

2.5.

Foreign direct investments in India

This section will begin with a rapid description of the inherent normative and political development concerning Foreign Direct Investments.

India: a Geo-economic Overview 51

Then the flow, the investing countries and the destination sectors of FDI will be pointed out. We will then conclude with the factors that still now reduce the attractiveness of the Indian ‘‘business environment’’. 2.5.1.

The attitude towards FDI

In the period immediately following Independence, the government’s attitude towards the FDI was rather ambiguous, oscillating between a nationalistic sentiment of distrust – due to the recent colonial dominion – and the hope that foreign investments would provide the technology and resources necessary for a fast industrialization (Athreye and Kapur, 2001). In the following section we will briefly retrace the evolution of the FDI policy (see Athreye and Kapur (2001) and in UNCTAD (2003) for more information). As we have seen, initially India sought to set up a self-sufficient system through the development of domestic industries. It realized however that the inner economic system still had limited resources and poor technological equipment. Therefore, the period following Independence (especially after the balance of payments crisis in 1957–58) was characterized by a receptive attitude towards FDI. Things changed towards the end of the Sixties. The government considered that domestic industry would by now have developed the necessary capacities; at the same time it was worried by the consequences of the remittance of profits. Therefore, in 1973 it promulgated the Foreign Exchange Regulation Act (FERA) which imposed on foreign companies a reduction in their equity participation to a maximum share of 40 per cent, with an exception made for those operating in high-priority or high tech industries, or for export-oriented units. In 1978 enterprises such as IBM and Coca Cola abandoned India. During the Eighties, economical stagnation and industry’s technological obsolescence reclaimed attention over the restrictive procedures of the licence system (‘‘licence Raj’’). The government then decided to grant to export-oriented enterprises numerous benefits and created four new Export Processing Zones (EPZs),14 in order to encourage foreign multinationals to invest. A major flexibility was introduced in the evaluation process of industrial projects, granting the foreign investors with participation shares higher than 40% in case of particularly worthy proposals. Retracing these events, Athreye and Kapur (2001) observe how the FDI policy adopted by the Indian government has always been correlated to the situation of the payment balance and to the governmental perceptions regarding the influence that the FDI could have had in the development of the local industry.

52 Sourcing in India

2.5.2.

The FDI’s flow

From 1991 the Indian government decided on the already cited opening towards foreign investments. The license system was reorganized, several impediments to foreign participation were unclenched, and an automatic approval for various investments typologies was created. Figure 2.4 shows the inflow during 1991–2006. The investment flow has registered a significant increase, passing from the value of 155 million dollars in 1991 to 3.6 billion USD in 1997, a value that constituted the maximum peak reached in the decade. The FDI’s increase during the Nineties is at least in part justified by the considerable expansion of the overall FDI flow directed towards developing countries (UNCTAD, 2003). After the peak of 1997, a sudden fall of investment was registered, related to the sanctions imposed by the United States following the nuclear tests led by India in May 1998, to the financial crisis of the Asian South-East, and finally to the rising tensions with Pakistan (Sahoo and Mathiyazhagan, 2003). After 2000 FDI continued to grow up to the value of 15,730 million USD in 2006. The rising trend in FDI observed from 2000–01 to 2006–07 was accelerated in 2006–07, in this last fiscal year the growth rate was 133%. The economic rise has made India attractive to investors. For example, foreign retailers have penetrated the Indian market (i.e. Wal-Mart) and some American and Japanese companies have rapidly extended their activities in India (i.e. General Motors, Toyota and Nissan) (UNCTAD, 2007). To offer a more accurate image regarding the Indian market’s appeal to foreign investors, Tab. 2.9 shows the incidence of Indian foreign investments to total FDI directed to developing countries. It shows how India’s ‘‘weight’’ over the total flow has increased, it has in fact passed from 1.85% in 1991 to 4.45% in 2006. But if we compare this data with that of other countries, the Indian performance appears rather downsized. The Indian share of 4.45% is far inferior to that of Brazil, Mexico, Saudi Arabia, Turkey, Singapore and Hong Kong, which have obtained respectively 4.95%, 5.02%, 4.83%, 5.31%, 6.39% and 11.31% of investment addressed to developing countries in 2006. The comparison then becomes really unbalanced when considering the Chinese case: China, without Hong Kong, has in fact absorbed alone over a fifth of these investments. 2.5.3.

Countries generating FDI into India

Table 2.10 indicates the 10 main investor countries in the period following economic liberalization (August 1991–December 2005). The table

18000

400

16000

350

14000

300

12000

200 8000

mld USD

mln USD

250 10000

150 6000 100

4000

50

2000 0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

FDI towards India (mln USD)

155

FDI towards developing countries (mld USD)

41.7 51.11 72.53 104.9 113.3 152.5 187.4 194.1 231.9 252.5 219.7 155.5 166.3 233.2 314

233

574

FDI towards India (mln USD)

Figure 2.4:

973

0

2144 2591 3613 2633 2168 2319 3403 3449 4269 5335 6750 15730 379

FDI towards developing countries (mld USD)

The FDI flow directed towards India and to developing countries during the 1991–2006 period

Source: for the years 1991–97 Kumar, 2002; for the years 1998–2001 UNCTAD, 2004; for the years 2002–2004 UNCTAD, 2005b.

53

54

Table 2.9:

FDI directed towards developing countries, in percentage of total FDIs (Data in millions of USD)

Country Argentina Brazil Mexico Saudi Arabia Turkey China Hong Kong South Korea Taiwan India Malaysia Singapore Thailand Viet Nam Developing economies

1995

1997

2000

2003

2004

2005

2006

4.84 3.80 8.21 0.50 0.76 32.36 5.36 1.08 1.34 1.85 5.01 9.95 1.79 1.54 115,963.13

4.81 9.97 6.73 0.03 0.42 23.75 5.97 1.39 1.18 1.90 3.32 7.22 2.04 1.36 190,568.51

4.07 12.80 6.95 0.07 0.38 15.90 24.18 3.52 1.92 1.40 1.48 6.44 1.31 0.50 256,087.79

0.92 5.68 8.58 0.44 0.98 29.94 7.62 2.45 0.25 2.42 1.38 6.53 2.93 0.81 178,699.25

1.62 6.41 7.91 0.69 1.02 21.42 12.02 3.17 0.67 2.04 1.63 7.01 2.07 0.57 283,029.80

1.59 4.79 6.28 3.85 3.12 23.04 10.70 2.24 0.52 2.12 1.26 4.77 2.85 0.64 314,315.68

1.27 4.95 5.02 4.83 5.31 18.33 11.31 1.31 1.96 4.45 1.60 6.39 2.57 0.61 379,070.49

Source: Elaboration on data UNCTAD, 2002b for years 1995 and 1997; elaboration on data UNCTAD, 2004 for years 1999–2001; elaboration on data UNCTAD, 2005b for years 2002–2004; elaboration on data UNCTAD, 2007 for years 2006.

Table 2.10:

The countries that most contributed to FDI inflow in the period August 1991–July 2007 (Data in millions of USD) 1991 (April– March)

1 2 3 4 5 6 7 8 9 10

2004–2005 (April– March)

2005–2006 (April– March)

2006–2007 (April– March)

2007–2008 (April–July 2007)

Total flow (August 1991– July 2007)

Country

Rs crore

US$ mln

Rs crore

US$ mln

Rs crore

US$ mln

Rs crore

US$ mln

Rs crore

US$ mln

Rs crore

US$ mln

% Share 1991

% Share 2005–2006

% Share 2007–2008

Total % Share

Mauritius USA UK Netherlands Japan Singapore Germany France Switzerland South Korea Others

0 292 506 16 59 n.a. 70 65 n.a. 0 733

0 17 29 1 3 n.a. 4 4 n.a. 0 42

5141 3055 458 1217 575 822 663 537 353 157 4160

1129 669 101 267 126 184 145 117 77 35 904

11441 2210 1164 340 925 1218 1345 82 426 269 5193

2570 502 266 76 208 275 303 18 96 60 1172

28759 3861 8389 2905 382 2662 540 528 257 321 22026

6363 856 1878 644 85 578 120 117 56 71 4958

10904 1320 497 621 1585 1654 884 178 786 133 4514

2661 321 122 151 377 405 216 43 192 33 1092

90066 25856 17157 12023 10898 8704 1944 3982 3665 3366 77456

20808 6215 3979 2789 2585 2033 1918 939 844 855 17276

0.00 16.78 29.10 0.89 3.41 n.a. 4.01 3.71 n.a. 0.00 42.10

46.48 8.98 4.73 1.38 3.76 4.95 5.46 0.33 1.73 1.09 21.10

47.25 5.72 2.15 2.69 6.87 7.17 3.83 0.77 3.41 0.58 19.56

35.30 10.13 6.73 4.71 4.27 3.41 0.76 1.56 1.44 1.32 30.36

17138

3754

24613

5546

70630

15726

23076

5613

255117

60241

Total

1740

99

Source: Elaboration on data Ministry of Commerce & Industry, Department Industry Policy & Promotion November 2007, for data of fiscal year 1991, elaboration of data Sahoo and Mathiyazhagan, 2003.

55

56 Sourcing in India

offers data regarding the amount of investments effected by these countries in the last fiscal years, as well as a comparison of their incidence to the total flow in 1991 and in 2005. While before the economic reform (1991) the main investors were Great Britain and the United States, in the subsequent period the most consistent investment fluxes came from Mauritius. In reality, as often pointed out in the literature (cf. Henley, 2003; Sahoo and Mathiyazhagan, 2003; Bajpai and Dasgupta, 2004a), Mauritius represents only a transit centre, a sort of ‘‘fiscal paradise’’. Note that in this country the dominant ethnic group is precisely the Indian one (68% of the population). Beside the United States, an important role is played by some EU countries, with the Netherlands, the United Kingdom, Germany and France placed in the top ten list. In the Pacific Area the major contributions came from Japan and from South Korea. Among the ASEAN countries we distinguish Singapore. Figure 2.5 gives a graphic chart of the shares detained by the ten main investors in India, both in fiscal year 2007–2008 and in comparison with the total investments in the period 1991–2007. 2.5.4.

FDI destination sectors

To analyse the industry distribution of FDI we can refer to Tab. 2.11 which shows data regarding the approved investment projects during the period of August 1991–August 2004. The approved projects are substantially concentrated in the infrastructural sectors: energy and oil, telecommunications and transports. The electrical equipment sector (which includes software and electronic components) represents an important portion of total approved FDI, as well as the service industries. These two sectors respectively gather 7.56% and the 6.7% of the total investments. Definitely lower is the value of the approved investments in the manufacturing sector where for example the textile sector absorbs only 1.19%. 2.5.5.

Obstacles to FDI

Many authors (i.e. Jain and Chick, 2001; Balasubramanyam, 2003; Sharma, 2003; Henley, 2003; Bajpai and Dasgupta, 2004a) underline the importance of some factors that make the Indian environment not fully attractive for foreign investments. These factors are summarized here. Complicated and slow administrative procedures. The procedure that must be followed in order to obtain a project approval at a central (federal) level is easy and, in many cases, automatic. Things are more complicated when approval is required from government for the State in

India: a Geo-economic Overview 57

% Share 2007–2008 Others 19.56% South Korea 3.41% Switzerland 3.41% France 0.77%

Mauritius 47.25%

Germany 3.83% Singapore 7.17% Japan 6.87% Netherlands 2.69%

USA 5.72%

UK 2.15%

Total % Share

Others 30.36%

Mauritius 35.30%

South Korea 1.32% Switzerland 1.44% France 1.56% Germany 0.76%

USA 10.13%

Singapore 3.41% Japan 4.27%

UK 6.73%

Netherlands 4.71% Figure 2.5: Graphic representation of the main investing countries that contributed most to total FDI inflow (Elaboration on data of Ministry of Commerce & Industry)

which the investment must take place. The complexity of procedures of any state causes an increase in times and costs for the investments, and this contributes to explain the existing gap between the value of approved investments and the real inflow of capitals. The Ministry of Finance (2002) recognized this aspect as one of the main causes limiting the inflow of investments.

58

Table 2.11: Main FDI destination industries, period August 1991–August 2004 (Data in millions of USD) No. of Approvals

Name of the Sector

Total

Technical

Financial

Amount of Foreign Direct Investment Approved (Rs)

% to Total

Fuels (Power & Oil Refinery) Telecommunications Transportation industry Electricals equipment (including software & electronic components) Service sector Metallurgical industries Chemicals (other than fertilizers) Food processing industries Hotel & tourism Textiles (included dyed, printed)

1,002 926 1,777 5,904

296 129 687 1,244

706 797 1,090 4,660

697,471.46 413,682.76 207,669.83 187,261.13

28.16 16.7 8.39 7.56

1,378 789 1,923 943 749 813

69 365 855 164 218 168

1,309 424 1,068 779 531 645

165,820.76 154,050.32 117,129.36 95,457.38 49,082.15 29,374.57

6.7 6.22 4.73 3.85 1.98 1.19

Note: This index of total production refers to the period 1991–2002. Source: SIA Newsletter, April 2004e Economic Survey 2003–2004, Reserve Bank of India – RBI.

India: a Geo-economic Overview 59

Another aspect underlined both by Henley (2003) and Bajpai and Dasgupta (2004a) is related to the ‘‘restrictive’’ laws regulating mergers and acquisitions and the need of removing actual barriers to foreign investors. Excessive controls. Another aspect that must be considered is the inspections the investors must submit to. According to a survey by the World Bank, managers of companies operating in India dedicate 16% of their time to deal with government officers. Insufficient promotion of exports. While China was proficient in attracting foreign investments that greatly enhanced exports (Bajpai and Dasgupta, 2004a), FDI addressed to India had a marginal role, except for the Information Technology industry, whose export is near 10% of total Indian exports. The reasons for this low export effectiveness of foreign investments must be found in the policy adopted in order to protect small companies and in the organization of Special Economic Zone (SEZS). The reforms of 1991 reserved to small companies (Small Scale Industry – SSI) the production of about 800 items (674 in 2003). In these sectors the upper limit for foreign or large-scale Indian companies’ share is 24%. Foreign investors must therefore accept a sort of limited sovereignty, and this dimension threshold put obstacles to the growth of productivity through the achievement of scale economies. Regarding SEZs, Henley (2003) observed that – even if India had a pioneer role in the creation, in 1965, of the first EPZ in the world – they had a limited effect on exports, unlike Chinese ones. In 2001–02 Indian SEZs counted for 4.4% of the total exports of the country, against the 10.5 % of Chinese SEZs (Bajpai and Dasgupta, 2004a). According to these two authors, the different results would derive from some of their structural limits: these zones are often small and crowded and not yet served by proper infrastructures. Moreover, Indian SEZs are tightly controlled by central government, so some States declared their dissent to their creation in their territory. Difficulties for foreign investors to operate in the retail sector. In the past Indian legislation did not allow FDI in the sector of retail distribution, which was reserved to local operators. Recently, legislation has been modified, granting FDI to ‘‘single brand retailers’’ with an equity share not superior to 51%. It is an intervention of January 2006, and so it is too soon to understand its implications, and in particular if the sector will become really open to foreign operators. Of course, the Indian market offers very good perspectives, however the retail sector is fragmented, being dominated by traditional kirana shops – small family run units – while organized distribution has only 3% of total volume.

60 Sourcing in India

Labour legislation. All sources consulted agree in defining labour laws as too stiff. Some legislative interventions guaranteed to the workers of organized market some excessive protections (Jain and Chick, 2001). The consequence, as Balasubramanyam (2003) observes, is that the employment rate grows slowly, because of the move to illegal markets. Lack of infrastructures. Indian infrastructures are still deficient, especially in energy and transport, while the situation is better in telecommunication. Indian authorities always declared themselves to be aware of these deficiencies and needs of enhancing infrastructures, in order to be able to offer companies an equipped environment (Ministry of Finance, 2002). Anyway, high debt and fiscal deficit limit public investment. The next chapter is dedicated to infrastructures.

2.6.

Industrial geography of India

Indian industrial geography is heterogeneous. In this section we will briefly introduce the main reasons for this heterogeneity, together with a look at Special Economic Zones (SEZs), Export Oriented Units (EOUs), Electronic Hardware Technology Parks (EHTPs), Software Technology Parks (STPs), and Bio-Technology Parks (BTPs). 2.6.1.

Geographic distribution of FDI in India

The various Indian states have different capacities of attraction to FDI. On one side are the south-west states, Maharashtra, Karnataka and Tamil Nadu, able to absorb the 34% of FDI directed to India, on the other are the north and north-west territories, except Delhi and West Bengal, that attract a modest quantity (SIA Newsletter, April 2004). The territories localized in the utmost North of India and at the East of Bangladesh attract much less FDI, because they pay for the infrastructural lacks, for the absence of a coastal outlet and for the border position. 2.6.2.

Origins of Indian industrial heterogeneity

Industrial unhomogeneity in India is the result of many factors. First comes the different equipment of natural resources and different territory morphology. To these factors must be added government choices and legacies of British colonialism; this is the case of Bangalore, an important centre of the state of Karnataka, and a location of important companies operating in the sectors of electronics, telecommunications and software. In 1947 the Indian government decided to establish industries related to national security (military products, telecommunications, aeronautics) in areas easy to defend, that is far from coasts and

India: a Geo-economic Overview 61

borders (Chaturvedi, 2005). The geographic position, together with the presence since 1909 of the Indian Institute of Science (a university created by the British providing a very good techno-scientific education), made Bangalore a privileged place for investment in knowledgeintensive sectors. Today in Karnataka there are 65 engineering universities of among 300 of the most important national and international companies in the sectors of electronics and telecommunications. During the first years of Independence, a large part of investments was addressed to metropolises like Mumbai, Chennai, Delhi, Hyderabad, Ahmadabad, Bangalore and Lucknow, cities in which, besides a wide and qualified labour force, the level of infrastructures was higher than elsewhere. Territorial heterogeneity is also justified by the different industrial policies adopted by the various states. In Maharashtra, for example, a series of reforms has resulted in visible developments. Its capital Bombay, today Mumbai, represents the principal Indian port since colonial times. The Indian Government wants to make industrial development more homogeneous in the country. Investments in infrastructures have this aim.

2.6.3.

Production localization

Table 2.12, created on the basis of data provided by the Federation of Indian Chambers of Commerce (2005), offers a summary of industries present in the main states. The table reports the percentage of production of any single state on the total one and classifies the productivity per worker of these industries (so controlling also the level of technological improvement). Once again we can notice the importance of Maharashtra, leader in the sectors of food products (17%), print products (21%), rubber and plastic (17%), metals (15%), metal products (28%), machineries (28%), electric machineries (17%), motor vehicles (30%). Also Tamil Nadu leads in textiles (24%) and leather (36%), and Uttar Pradesh in the production of office equipment (35%) and TV and radio items (31%). The position of Gujarat, the most receptive state to international FDI, must be underlined. Gujarat has relevant shares in the production of textiles (15%), metal (10%), vehicles (10%), rubber and plastic (10%), non metal minerals (12%), metal products (10%), paper (11%), and has leadership in the production of coal and oil products (38%) and chemical products (31%).

62

Table 2.12: Output of production per worker in the main Indian states* Output per worker State Assam Andhra Pradesh

Low

Tobacco (16%), non metal minerals (12%)

Delhi Gujarat

Haryana Jharkhand Karnataka Kerala Maharashtra

Metals (12%) Apparel (18%) Wooden products (10%) Precision, optical and medical items (15%)

Medium

High

Machineries, paper (14%) Electric machineries (10%)

Food products (17%)

Print products (16%) Textiles (15%), metal (10%), machineries (10%), rubber and plastic(10%), chemical products (31%), non metal minerals (12%), metal products (10%) Apparel (10%)

Apparel (28%) Paper (11%), coal and oil products (38%)

Precision, optical and medical items (24%)

Machineries (11%), tobacco (35%)

Food products (17%), textiles (12%), chemical products (19%), electric machineries (17%), metals (15%), rubber and plastic (17%), wood products (13%), print products (21%), coal and oil products (21%), metal products(28%)

Machineries (28%), motor vehicles (30%), TV and radio items (23%), transport equipment (25%)

Motor vehicles (20%), transport equipments (27%)

Madhya Pradesh Punjab Pondicherry Rajastahan Uttar Pradesh Tamil Nadu

West Bengal

Non metallic minerals (10%) Paper (16%) Office machineries (31%)

Apparel (19%)

Non metallic minerals (12%) Food products (11%), leather (26%), tobacco (11%), print product (11%), metal product (12%) Textiles (24%), leather (36%), print product (13%), non metallic minerals (10%), metal product (13%), precision, optic and medical product (16%) Leather (10%), wooden products (15%)

Office machineries (35%), TV and radio items (31%) Machineries (13%), motor vehicles (23%)

* Percentage produced by the single state is compared to the total Indian production in brackets; it has been decided to include only those states with a production of at least 10%. Source: FICCI, Federation of Indian Chambers of Commerce & Industry, su dati dell’Annual Survey of Industries, 2005.

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64 Sourcing in India

2.6.4.

EPZ, EOU, EHTP, STP, BTP

The need for increasing foreign investments and exports, together with the will to open the economy to local producers, brought the creation in April 2000 of Special Economic Zones (SEZs). SEZs offer infrastructures and service coverages higher than in the rest of the country, also guaranteeing the import of instrumental and primary goods without customer duties, and simplified customs and banking procedures. With the aim of favouring the international operators’ presence, SEZs allow a foreign share up to 100%15 and automatic acceptance procedure. Since SEZs are considered like foreign territories, the inflow of goods from national areas (Domestic Tariff Area – DTA) is considered as exports, while goods outgoing to national areas are considered as imports. Inside SEZs it is possible to benefit from some incentives: we will explain these later. Today the main SEZs are: 1. 2. 3. 4. 5. 6. 7. 8.

Kandla Special Economic Zone (KSEZ); Santacruz Electronics Export Processing Zone (SEEPZ); Cochin Special Economic Zone (CSEZ); Surat Special Economic Zone SEZ (Surat SEZ); Noida Export Processing Zone (NSEZ); Madras Special Economic Zone (MEPZ); Visakhapatnam Special Economic Zone (VSEZ); Falta Special Economic Zone (FSEZ).

If we exclude SEEPZ, dedicated to the development of exports of electronic products, gems and jewels, all others SEZs are multi-product. Today there are 14 operative SEZs (Tab. 2.13); 8 of them were EPZ and subsequently were turned into SEZ, and 6 others have been set up in the last years (Ministry of Commerce & Industry, Dept. of Commerce, Govt. of India). The expansion in this direction is very relevant: during the summer 2005 until March 2006 the number of establishing SEZs increased from 27 to 61 (Ministry of Commerce & Industry, Dept. of Commerce, Govt. of India). Finally, there are 236 zones in phase of development, they are approved and will set up in the near future. As we can see (Fig. 2.6) in the past SEZs were mostly located in coastal areas, while nowadays the government plan for new SEZs tries to expand their positioning in interior areas to distribute the openings for business evenly. In Fig. 2.6 we show the main operative and approved SEZs.

Table 2.13: The operational SEZs SEZ No.

SEZ (State)

Type

Year of Establishment

Products

1 2

SEEPZ SEZ, Mumbai Kandla SEZ, Kachchh

Multi-Product Multi-Product

1974 1965

3

Cochin SEZ, Cochin

Multi-Product

1985

4

Madras SEZ, Chennai

Multi-Product

1985

5

Falta SEZ,

Multi-Product

1985

6

Noida SEZ, Noida

Multi-Product

1985

7 8

Surat SEZ, Vishakhapatnam SEZ, Vishakhapatnam Manikanchan, Salt Lake SEZ, Kolkata Indore SEZ, Indore

Multi-Product Multi-Product

2000 1994

Electronic items & hardware, Jewellery, Software etc. Stainless steel utensils, engineering goods, Electrical items, Pharmaceuticals, Knitwear etc. Electronic items, Wood products, Frozen foods, Rubber, Ceramics, Garments etc. Engineering goods, Electronics items, Chemicals & Pharmaceuticals, Textiles, Leather goods etc. Gems & Jewellry, Readymade garments, Rubber, Electronics items etc. Software, Toys, Garments, Pharmaceuticals, Electronic goods etc. Textiles, Garments, IT hardware, Chemicals, Tobacco etc. Electronic goods, Software, Pharmaceuticals etc.

Gems and Jewellery

2004

Jewellery, Services

Multi-Product

2004

Gems and Jewellery IT Park, Hardware, Bio Informatics Apparel and Fashion IT Park

2004 2005

Automotive and Engigneering goods, Granite, Textile, Leather etc. Gems and Jewellery Software, ITES, Biotechnology goods

2005

Apparel and Fashion

2005

Software and ITES

9 10 11 12 13 14

Jaipur SEZ, Jaipur Mahindra City SEZ, Chennai Mahindra City SEZ, Chennai Salt Lake Electronis City Sez, Kolkata

65

Source: Titolo Dello Studio. Copyright A.T. Kearney, anno. All rights reserved. Reprinted with permission.

66 Sourcing in India

Currently Operational Approved

Electronics and IT enabled services

Free trade & warehousing zone

To be indicated IT (Getting ready for operations) Multi-products Free trade & warehousing zone IT Multi-product

Handicrafts Multi-products SEZ Handicrafts Multi-products

Handicrafts Multiproducts Apparel P&PC

Multiproducts

Multi-products Apparel Multi-products Gem & Jewellery Pharma, IT/ITES

Leather products Multi-products

IT/ITES

Multiproducts Multi-products Port based SEZ IT/ITES Multi-products

IT Textiles Port based SEZ Food Processing Electronics IT (Animation and gaming)

IT/ITES Auto ancillaries Automobiles and atuoparts IT Telecom equip & services in telecom getting ready for operations Multi-products

Figure 2.6: Localization of active and approved or in process of approval SEZs in India, situation summer 2006 Source: A.T. Kearney Titolo dello studio, Copyright A.T. Kearney, anno. All rights reserved. Reprinted with permission.

Then, there are Export Oriented Units (EOUS), i.e. export-oriented companies. They are subject to a plan of incentives similar to that of companies operating inside SEZs, but they have the freedom of choice regarding localization over the entire national territory. They are obliged to export at least 66% of their production. Further incentives are provided to companies operating in the sector of software or electronic components that decide to put their plant near an Electronic Hardware Technology Park (EHTP) or a Software Technology Park (STP). These areas are managed by Software Technology Parks of India, an autonomous company founded in 1991 with the

India: a Geo-economic Overview 67

Srinagar Jammu Mohali Shimla Dehradun STPI-HO Lucknow

Noida Kanpur

Jaipur

Mumbai

Indore Nashik Aurangabad Pune Nagpur Kolhapur

Kolkata Durgapur Bhilai Rourkela

Guwahati Imphal

Allahabad

Ranchi Gandhi Nagar

Gangtok

Kharagpur

Bhubaneswar

Wanrangal Vizag Vijayawada Hyderabad

Hubli Manipal Thirupati Mangalore Bangalore Chennai Mysore Trichy Coimbatore Pondicherry Madurai Thiruvananthapuram Thirunelveli

Figure 2.7: Software Technology Parks in India Source: STPI.

aim of implementing STP projects, building and managing infrastructures and facilities, supplying services of technological development and education (STPI, Right to Information Act 2005). Incentives in these parks are similar to those for EOUs or SEZs, and plan a regime of free import, special terms and a period of exemption from fiscal obligations. Figure 2.7 offers a representation of the localization of the main Indian STPs. Another interesting phenomenon is that of Bio-Technology Parks (BTP), areas dedicated to biotechnologies and characterized by a scheme of incentives similar to that of EOUs, STPs and EHTPs (Foreign Trade Policy 2004–2009); the sector of biotechnologies is growing in India and the creation of these parks increases this trend. As highlighted in Fig. 2.8, excepting BTP of Lucknow in Uttar Pradesh, all remaining Bio-Technology Parks are located in the south-west area

68 Sourcing in India

Lucknow

Mumbai Pune Turkapally Dharwar Auroville Karwar

Bangalore Chennai

Ernakulam Idukki Thiruvananthapuram Figure 2.8: Bio Technology Parks in India Source: DaSilva et al., 2002.

of the country, the most industrialized one. The state of Karnataka was the first to adopt a policy for the support of biotechnological activities in February 2001; and for this reason Karnataka became the privileged location for companies of the sector. Maharashtra, Mumbai and Pune became poles of attractions for many branches of the sector of biotechnologies, while Hyderabad (Andhra Pradesh) is the reference location for the pharmaceutical industry; the situation of Delhi is similar, while in Chennai prevail biotechnologies applied to agriculture (Chaturvedi, 2005). 2.6.5.

Focus on the main Indian state

The following sections are focused on three of the most important States for the Indian economy: Maharashtra, West Bengal and Karnataka. Each analysis investigates the macroeconomic scenario, the development policies and the main industrial sectors of the State.

India: a Geo-economic Overview 69

Maharashtra Mumbai

Figure 2.9: Maharashtra

2.6.5.1.

Maharashtra

Maharashtra covers a favourable position in India (Fig. 2.9). This State has 10 per cent of the Indian coast line and its area is the equivalent of 10 per cent of India. The population is 96.88 million people, and 9.4 per cent of the country’s population. Forty-three per cent of its population lives in urban areas as against the country’s 28 per cent. Maharashtra has a high literacy level (77 per cent), has 12 per cent of the country’s universities and 344 engineering colleges; moreover the institutions provide 169,000 technical manpowers every year (Maharashtra industrial development corporation – MICD, 2007). In 2006, the Gross Domestic Product of Maharashtra amounted to 74 billion USD, the highest Gross State Domestic Product in India and represents 13% of India’s GDP. Moreover in the last decade the average rise of GDP was of 7.1% (MIDC, 2007). Currently, the State Government has important goals: primarily an industrial rise of 10 per cent and a

70 Sourcing in India

services rise of 12 per cent. To sustain these targets there are some incentives to small industries, such as the textile, hosiery and knitwear sectors (A.T. Kearney, 2007). The Per Capita Income is 542.64, 39 per cent higher than India’s average (MICD, 2007). Furthermore, the largest share of national funds for the industrial rise and social infrastructure are destined to Maharashtra. One important aspect of this State is the high number of qualified human resources, moreover there are good educational institutions and infrastructures, sustained by the constant investments of the Government, which classify Maharashtra such as one of the best choice destination of the national and foreign investments. In fact, it has attracted the most elevated FDI in India, 22 per cent, from 1991 to March 2006. Maharashtra contributes to 45 per cent of total Indian exports. The Maharashtra Industrial Development Corporation will institute Multi Product and Product Specific SEZs and the State Government stimulates the setting up of SEZs towards partnership between public and private organizations. This State covers an important role for the industrial rise of India; the main sectors of the region are petrochemicals, automobiles, leather, textiles, engineering, tyres and pharmaceuticals. The most important city of Maharashtra is Mumbai. It presents itself as a financial and commercial capital both of the Indian Federation and of Maharashtra. The two most important Indian stock exchanges have headquarters in Mumbai and it gives shelter to 70 per cent of total market transactions. The capital of Maharashtra reaches about 33 per cent of the Indian Income Tax and concurs for over 5 per cent of the Indian Gross Domestic Country (MIDC, 2007). The policy after 1991 and the internalization has produced a lot of business occasions in Mumbai from foreign enterprises. Mumbai is an important industrial zone to the sectors of oil, gas and chemicals, pharmaceuticals, consumer goods, engineering, textiles, financial services and tyres. Pune is one of the main industrial centres after Mumbai. It hosts several important automotive companies (Bjaj Auto, Tata Motors, Daimler Chrysler, Kinetic Engineerind and Force Motors Ltd) and many engineering industries (Bharat Forge Ltd, Cummins Engines Co Ltd, Thermax Limited, Alfa Laval, Sandvik Asia, Thyssen Krupp). Pune is a growing software centre, thanks to the presence of IT parks. There are important companies place in this city, i.e. Accenture, BMC Software, HSBC Global Technology, IBM, Dell, Siemens, SunGard Data Systems. The other main cities are reported in Fig. 2.10, where each city is linked to its main important sectors.

Nagpur Metals, Engineering and Textiles

Nashik Aerospace, Automotive and Engineering

Thane Chemicals, Pharma, Automotive, Engineerings and Metals

AMRAVATI

DHULE

Bhandara Metals

NAGPUR BHANDARA

JALGAON AKOLA NASHIK

BULDHANA AURANGABAD

WARDHA YAVATMAL

GADCHIROLI CHANDRAPUR

THANE

Alibag Greater Mumbai Oil & Gas, Consumer Goods, Engineering, Textiles, Financial services and Tires

AHMADNAGAR

PUNE

SATARA

Kudal

NANDED

USMANABAD LATUR

Chandrapur Cement

SOLAPUR Aurangabad Consumer Goods, Engineering and Pharma

SANGLI

KOLHAPUR SINDHUDURG Raigarh Oil & Gas, Chemicals, Pharma and Engineering

PARBHANI

BID

RAIGARH

RATNAGIRI

JALNA

Pune Automotive, Tires, Engineering, Metals and Pharma

71

Figire 2.10: Major clusters in Maharashtra

72 Sourcing in India

2.6.5.2.

West Bengal

West Bengal (Fig. 2.11) is situated in the Eastern Region of the country, on the borders with Bangladesh, Nepal and Bhutan. The population is 84.23 million people, 8 per cent of the Indian population, though its surface represents 3 per cent of the country’s area. The population living in poverty is strongly decreased, the per capita income is 379.24, 3 per cent lower than India’s average (A.T. Kearney, 2007). West Bengal’s Government invests the highest per capita assets on education: the literacy rate has increased in the last decade and in 2004 it reached 68.6 per cent against 50 per cent of 1991 (IBEF, 2005). From 1994 to 2004 the economy of West Bengal grew at the average rate of 8 per cent per annum; currently the GDP of the State represents 8 per cent of the total Indian GDP; now it is the third developed economy in India. The services sector is the most important one, its rate growing from 41 per cent of Gross State Domestic Product in 1991 to 51 per cent in 2002. The most significant contributors to this sector are software and

West Bengal Kolkata

Figure 2.11: West Bengal

India: a Geo-economic Overview 73

communications, respectively of 34 and 24 per cent. The industrial sector has shown a growth of over 7 per cent since 1995 and currently represents 22 per cent of the State GDP. Finally, agriculture accounts for 27 per cent of the economy of West Bengal (IBEF, 2005). From 1998 to 2001, West Bengal exports increased from USD 1,840 million to over USD 2,800 million. The main share of exports is represented by manufactured goods, 39 per cent in 2001, followed by engineering goods, agricultural, textiles and leather products (IBEF, 2005). The cumulative data of foreign direct investment show that West Bengal attracted over USD 1,346 million from 1996 to 2003. The most attracting industries are fuel, software, chemicals other than fertilizers, and hotels and tourism. To support economical growth and to encourage foreign investment, there are the operative Special Economic Zones (SEZs) at Falta. Moreover the Government proposes to develop a Greenfield SEZ at Kulpi. The Falta SEZ produce in multiple sectors, in fact the companies situated here manufacture engineering goods, processed food items, textiles, chemicals and petrochemicals. Exports from Falta grew between 1999 and 2003, from USD 16 million to USD 116 million in 2003. The major share of exports were to the USA, Hong Kong and Russia (IBEF, 2005). West Bengal is one of the widest markets of consumer goods in India and it is one of the Indian States with excess electricity generation capacity. Another distinctiveness of West Bengal is that it is the important producer of vegetables in the country and shows significant advantages for the food processing industry. For example, this State is the second widest producer of tea and paper in India. Another important advantage is related to the availability of ports and adjacency to mineral resources, for example in the steel sector (IBEF, 2005). Finally, this State offers a large number of qualified students. In fact it has a strong education system, with 9 universities, over 300 colleges and about 50,000 primary and 8,000 secondary schools (IBEF, 2005). Moreover West Bengal has 53 engineering colleges, comprising one of the most important Indian Institutes of Technology at Kharagpur, 54 technical institutes, 7 medical institutes and 17 management institutes. This number of institutes and the strong education system is reflected in the enormous number of students that every year achieve a degree, in particular engineering graduates (20,000) and graduates in general streams (600,000) (Department of Information Technology – Government West Bengal, 2003). The scope of the IT policy is to stimulate investment in this sector and to increase the share of West Bengal in the total exports of India; giving an incentive to sustain the rise of the IT sector and stimulating the use of IT in public life. The Government has promoted an IT literacy

74 Sourcing in India

programme in schools in collaboration with IBM, Wipro and NIIT, which covered 11,000 schools in the state (IBEF, 2005). The West Bengal Industrial Development Corporation has stimulated the growth of specific industrial parks providing a strategy to sustain rapid industrial increase. An overview of the main Industrial Parks developed in the State are shown in Tab. 2.14 (WBIDC, 2007). West Bengal has a strong competitive position in oil, gas and chemicals, metals and minerals, aerospace and defence, consumer goods, automotives and cement. In particular, in the petroleum and chemicals sector the state has 4 per cent of the total Indian oil production and 13 per cent of polymer production. The production of petroleum products has grown of 40 per cent from 1993–94 to 2002–03. The main factor that led the sector rise is the development of the oil refining and petrochemical units located in the state. Another important sector is related to iron and steel. This State accounts for around 10 per cent of India’s steel production. From 1995–96 to 2001–02 the growth was 36 per cent. The competitive advantage of West Bengal is its adjacency to fundamental raw materials, iron ore and coal. The port of Haldia allows the availability of imported inputs for steel products and export of steel manufacturing to China and south-east Asia (IBEF, 2005). The other important sectors are shown in Fig. 2.12.

Table 2.14:

The main industrial parks in West Bengal

Name

Products/Services

Location

Manikanchan SEZ Shilpangan Apperal Export Park

Gems and jewellery Light eng. Products Garments, buttons, accessories, washing / processing Food processing Polymer products Castings, forgings and other foundry items Bio Tech projects Steel products

Sal Lake, Kolkata Sal Lake, Kolkata Uluberia

Steel products

Jhargram

Food Park Poly Park Foundry Park

Biotech Park Iron and Steel Park, Kharagpur Iron and Steel Park, Guptamoni

Source: West Bengal Industrial Development Corporation, 2007.

Sankarail Sankarail Howrah

Dewanmara Kharagpur

DARJEELING JALPAIGURI COOCHBEHAR NORTH DINAJPUR

Raniganj Metals & Minerals SOUTH DINAJPUR

Durgapur Metals & Minerals and Chemicals

MALDA

Kolkata Aerospace and defense, Consumer goods, Chemicals, Leather

MURSHIDABAD

Burnpur Metals & Minerals

BIRBHUM BURDWAN

NADIA

BANKURA PURULIA HOOGHLY

MIDNAPUR

24 PRGANAS NORTH

HOWRAH 24 PRGANAS SOUTH

Uttarpa Automotive

Haldia Oil, Gas and Chemicals, Consumer Goods

75

Figure 2.12: Clusters for industrial activities

76 Sourcing in India

The capital of West Bengal is Kolkata and it is also the heart of financial and commercial transactions of the east and north-east of India. This strategic position represents an important advantage for this city and it has encouraged industrial development. The main industries are related to jute, leather, chemicals, electronics and plastic products (IBEF, 2005; WBIDC, 2007). Finally, Haldia is one of the most important cities of West Bengal and one the principal industrial zones, and the main sectors are oil, gas, chemicals and consumer goods (Fig. 2.12). One advantage of Haldia is its location and its export/import facilities. In particular, the Haldia Development Authority has designed some steps to set up a positive investor context and to support foreign investment. The main points of the strategy are to provide availability of land and adequate infrastructure, both for transport and for communications and society (WBIDC, 2007). 2.6.5.3.

Karnataka

Karnataka is situated on the west coast and represents the eighth state of India according to population and territorial extension. The Karnataka population reaches 55.2 million; 31 per cent live in urban areas, and the citizens of this State represent 5 per cent of the total Indian population (A.T. Kearney, 2007). It borders with Maharashtra, Goa, Andhra Pradesh, Tamil Nadu and Kerala and opens on the Arabian Sea, Fig. 2.13. The main advantages that encourage the development of Karnataka are the richness of natural resources and skills and know-how in IT – this State is called the ‘‘Silicon State’’ of India. Social development has also achieved good levels, employment is high and the per capita income is 403.56, 3 per cent over the Indian average, and the literacy rate in Karnataka achieved 67 per cent in 2003–04. The Net State Domestic Product (NSDP) of this State reached about USD 25.93 billion during the 2004–05 fiscal year. The agriculture sector represents 24.5 per cent of GSDP, and 70 per cent of the population of this State works in this sector. The most important contributor to the agriculture income in Karnataka is related to horticulture, which produced 107 million tonnes in 2003–2004 (IBEF, 2006). The industrial sector reached 25.6 per cent of GSDP. Until now, it has captivated USD 6,813 million of manufacturing investment, the investors are both national and international companies and they set up 1,068 units, both large and medium enterprises (IBEF, 2006). The services sector has the main share of the Karnataka’s GDP, 49.90 per cent in 2003–2004. The 36 per cent of the Indian software exports come from this State, which achieved USD 3.85 billion.

India: a Geo-economic Overview 77

Karnataka

Figure 2.13: Karnataka

Karnataka exports reached USD 9.33 billion in 2003–2004, and in this period they registered a growth of 25 per cent. The most important rate of the exports derives from electronics and software products, while other significant shares are related to textiles, 20 per cent, followed by chemicals, which grew 57 per cent in 2003–2004 (IBEF, 2006). In 2004, Karnataka has caught USD 5.4 billion of foreign direct investment for 160 projects. The policies of the State has attracted many multinational companies in various sectors. In 2004 Karnataka was the most important destination of FDI in India and there are 65 of the 500 most important companies of the world (National Portal of India, 2007). The concentration of IT and biotechnology companies, and the presence of important research institutions are some of the strengths of Karnataka. The State has also a large number of IT qualified technicians and some of the most important academic and research institutions. Therefore, several multinationals (i.e. IBM, SAP, Accenture, etc.) and Indian companies have selected Karnataka as the centre of their R&D activities,

78 Sourcing in India

and in fact in this State there are over 100 R&D enterprises and this is the largest number in India (IBEF, 2006). Another advantage of Karnataka is related to the production of gold and iron. It is the largest producer of limestone, gold (90 per cent of the Indian gold is produced here) iron-ore (30 million tonnes per annum) and felspite. The policy of the Government is focused on sustaining economic growth, particularly in the telecommunications, electronics, informatics, precision tooling, tool rooms, pollution control, and biotechnology industries (IBEF, 2006). The State Government has made infrastructure development a priority. The ‘‘Infrastructure Development Fund’’, amounts to USD 21 million, and is planned by the Government to satisfy the primarily requirements of the industries and to ensure uninterrupted power (A.T. Kearney, 2007). Another important sector for Karnataka is the biotechnology sector. To sustain and impel this sector, the State Government has developed a policy which includes some facilitations for these industries. It offers for example: exemption on entry tax on machinery, capital goods and construction materials; concessions for biotechnology parks authorized by the Department of IT and Biotechnology (IBEF, 2006). In the State of Karnataka there are 92 biotechnology companies, and they represent about 50 per cent of the total biotechnology enterprises in India (IBEF, 2006). Bangalore, the capital of Karnataka, is one of the most important and largest technological centres in the world (Fig. 2.14).

2.7.

Conclusions

In the attempt to trace a concluding picture, we must stress that element which distinguished India over centuries: its complex and multiform variety. The emerging picture is unavoidably heterogeneous: the recent developments acted on a young state already divided in many linguistic, territorial and religious entities, thus enhancing the pre-existing contrasts. There are nuclear arsenals and hungry bidonvilles, ancient manufacturing laboratories and R&D structures with the most sophisticated technologies, rural underdeveloped areas and extra-modern metropolises. While one fourth of the population lives under the poverty threshold, a new middle class is emerging, that works in the software industry, in call centres, in service companies. There are hundreds millions of illiterates, but also millions of scientific graduates, engineers and qualified

BIDAR

Gulbarga Cement GULBARGA

BIJAPUR

BAGALKOTE

Uttar Kannad Paper

BELGAUM

Koppal Metals & Minerals

RAICHUR

KOPPAL GADAG DHARWAD

UTTARA KANNADA

BELLARY

HAVERI

Bellary Metals & Minerals

DAVANAGERE

Shimoga Metals & Minerals

CHITRADURGA

SHIMOGA

TUMKUR

UDUPI CHIKMAGALUR

KOLAR BAGALORE

HASSAN

BANGALORE RURAL

MANGALORE

MANDYA

Dashkin Kannad Oil & Gas, Metals & Minerals

Figure 2.14:

KODAGU MYSORE CHAMARAJANAGARA

Bangalore IT, Aerospace, Pharmaceuticals, Textiles, Engineering, Automotive

Clusters for industrial activities 79

80 Sourcing in India

technicians. Evident disparities exist among states: Bihar and Orissa, examples of poverty, against Kerala, a socially developed state. There is also a demographic matter. Population density is almost double the Italian one (on a 10 times bigger geographic extension), and two times and half the Chinese one. The population grows by 20 million per years and asks for work and subsistence. These elements show how India’s greatest challenge concerns economic growth, but also show its homogeneous diffusion in order to avoid stressing current unbalances. This development still has some obstacles. Among these are the colonial legacy that delayed industrial growth, emphasized the division between castes and religions, and hindered the valorization of the scientific Indian tradition. And it also explains the distrust with which some components of society look at international openings. Among these obstacles are the centralization and dirigisme of the economic policy, a consequence of the adoption of a model of soviet inspiration. This model could fit during the first difficult years of life of the country, but later it harnessed capitalism in a heavy system of licences and protections, putting away foreign participation. The economic policy of Independent India until today oscillated between liberalization and protectionism, the need of foreign capitals and self-sufficient will, valorization of private initiatives and collectivism. 1991 was the moment of change, with some reforms that reduced the presence of Government in the economy and relaxed some constraints to foreign investments. However, this change must face popular consent at any election. At the base of the relative discontinuity of the Indian path – that emerges especially when compared to the Chinese one – there is another important factor: the institutional structure. India has adopted a democratic and federal system, the only one able to protect regional identities and sovereignties, to control centrifugal movements and sub-nationalisms. Indians claim they belong to the largest democracy in the world, where the press is free, the magistracy independent and where the parties who lose elections go to opposition. If China since 1979 seems to have developed in a constant direction, is because the Communist party has not an electoral consent to achieve, an opposition to contrast, a free press to face. China could erase the welfare system, this way enhancing one of the factors that mostly attract foreign capitals: low labour cost. Vice versa the welfare system affects the approval, and therefore electoral success, in Indian democracy. BJP, the party governing until 2004, could not be confirmed only for its

India: a Geo-economic Overview 81

good economic results. The coalition led by the Congress party conquered the majority with the promise of a more homogeneous distribution of the richess associated with the recent economic growth. Despite fears accompanying this victory, the new coalition seems to offer a strong warranty of continuity of the undergoing reform process. The differences of the institutional organization, together with the 12 years separating the ‘‘open door policy’’ of Deng Xiao Ping from the reform action of Prime Minister Manmohan Singh, explains much of the economic difference between China and India. Indian GDP is around one third of the Chinese one and in these years increased 6–7 per cent per year, against the two-figures growth rates of China. The trade exchange grew significantly in both countries, but China’s current incidence on global commerce is around 8% against the 1% of India. Public deficit and debt are bigger in India: public expense was used (also) as an instrument for electoral consensus. Indian commercial balance is negative, the Chinese one is positive. In order to understand the different Chinese economic register, it is sufficient to have a look at the rhythm the infrastructures developed in the two countries and to the existing legislation about FDI. The Indian ‘‘business environment’’ is less attractive, as shown by the different export effectiveness of special economic zones, the entity of FDI (ten times smaller than the Chinese one) and the fact that these are mostly ‘‘market seeking’’, while Sinoforeign companies contributed for more than 50% of Chinese exports. If the Indian Elephant is slower than the Chinese Dragon, many observers consider its path more solid and sustainable. Indian democracy imposes a gradual development as it comes from the electoral will of the population, and so should cause less social tensions. Even in terms of environmental sustainability India has advantages, both because its industry is lighter (and less developed) and because at the moment is not involved in infrastructural projects having strong environmental impact, as the three gorges dam recently inaugurated on the Yangtze River. On the contrary, it is commonly thought that the Chinese government should sooner or later face social shudders and the will for political participation. India has other strengths when compared to China. The choice of democracy, together with a legislative organization built on English legacy, make it an reassuring Asian gateway, a country whose rules are more similar to the western ones, a low-based State with more warranties. In addition, India seems to be the privileged country over the containment strategies of China carried out by the USA and all other countries that want a multi-polar Asian context. The recent visit of the American

82 Sourcing in India

President, as well as all the meetings and bilateral agreements with the European Union, go in this direction. India is a young country: 70% of its population is less than 36 years. It offers a vast availability of qualified technical-scientific human resources with perfect English knowledge, thanks to a good university education, especially in the field of engineering and IT. If China has already attracted a big part of global manufacturing, India is consolidating as a privileged location for offshoring projects. The most important global players are setting research and development centres here. However, the two Asian giants have some relevant similarities. They both have thousands years of history, ancient cultures and scientific traditions. They both surpass one billion inhabitants and share the problem of a socially and territorially homogeneous growth. They are both hungry for development: you can feel there the sensation that these two populations feel themselves as protagonists of a new era that is redrawing the global hierarchies, giving back to them that leading role they had in the past. Above all, China and India seem to be more and more interdependent. Many times in this chapter we underlined how Indian commerce is moving towards Asian countries, and how trade with China is developing. SAFTA and ASEAN agreements want precisely to build a free and more open area for trade exchanges. Important synergies between China and India are in the field of energy, for which the two countries are hungry. China, which is more export oriented than India, is trying to develop other markets because is conscious that Western countries, first of all the USA, to which the majority of exports is addressed to, cannot go on absorbing Chinese products as it is doing. Appealing to these strong points, India should maintain its reform path. In this chapter we listed the main factors that represent obstacles to foreign investments: excessive bureaucracy, a labour and FDI legislation still much too protectionist, the very recent opening to retail commerce, the lack of infrastructures. Another challenge regards the ability of rationalizing the industry composition of the economy. It will be important to sustain services, especially those knowledge intensive of IT and of biotechnologies. Anyway, it will be also important to favour a wider coverage of the value chain, so as to be able to reach the final market with a more integrated offer. Manufacturing, for example in the textile, jewels and engineering industries, needs improvements and the full valorization of Indian traditions and distinctive resources.

India: a Geo-economic Overview 83

In conclusion, the history, the political path and the geographical and demographical size of India help to understand its heterogeneity, but also explain a growth that put this sub-continent at the fourth position among the global economies. Its strengths, from availability and quality of human resources to the favourable geo-politic location, make it a very interesting market today and in the future. India is a chance that is consolidating in these years.

3 India: the Land of Service Offshoring

3.1.

Introduction

The group of innovations identified through the acronym ICT (Information & Communication Technology) allows (often quickly and cheaply) the digitalization, storing and transferring of information in any part of the world connected to the web. This change modified the geographic distribution of several value chain activities and made ‘‘merchantable’’ many kinds of services, overcoming some limits (like no-transferability) and changing some of their typical characteristics (e.g. the simultaneity between production and use, the closeness between distributor and user, etc.). India was able to take all the opportunities of this revolution and is now recognized as the most important location for the development of some kinds of services (from software development to the management of complete business processes). In this chapter we will provide some data about the size of ITO (Information Technology Outsourcing) and BPO (Business Process Outsourcing) global markets. Then we will analyse these sectors in India, describing the mix of services, the factors that have sustained their growth and their actual potentials.

3.2.

ITO and BPO markets

It is often argued in the literature that it’s difficult to value the size of the IT market and in general of service offshoring (see Atkinson, 2004; van Welsum, 2004; Huws et al., 2004). The intangibility of these services and their ability of circulating in the web without crossing customs, jointly with the difficulty to value them at the source (taking into 84

India: the Land of Service Offshoring 85

consideration the various adoptable contractual agreements), make their measurement more fleeting than the measurement of the international exchange of goods. There are few statistics available concerning this phenomenon and they are often focused on specific kinds of services (software development, finance services, etc). Moreover, many studies belong to unofficial sources. So data here provided has to be seen just as an indication. According to IDC1 (2005), the global expense for the Business Process Outsourcing will increase with an annual rate of more than 10%, passing from 382.5 billion dollars of 2004 to about 650 in 2009. As far as the US is concerned, the Progressive Policy Institute detected that between 2001 and 2004 about 300 thousands job positions in service sectors were transferred outside the national borders (Atkinson, 2004). Forrester Research evaluate that in the US by 2015 3.4 millions jobs in services will be transferred outside the nation, for a total value of 136.5 millions dollars (McCarthy et al., 2002). This latter is an underestimated data if we believe the information of Deloitte2 (2004b). According to this survey (not limited to USA and focused only on the international transfer of financial services), the 100 major financial institutions in the world plan to transfer abroad a value of 400 billions dollars by 2010. As far as the offshoring of legal services is concerned (surely a quite new phenomenon), Forrester Research calculates that in 2004 about 12 thousand job positions were transferred abroad, while by 2010 this number could increase up to 35 thousands. Thanks to its legislation (common law), India is likely to be the favourite location for these activities (The Economist, 2005). A NeoIT survey (2005a) calculated the export of IT and BP services of the main exporting nations. Results are shown in Fig. 3.1. India is the major exporter both of IT services and business processes (respectively 12.2 and 5.2 billions USD), followed by Canada (8.28 and 5.5 billions USD) and Ireland (ITO: 2.2 billions USD). We highlight that China, ranking second among the developing countries, follows India at a distance (ITO: 700 millions USD; BPO: 25 millions USD). Apart from the reliability of the data here reported, it is evident how the resort to BPO and ITO is experiencing a phase of expansion both at a geographic and quantitative level: the number of countries which supply services and the number of countries using them is increasing. It’s also evident that India is the favourite destination for these projects and it is consolidating its position. For example, Microsoft announced 1.7 billions of dollars investments in India for the next future; the half of this amount will be used in order to expand the already existing

CANADA $5.5B

IRELAND $2.2B

MEXICO $100M $200M

CZECH REPUBLIC $60M $40M

86

$8.2B

POLAND $110M $70M RUSSIA $550M $25M

CHINA $700M $300M INDIA $12.2B

$5.2B

PHILIPPINES $330M $800M MALAYSIA $120M $40M ROMANIA $30M $25M

BRAZIL $200M HUNGARY $50M $25M

IT Services Exports Figure 3.1:

BPO Exports

Main IT services and BP exporting countries

Source: neoIT, 2005a Reprinted with permission.

SOUTH AFRICA $220M

India: the Land of Service Offshoring 87

R&D centre and the office providing technical support (The Economist, 2005). The same happens for Intel (which planned an investment of one billion dollars for the expansion of its R&D centres in Bangalore), and Cysco system (which is planning to invest in India 1.1 billions dollars). The three biggest IT and business process supplying companies (Tata Consultancy Services, Infosys and Wipro) recently declared a rate of hiring of a thousands of persons per month (The Economist, 2005).

3.3.

Advantages offered by India

The attraction of India for service offshoring projects is discussed in many studies reported on scientific journals; these studies often use an historical and qualitative approach. More quantitative evaluations are instead provided by consulting companies or industry associations. Figure 3.2 shows the results of a study carried out by A.T. Kearney (2005a) on the main Asian locations for service offshoring. This attractiveness index uses 39 drivers belonging to three main categories: financial structure, people and skills availability, and business environment. Looking at this figure it’s clear that Asia is the privileged destination for service (#) Indicates overall index ranking 3.5

India China

3.2

Malaysia

3.0

2.1 1.8

1.3 1.2

1.1

China (2)

2.0

Index ranking 1–10

3.6

Philippines

1.2 1.1

11–20

India (1) Singapore

1.6

1.4

21–30

2.7 Vietnam (26)

Thailand

3.3

Indonesia

3.5

1.1 .9

Vietnam

3.6

.7 .8

.9

1.5

Thailand (6)

Singapore (5)

Philippines (4) Malaysia (3)

Indonesia (13)

Financial structure People skills and availability Business environment

Figure 3.2: A.T. Kearney offshore location attractiveness index for main location of Asia Source: Titolo dello studio, Copyright A.T. Kearney, anno. All rights reserved. Reprinted with permission.

88 Sourcing in India

offshoring: the first six positions in the global ranking are located here (India, China, Malaysia, Philippine, Singapore, and Thailand). India is the most attractive country, being able to combine costs advantages with the availability of skilled people. As far as this last aspect is concerned, India seems to be more competitive than developed countries, as Canada, Australia, Ireland, Spain, Germany, Great Britain; this primacy derives also from the experience gained by this country, having managed for many years BPO projects (Rutherford and Mobley, 2005). The neoIT’s study (2005a), which analysis separately ITO and BPO projects (Fig. 3.3), confirms that India is the privileged destination of service offshoring. The neoIT’s Offshore Attractiveness Index results from factors belonging to five macro-categories: financial benefits

ITO Landscape India Canada

1.31 0.62

1.15 1.16

0.79

China

1.38

0.69

Poland

1.3

0.69

Ireland

0.72

1.03

0.83

0.61

1.3

0.57

Russia

1.24

0.73

Malaysia

1.3

Mexico

1.12

0.45 0.61

0.24

0.39 0.2

1.27

Philippines

1.33

0.42

Romania

1.29

0.39 0.35 0.16

South Africa 0.00 Financial Benefit

1.06 0.94

0.62 0.52

0.50

1.00

0.61

0.54

0.49 0.15 0.44 0.59

0.38 0.16

0.46

0.53

0.69

0.48 0.18

Hungary

Brazil

0.18

0.58

0.66

0.19

0.54

0.6

Czech Republic

0.25

0.18

0.6

0.43 0.16 0.52 0.37 0.16

0.56 0.52

0.35 0.14 0.45 0.48 0.18

1.50

Service Maturity

2.00

0.47

2.50

People

3.00

Infrastructure

Figure 3.3: ITO and BPO neoIT Offshore Attractiveness Index Source: neoIT, 2005a Reprinted with permission.

3.50

4.00

4.50 Catalyst

India: the Land of Service Offshoring 89

BPO Landscape India

1.31

1.00

Philippines

1.34

0.88

0.90

0.86

0.88

Poland

1.32

Ireland

0.76

Canada

0.62

Mexico

1.09

1.13

1.15

Czech Republic

1.30

Malaysia

1.34

China

0.16 0.18

0.55

0.75

0.20

0.51

0.72

0.19

0.58

Romania

1.24

0.49

0.72

0.16

0.63

0.75

0.14 0.47

South Africa Russia 0.00 Financial Benefit

0.85

0.61 1.18

0.50

0.86 0.48

1.00

1.50

Service Maturity

0.72

2.00

0.60 0.54

0.51

1.25

1.13

0.67

0.56

Hungary

Brazil

0.69

0.25

0.83

0.73

0.59

0.24

0.88

0.60

1.38

0.18

1.05 0.78

0.56

0.16 0.57

1.02

1.20

0.18

0.16 0.53 0.52

0.18 0.49 0.15 0.45

2.50

People

3.00

3.50

Infrastructure

4.00

4.50 Catalyst

Figure 3.3: (Continued)

(weight: 30%), service maturity (25%), people (25%), infrastructures (5%), socio-economical environment (15%). The attractiveness of India is particularly clear for IT services, justified by the experience gained year after year by local providers, the technical competencies, the quality of the adopted processes, the dimension and rate of growth of the market, the adequacy of the legislation on intellectual property protection, the skills of the employees and their cost (neoIT, 2005a; McCormack et al., 2005). The qualities of the infrastructures and of the socioeconomic environment (the government support, the geopolitical risk, the geographic and time distance, and cultural compatibility) are instead similar to other locations. For BPO India has the primacy too, but the competition of other countries is stronger. Compared to the evaluation for ITO, India shows for

90 Sourcing in India

lower scores in the factors that measure the ‘‘sector maturity’’, demonstrating that BPO is a rather new phenomenon. Compared with A.T. Kearney, neoIT’s analysis underlines a wider gap between India and other Asian countries. The methodology adopted here, in fact, emphasizes aspects such as the technical experience, the quality of the processes, the staff’s education and linguistic competences. A comparison limited to costs advantages, on the contrary, shows other locations even more attractive. The neoIT’s study (2005a) also proposes an evaluation of ITO and BPO markets (Fig. 3.4: the dimension of the circles is proportional to the size of the local markets). Looking at this analysis, India should confirm its dominant position, favoured more by the competences gained year by year and by the quality of its processes rather than by cost advantages (neoIT, 2005a). India’s supremacy is also underlined by a study presented by Gartner during the Outsourcing Summit (London) in 2003 and reported by Kobayashi and Hillary (2004). Comparing some locations along different factors (government support, labour force, infrastructures, education system, etc.), the study evidences the Indian supremacy in terms of availability of qualified staff (Fig. 3.5). The comparison with China, is interesting, which is weaker in terms of government support, security (intellectual

India

China

Future Attractiveness

Poland Malaysia Russia

Canada

Czech Republic

Hungary Mexico

Ireland

Brazil Philippines

South Africa

Romania

ITO Current Attractiveness Figure 3.4: Actual and future attraction of main offshore services destinations Source: neoIT, 2005a Reprinted with permission.

91

India

Philippines

Poland

Future Attractiveness

China

Mexico

Czech Republic

Canada

Brazil

Ireland Malaysia

Hungary

Romania South Africa Russia

BPO Current Attractiveness

P F G VG

Very good

E

Excellent

China

Israel

South Africa

Northern Ireland

Ireland

Poland

Hungary

Russia

Government support Labour pool Infrastructures Education system Cost Political stability Cultural compatibility Data/IP Security Overall climate

India

Figure 3.4: (Continued)

E E F VG E F F G VG

F G P F E F P P P

G G VG VG F P VG VG F

F F F G VG F E G F

VG G VG VG G G E E G

VG G VG VG F E E E G

F G F G G G VG F F

F G P F VG F VG F P

P VG P VG E F G P F

Poor Fair Good

Figure 3.5: Evaluation of some offshore locations Source: Gartner, 2003.

92 Sourcing in India

property protection), people’s education and skills. Anyway the gap between the countries is becoming smaller and smaller. A.T. Kearney (2005b) underlines the important results obtained by China in the improvement of infrastructures quality, in the educational system, and in the technical-scientific research. A previous study carried out by the authors and focused on sourcing in China (Nassimbeni and Sartor, 2006) confirms that this country has achieved important improvements in these fields. As an example, the software sector in China is very fragmented and less mature than the Indian one, but it is benefiting by the closeness to the most important agglomeration of hardware producers in the world. Going back to comparative studies on the main locations for IT services, many of them underline also the weaknesses of the Indian market: the lack and the inadequacy of infrastructures3 (Gartner, 2003; UNCTAD, 2005a; neoIT, 2005a), the bureaucracy (neoIT, 2005a), and the geo-politic instability (Gartner, 2003; UNCTAD, 2005a), even if this factor has been recently downsized in latest studies thanks to the relaxing of tensions with Pakistan and China (Kobayashi and Hillary, 2004; Rutherford and Mobley, 2005). After having introduced through these studies the attractiveness of India for service offshoring projects, we can go into the main advantages this context can offer. Human resources This is probably the main strength of this market. The India educational system, whose characteristics where already presented in Chapter 2, provide a number of engineers, physicians, chemists, biologists, mathematicians and IT experts that is the highest in the world. Every year 2.3 millions of graduates enter the working world. It is a very large number but, as far as service offshoring is concerned, it’s lower than the demand. The integration of foreign units with western headquarters, and in general the commercial relationships between Indian and western companies, are favoured by the perfect knowledge of the English language. It’s an advantage often underlined in the literature and particularly evident when comparing India with other locations as China (Rutherford and Mobley, 2005; Davies, 2004; McCormack et al., 2005; Kobayashi and Hillary, 2004). The technical skills and the competences of Indian graduates, together with the excellent reputation of the local education and research centres (Indian Institute of Technology, Indian Institute of Science, Indian Institute of Chemical Technologies, Centre for Drug Research), fostered the development of a number of R&D projects by important multinationals (UNCTAD, 2005b). The first companies that built in India a Research and

India: the Land of Service Offshoring 93

Development centre were Texas Instruments (1986) in the semiconductors industry, and Astra (1987) in the bio-pharmaceutical area; in the 90s Motorola (software for telecommunication), Microsoft (operating systems), STMicroelectronics (semiconductors), Daimler-Benz (avionics), Pfizer (biometrics), and, since 2000, Intel (semiconductors) and GE (engines for aircraft and medical equipment) followed their example (UNCTAD, 2005b). Cost The (just described) Indian skilled employees are available at competitive costs, as Fig. 3.6 shows. Based of neoIT data (2005b), the figure compares the average Indian salary in the IT sector with that of other typical locations. The data collected in a study made by Dataquest and quoted in McCormack et al. (2005) are less attractive: for employees with an experience shorter than two years, the annual average salary is 7,333 dollars, 90000 Average annual salary (USD)

80000 70000 60000 50000 40000 30000 20000 10000 0

Entry level

India

5443

Team lead (2–3 yrs. exp.) Manager (5–8 yrs. exp.) 8429

13124

China

5460

8799

13732

Russia

11664

18503

29353

Malaysia

12455

19915

30580

Israel

22152

36821

56065

Canada

25338

40829

62164

Ireland

31500

51963

84397

Figure 3.6: Annual average salaries in the Information Technology sector Source: neoIT, 2005b.

94 Sourcing in India

for those with experience among 2 and 5 years it is 11,777 dollars, while for those with more than five years it is 19,777 dollars (McCormick et al., 2005). So the average salary is low compared to the western one, but it is on the same order of magnitude. On the contrary, labour cost in manufacturing offshoring can be even 20–30 times lower than in western countries. The demographic profile of the country and the number of technicians and graduates entering the labour market every year will presumably maintain the cost attraction of this area for a long time. However the strong expansion of ITO and BPO has already caused a deficit in offerings, and a consequent relevant increase of salaries. Therefore the competition of other offshore locations is becoming more and more aggressive. Service quality In India low cost goes hand in hand with a quality of service really appreciated. Since the 1990s, the IT Indian sector has looked for international recognitions for the quality of processes. Many companies obtained ISO 9000 and/or SEI-CMM4 certification. It is interesting to notice how more than half of software development centres which obtained CMM Level-5 certification are located in India and that the first company to achieve it was the Indian Wipro. In Tab. 3.1 the results of a survey carried out by NASSCOM5 in 2002 on the 300 biggest software and services companies are pointed out: 216 of these companies had already obtained certificates and many others were waiting for it. More recent data are provided by NASSCOM’s Quality Summit 2005: it shows that Indian companies with SEI-CMM and CMM Level-5 certification are more than 89; 275 companies have at least one internationally acknowledged quality certification (NASSCOM, 2005). This considerable diffusion of quality certification is a consequence of the awareness of its commercial value. In front of a western partner – that sometimes associates (even if unconsciously) Indian producers with Table 3.1: The certificates obtained by a sample composed by the 300 biggest Indian companies working in service and software development sectors Quality Certificates ISO 9000 or SEI-CMM certificate or other Company waiting for certificate by the end of 2002 Company waiting for certificate during 2002 Company without any project Source: NASSCOM, 2002.

Number of companies 216 62 70 22

India: the Land of Service Offshoring 95

organizational backwardness and technological obsolescence – the international certification can have an important steering role. Time zone The geographical position of India determines a difference of the time zone of 12 hours with the USA: so the working timetable is complementary. Well known is the case of the USA health sector, where the transfer to India of transcription activities of medical data has become quite frequent. The chance of obtaining a continuous service thanks to this nightly offshoring has been subsequently extended to other services, as call centres, help desks, etc. (Davies, 2004; McCormack et al., 2005). At the end of this synthesis of the strengths of the Indian context, it is necessary to anticipate an aspect which will be deepened in the following chapters. Comparative advantages we have just listed don’t offer certainties regarding the success of a service offshoring project in India. As we detected analysing the sampled companies’ experiences, the results of this transfer depend on many other aspects which are independent from the supplier and from the geographic basin: the characteristics of the transferred activity, the identification of input/output parameters, the presence of adequate organizational connections, etc. In particular, the experiences analysed show the importance of a preventive check of the activities/processes to be outsourced (and their relations with all the other activities/processes) and of the transfer path.

3.4.

The development of the IT sector in India

The IT sector in India has registered a strong growth since the 1990s: software and service development (that is the most important activity for this market) passed from 128 millions dollars in 1990–91 to 8.3 billions dollars in 2000–01, with an average annual growth rate higher than 45% (Patibandla and Petersen, 2002). India did not demonstrate a similar dynamism even in the most labour-intensive manufacturing sectors (Kapur and Ramamurti, 2001). In the next sections we will describe how India was able to develop a typically skill-intensive sector and become the location preferred by many important multinationals for the development of these activities. The role of institutions The National Innovation System, i.e. all the public and private institutions and legislative initiatives regarding innovation, was very important for the development of the IT sector (Kumar and Joseph, 2004).

96 Sourcing in India

At the beginning of the 1960s the Indian government understood the decisive role that electronics and informatics could have. In 1970 they founded the Department of Electronics (DoE), with the aim of elaborating policies and coordinating interventions in these areas. In a business environment quite difficult (until 1991) for foreign investments, these activities received privileged treatments: for instance the Components Policy (1981) and Computer Software Policy (1986) granted less strict bonds and incentives for export-oriented companies. The reforms of 1991 confirmed the importance of IT in the Indian economy. In 1994 they started privatization of telecommunications and some years later (1999) they decided that DoE had to be promoted to the Ministry of Information Technology (1999). Also the effort in the higher educational system was very important, most of all in technological-scientific fields. Indian Institutes of Technology (IITs), founded during the 1950s and 1960s, and the Indian Institutes of Information Technology (IIITs) must also be mentioned. Important also was the creation since 1990 of Software Technology Parks (STPs), i.e. areas destined to host export-oriented companies developing software and services. Besides providing necessary infrastructures (e.g. working areas and high speed communication lines), the STPs provide a number of fiscal incentives and benefits for promoting investments (STPI, 2004). Today there are 39 existing STPs located in different states; they host thousands of companies (7,000 units in 2002–03) and contribute to more than 80% towards the national export of software (Kumar and Joseph, 2004). The ‘‘knowledge diaspora’’ Speaking about the factors that favoured the growth of the IT sector in India, many authors (Kapur and Ramamurti, 2001; Dossani and Kenney, 2002; Patibandla and Peterson, 2002; D’Costa, 2003) underline the role of Indians who emigrated (Non Resident Indians – NRIs) in particular in the US. Kapur and Ramamurti (2001) uses the expression ‘‘knowledge Diaspora’’ to say that a consistent number of emigrants worked in leading universities, in companies operating in high technology sectors, and in managing and finance consulting companies. These people reduced the entry barriers in the Indian market for the multinationals where they worked, demonstrating the potential of Indian human resources, providing an efficient relational and cultural mediation with local institutions. Patibandla and Peterson (2002) – in a study on big American companies operating in India – say that one of the most important reasons that convinced Oracle, Texas Instruments (TI), Hewlett Packard (HP) and Nortell

India: the Land of Service Offshoring 97

to invest in this country was linked to their Indian staff, which usually worked in good positions. Since the end of the 1980s the same Indian Government recognized the success obtained abroad by NRIs (Dossani and Kenney, 2002). All in all the NRIs gave an important contribution to the Indian economy through investments, remittances, the development of local entrepreneurship, the transfer of knowledge and support to technical education (D’Costa, 2003). Foreign investments It is evident that the entry of foreign multinationals such as Adobe, Microsoft, HP, Oracle and Texas Instruments has strongly nourished the development of Indian IT, fertilizing an area that was already attractive for the reasons already explained in the previous paragraphs. Foreign companies transferred technologies and knowhow, favoured the development of local entrepreneurship through collaborating and sourcing agreements, and called out the industrial system for an international opening which solicited a growth not only in the field of technology and IT. A very important date in the process of entry of IT multinationals in the Indian market is 1985, when Texas Instruments constitutes a sophisticated R&D centre in Bangalore. After that many other companies follow its example: HP built similar centres in 1989, Motorola in 1991, Oracle in 1994. In the meantime the relationships among foreign multinationals and the Indian higher educational system continued to grow. Many research laboratories of foreign multinationals are set in Indian Institutes, whose professors and courses are chosen jointly with the companies.

3.5.

The IT market in India

During the 2005–06 fiscal year the Indian IT market registered a growth of 29.4%, passing from 97.05 billion rupees (21.6 billion USD) in 2004–05 to 125.62 billion rupees (28.4 billion USD) in 2005–06 (NASSCOM, 2006). The positive trend of this market is thus confirmed, as shown in Fig. 3.7. As we can see, the growth was absolutely positive looking both at the numerical value (the size of the market in terms of local money was quadrupled) and at the percentage of these activities on GDP (that passed from 1.22% in 1997 to 3.71% in 2005).

98 Sourcing in India 3.71 3.28

3.10

3.13

2.90

2.71

125.62 1.87

97.05

90.59

1.45 1.22

76.48 65.79 56.59 36.18 25.31

18.64 5.02

1997

6.02

1998

8.35

1999

13.79

12.39

2000

2001

15.80

2002

19.71

2003

28.40

21.60

2004

2005

Fiscal year Market value (mld Rs)

Value % on GDP

Market value (mld USD)

Figure 3.7: IT Indian market dimensions in fiscal years 1998–2004 – in rupees and dollars – and percentage value compared to GDP of the country Source: NASSCOM.

Table 3.2: IT Indian market composition in 2002–03 and 2003–04 (Values in billions of USD) 2002–03

2003–04

9.53 3.29 2.77 0.23

12.5 3.75 3.4 0.26

15.82

19.91

Software and services for foreign markets Hardware, peripherals and net devices Software and services for national market Education TOTAL Source: Elaboration on data NASSCOM, 2006.

As far as the composition of this market is concerned – on the basis of NASSCOM categorization – the following sectors can be identified: hardware, peripheral and net devices; software and services for the national market; • software and services for foreign markets; • education. • •

Table 3.2 shows the values of each sub-sector in 2002–03 and 2003–04, while Fig. 3.8 shows the composition of the IT market in the same years.

India: the Land of Service Offshoring 99

2002–2003 20.78%

17.50%

60.27%

1.45%

2003–2004 18.83%

market 17.08%

62.78%

1.31%

Software and services for the exports Hardware, devices and net systems Software and services for the national market Training Figure 3.8: IT Indian market composition in 2002–03 and 2003–04 (Values in billions of USD) Source: Elaboration on data NASSCOM, 2006.

Analysing these data, we can easily notice how the IT market is focused on the ‘‘software and services’’ sub-sector. Considering together the production for export and for the domestic market, this sub-sector represent about the 80% of the total value. The part destined to export is, anyway, the dominant one, representing 62.78% of the whole market. This activity will be deepened in the next section.

100 Sourcing in India

17.5

18.1

19.6 16.0

13.9 10.8 7.8

12.5

12.9

2003

2004

9.545

5.0

7.647

3.3

6.217

1.1

1.759

1996

1997

2.6

1998

3.96

1999

2000

2001

2002

Fiscal year Export of software and services (mld USD) Figure 3.9: Value of the software and services exports in 1996–2004 and its percentage on the total export amount Source: Elaboration on data: NASSCOM, 2006.

3.5.1.

Software and services for export

The sub-sector that produces software and services for foreign markets was, until now, the engine of Indian IT growth. Figure 3.9 describes the trend of this sub-sector and (in percentage) its incidence on the Indian export.6 Export of software and services has given an important contribution to the trade surplus and to the progressive growth of foreign currency reserves. Composition With reference to NASSCOM categorization, the ‘‘software and services for export’’ sub-sector can be further divided into these divisions: • • •

IT software and services; IT enabled services; R&D services.

Table 3.3 illustrates the main components of the divisions just presented and their export in the 2001–02 and 2002–03 fiscal years. The most important activity is the ‘‘development and maintenance of specific applications’’ and ‘‘application outsourcing’’; these activities in 2002–03 covered 88% of software and IT service exports. Anyway – as indicated by NASSCOM – as these activities matter only for 10% in the

India: the Land of Service Offshoring 101 Table 3.3: Main product lines offered by Indian exports in the IT sector (Data in billions of USD) 2001–02

2002–03

IT SOFTWARE AND SERVICES Consultancy Systems integration Development and maintenance of specific applications for customers Network integration Support for the installation and maintenance of hardware Support for the installation and maintenance of software Application Outsourcing Network Infrastructure Administration IT ENABLED SERVICES R&D SERVICES Product Development Embedded software7

4.95 0.05 0.15 2.65

5.53 0.08 0.10 3.02

– –

0.03 0.02

0.30

0.35

1.75 0.05 1.49 1.21 0.30 0.91

1.85 0.08 2.34 1.66 0.56 1.10

TOTAL

7.65

9.53

Source: Elaboration on data: NASSCOM, 2006.

global IT market, many companies have started diversifying so to be able to cover the offering of ‘‘systems integration’’, ‘‘support for the installation and maintenance of software’’ and ‘‘network integration’’. As far as these last activities are concerned, Indian companies are favoured by the experience made in the implementation of solutions designed by big multinationals working in India in previous decades (e.g. Accenture, IBM, KPMG, Cap Gemini Ernst and Young). Particular attention must be also paid to the ‘‘IT enabled services’’, area usually indicated using the ITES-BPO8 acronym. This sector has developed only in the last few years, but its growth in India (as Fig. 3.10 shows) is remarkable: exports passed from 565 million dollars in 1999–2000 to 4.6 billion dollars in 2005–06. In the second half of the 1990s, companies as GE Capital, American Express and British Airways, and later Ford, Citibank and Accenture transferred several kinds of business processes to India (Bajpai et al., 2004). They had an important role in the development of ITES-BPO, as export data show: in 2002–03 branch offices of foreign companies managed 58% of the total export. On the contrary, in software development their contribution was smaller: only 20% (UNCTAD, 2004).

102 Sourcing in India

7

6,3

6 4,6

Mld US

5 3,6

4

3,1

3

2,34 1,494

2 1

0,565

0,93

0 1999

2000

2001

2002 2003 Fiscal year

2004

2005

2006E

Figure 3.10: The growth of ITES-BPO activities Source: Elaboration on data: NASSCOM, 2004b for years previous to 2004, NASSCOM, 2006b for years following 2004.

Recently, besides the branch offices of the big foreign Transnational Corporations (TNCs), also some local service providers (e.g. Wipro Spectramind) are rapidly making a name for themselves. Main destinations (by sector) Export of software and services is mainly (40%) destined to financial, banking and insurance sectors. Other important sectors are telecommunications (13%) and manufacturing (12%). According to NASSCOM, good openings could be provided in the future by health care and retail commerce (e.g. for e-business solutions), as well as by public institutions/administrations (Fig. 3.11). Main destinations (by area) The main market is represented by the USA, which is the nation that represents the most important IT market: the USA alone represents 55% of global expenses. Here 67.73% of Indian export arrives (NASSCOM, 2004a), as Fig. 3.12 shows. Europe absorbs 22.25% of Indian exports. Referring to the penetration inside the European market, Bajpai et al. (2004) detected the existence of many difficulties for Indian companies to acquire customers, because of language and cultural differences and because European companies seem to be less prone to offshore/outsource than the USA. Moreover for European companies Eastern countries can be an interesting destination thanks to its geographic closeness and the existence of production

103

Telecommunications 13%

Financial, assurance and banking services 40%

Manufacturing 12%

Retailing 5% Medical assistance 5% Public services 3% Government 1%

Other 20%

Transport 1% Figure 3.11: 2003–04

Main destinations (by sector) of software and services exports in

Source: Elaboration on data provided by NASSCOM, 2004a.

United Kingdom 14% Other countries 4.40% Japan 2.82%

USA 67.73%

Germany 2.60%

Singapore 1.74% Belgium 1.45% Netherlands 1.06%

Canada 1.06%

Other European countries 3.14% Figure 3.12: Main destinations (by country) of software and services exports Source: Bajpai et al., 2004.

104 Sourcing in India

facilities, that are the results of delocalization processes followed by the western companies in the last years. Among European countries, Great Britain stands out, having collected in 2002–03 63% of exports destined to Europe. In this case it’s evidence of the influence of the historical tie and the linguistic affinity between the two nations. However the Indian companies seem to be intending – according to NASSCOM – to increase their presence in Europe in order to reduce their dependence on the American market. It explains why Indian companies hire staff with knowledge of other languages besides English, and invest in multicultural education. Nevertheless this effort at the moment seems to privilege only France and Germany (Bajpai et al., 2004). The markets that should offer more chances of growth are, anyway, the Asian and Pacific ones (China, Australia, New Zealand, Taiwan, Hong Kong, Singapore and South Korea), where a steady growth of IT expenses is expected. The exchanges should be also favoured by SAARC and ASEAN agreements.

3.6.

Conclusions

Sectors linked to IT represent the most important success of the Indian economy. Some characteristics of these activities (skill-intensive productions focused on human resources, lower needs for financial resources, limited or absent requirements for transport infrastructures), allowed India to exploit its strengths (the availability of labour force, technical-scientific skills and ancient scientific traditions, the presence of a qualified educational system), facing its weakest points. Legislative action and industrial projects are more effective here than in other sectors, and together with the cost advantages and the constant growth of the IT international market, complete the list of factors favouring this quick development. Besides income and employment that IT has generated, there is another (less evident but important) benefit. The software and services industry draws foreign operators’ attention to the value of Indian human resources, on its entrepreneurial ability, on the quality of its educational and research system and on the overall potential of this market. In the meantime, the IT sector offers positive tests on industrial policies aimed to support market liberalizations and foreign investments. As far as the future of this sector is concerned, India should move towards more and more qualitative and complex services. It should reach the third stage of its development: after a stage of activities (developed by some local pioneers) of applications development and maintenance, after a subsequent stage focused on the supply of back office services, the sector must improve its IT and BPO value added activities.

4 Planning and Starting an Offshore Project in India

Thanks to low labour costs, the wide use of English and the availability of a large well educated workforce with experience in the field of IT, India has become one of the most attractive sourcing pools in the world, the preferred place for service offshoring. In this chapter we propose a theoretical model; some methodological indications useful in choice-making and planning the activities for creating a sourcing channel in India. The difficulties met by firms in this market often depend on the absence of a specific strategy. A series of factors must be taken into account: the local restraints and incentives, the characteristics of the developed activities, the pre-existing experiences in service offshoring, the internal competencies and those that can be acquired by collaborating with a third party. By proposing a scheme that describes the strategic path for developing a service sourcing channel in India we will combine the experiences of our sampled firms and the suggestions taken from the literature. Though each case seems different, there are many similarities in their development paths and in the difficulties they found. Thus, by examining the sampled cases and comparing them with the literature we will indicate a general reference that then can be adapted to each specific situation. The chapter is arranged in the following way. In the first part we briefly describe the research project: the main objectives of the investigation and some features of the companies we have analysed. In the second part we describe in depth the results of the study. We start from the preliminary analysis and the strategic evaluation which leads to the choice of the location and the ownership of the productive assets. We continue describing the form of offshore insourcing and outsourcing selected by foreign investors in India. The description of the phases that lead to the selection of the provider, the criticality of the transition and the 105

106 Sourcing in India

description of the activities involved in the management of the sourcing project complete the chapter.

4.1.

The research: objectives and main sample features

On the basis of some business experiences and the literature review, the research was aimed at analysing determinants, phases, problems and organizational solutions in the planning, starting and management of an offshore project in India, paying attention to the specificities of this country. The objectives of the study were in particular the following: to analyse the literature focused on service offshoring, so as to develop a synthesis of determinants, risks, advantages and criticalities linked to that; • to examine the main aspects linked to a sourcing activity in India: peculiarities in purchase orders (terms of payment, time frames, solutions for the industrial property protection, etc.), logistic variables (transport methods, delivery times, obstacles, costs, solutions for the flow coordination, etc.) and cultural factors which play a role in these processes; • to identify organizational and managerial solutions adoptable for developing services in India. We have also tried to determine a classification of the entry modes in India and the path leading to an effective offshoring choice. Information sources, organizational responsibilities, control and monitoring tools are other aspects we wanted to investigate. •

The companies analysed in the research are introduced in Tab. 4.1. Comau India (subsidiary wholly owned by Comau since 1997) was founded to serve clients of the automotive sector already working in India. In fact the rapid growth of the Asian markets (above all the Indian and Chinese) has stimulated the main car producers to transfer their production activities there in order to operate in these countries as insiders. Several suppliers, e.g. Comau, have created production units in the same places to serve their clients from close up. Comau India is located near Pune in the State of Maharashtra, i.e. the real centre of the automotive sector in India (Fiat, Mercedes Benz, General Motors, Skoda have plants here). The company has been able to take advantage – beside the low labour cost typical of India – of competences specific for the automotive

Table 4.1: The sample

Company

ACCENTURE

COMAU

GSK

IDS

Logo

Employees

146,000

13,000

105,000

160

Turnover (2005*; 20068)

Company Profile

1.7 mld *

The company offers product engineering, production systems and maintenance services to automotive companies. It owns 38 facilities in 19 countries.

33.4 mld 8

Headquartered in the UK and with operations based in the US, the company is one of the pharmaceutical industry leaders, with an estimated 7 per cent of the world’s market.

13.5 mln *

It’s an engineering system technology company, providing research and innovation in the electromagnetic field for Civil and Defence markets. They currently operate in 20 Countries. (Continued )

107

15.55 mld $*

The company is one of the worldwide leading consulting firms. They supply a wide range of services, through 146,000 employees working in 49 countries.

108

Table 4.1:

(Continued)

Company

Logo

Employees

Turnover (2005*; 20068)

Company Profile

NCR

28,500

6,142 mln $*

It’s one of the worldwide leading companies in the production of retail systems, ATMs, Teradata data warehouses and IT services. In 1884 its founder was the maker of the first mechanical cash register.

SELLA BANK

4,200

It doesn’t exist for a bank

With 322 branches (the first one was founded in 1886), the company is one of the oldest and most important Italian banks.

96 mln *

With 100 proprietary shops in Italy, 25 in Spain and 10 in France, Stonefly is one of the Italian leading shoe factories.

STONEFLY

170

Planning and Starting an Offshore Project in India 109

sector and of logistic infrastructures that are here more widely established than in other States of the Indian subcontinent. Sella Bank creates a joint venture in India to have access to the Indian authorities on financial software. The choice of the bank was not determined by the objective of reducing costs – which are lower in other basins (e.g. Romania) – but by the necessity to improve the performances of their software. As also other case studies clearly show, the access to skills available locally is an important motivation supporting localization in India. In fact, as far as several IT services and business processes are concerned, this country has demonstrated a considerable dynamism and the ability to develop high added value activities for some time now. IDS is the Italian leading company in the sector of electromagnetic codesign of military ships and helicopters. It is a clear example of a particular mode of entering into the Indian market. Initially interested only in a sales partnership, IDS supports some employees working in the Indian commercial partner in creating a new company (working on software development), becoming its main client. The case study clearly shows how the creation of a sourcing channel of services in India can be facilitated by some factors: the modular nature of the developed services (to be able to define the constitutive activities and assign them to different developers), their being digital, the small size of the investments for the creation of a offshore unit (which often consist only of the office and IT instruments), competence, experience and the typical Indians’ inclination towards entrepreneurship. GlaxoSmithKline, a multinational company working in the pharmaceutical sector, localizes in India several back office and support activities with the aim to reduce costs and increase operation flexibility. Drivers which lead the offshoring choices of GSK can be grouped according to two dimensions: an internal (i.e. the features of the activity that can be outsourced/offshored) and an external (i.e. the supply of the foreign basin) one. The GSK case study shows the need to deeply analyse both the processes and the Indian context, verifying which can be the differences between the onshore and the offshore development. The core activities are always developed internally, but their identification is often a complex task. Also looking at NCR – one of the worldwide leading companies in the production of retail systems, ATMs, Teradata data warehouses and IT services – we can see evidence of an effort to distinguish the strategic processes from the non-core ones (i.e. the only ones which are outsourced). In this case, of interest is the fact that the choice between insourcing and outsourcing is strongly linked to the decision regarding

110 Sourcing in India

(the domestic or international) localization of the activities, according to an approach which considers many aspects, first being the need to interact with customers. Another interesting element of this case study is that a big company like NCR has entrusted the development and management of its service sourcing channel in India to a western partner (adopting a sort of ‘‘intermediated sourcing’’). The intermediary – a company specialized in the global delivery of IT services and Business Processes – created in India a proprietary local network supplying services in previous decades. On the contrary, NCR by itself produces hardware in India, encouraged above all by commercial motivations: thanks to the adoption of a fully owned solution, the company aims to supply more effectively and more cheaply the Indian market. Accenture – one of the most important worldwide working consulting companies – is one of the first western firms to have identified the opportunities of this basin and to develop locally a wide presence. India is strategic for Accenture, both for the low labour cost and for the availability of a solid basin of graduates in scientific disciplines with a good knowledge of the English language. The Accenture case study clearly shows how an Indian supply basin can work effectively in a global sourcing and delivery strategy. Finally, inside the sample there is an example of sourcing of goods: the Stonefly case study. The Italian company – that in India sources almost 30% of its shoes – entered this market at the end of the 90s. The main reason which brought Stonefly into India is the ability of this country to combine low labour cost, availability of good quality raw materials and a historical experience in leather working. The case study shows similarities and differences between sourcing of goods and services in India. In Fig. 4.1, we report the localizations from which sampled companies get provisions. As you can see, they are spread in an unhomogeneous way inside the country. As Chapter 2 has shown, the industrial geography of India is heterogeneous: a series of historical and political facts made areas of the country differently attractive for foreign investors.

4.2. Provisioning of services: from strategy to implementation The strategic path of the IT and BP offshoring experiences that we have gathered can be organized though the model of Monczka et al. (2005), a model that refers to the outsourcing strategy of IT services.

Planning and Starting an Offshore Project in India 111

Figure 4.1: Sourcing areas of the sampled companies

The authors here theorize the succession of three phases (Fig. 4.2): analysis and strategic planning, supplier selection, and relationship control. Starting from this scheme, we will study each phase in detail. 4.2.1.

Phase 1: strategic analysis and planning

The first phase regards strategic analysis and planning (Fig. 4.2). The focus is on the firm internal environment: this means establishing, at a strategic level, the incentives and motives that justify the choice of an offshore location and analysing activities and processes (i.e. groups of activities) to promote their rationalization and standardization. Figure 4.3 shows a schematic representation of this phase; each subphase is described in the following pages. 4.2.1.1.

Preventive analysis and strategic evaluation

The first step consists of preventive analysis (Fig. 4.3). Before choosing an international sourcing type it is vital to have in-depth knowledge of the

112 Sourcing in India

1

2 Strategic analysis and planning

3 Supplier selection and contracting

Implementation and control

Referring context Prospective internal to the firm

Phase of transition to outside

Prospective external to the firm

Strategic

Tactical

Operational

Figure 4.2: The macrophases of the Monczka et al. (2005) model (adapted)

Strategic evaluation 1.3 b Global Optimization (Noncore activities)

Choice of the sourcing typology

Preventive analysis

1.2

Choice of the localization

1.1

Global Optimization (Core activities)

1.5

1.4

1.3 a

Figure 4.3: Phase 1: analysis and strategic planning

activities that could be developed abroad. The identification of input variables, output performance expectations, constitutive stages, work procedures, lead times, organizational interdependences and the concomitant creation of the documents stating these aspects are prerequisites for a well-informed choice of outsourcing, especially when offshore.1 This investigation can also be carried out with the potential external provider, as the Accenture case study shows. The process of preventive analysis (Fig. 4.3 (1.1)), according to the firms analysed and the literature, consists in the creation and/or updating of the documentation related to the involved activities (Fig. 4.4 (a)), the development of plans for internal improvement (Fig. 4.4 (b)) and the standardization of the company’s processes (Fig. 4.4(c)).

Planning and Starting an Offshore Project in India 113

Preventive analysis Creation/updating of documentation a b

St n tio iza rd da an

Pl a i m ns o pr f i ov nt em ern en al t

c

Figure 4.4: The iterative process of preventive analysis

The examined cases clearly show the importance of this phase. In IDS, for instance, the realization of an articulated system of technical specifications to support software programming and development has helped the firm to reduce a series of criticalities (mainly linked to the transmission of project specifications and technical communication to the supplier) in the sourcing process. The preventive analysis has proved useful for breaking processes into distinct modules, so as to identify and isolate activities that can be standardized and arranged for outsourcing. Similarly in GlaxoSmithKline the company’s analysis of its internal knowhow and documentation is the starting point for every sourcing project. Strategic evaluation (Fig. 4.3 (1.2)) follows, aimed at defining the relative importance of each activity with respect to the core business. The distinction between ‘‘core’’ and ‘‘non-core’’ activities is one of the key aspects of global sourcing projects. In GlaxoSmithKline every choice of service offshoring is assessed in order to quantify the value added by each activity; IDS and NCR make externalization choices that do not weaken the control of critical competencies. Also the other examined cases demonstrate that sourcing choices must ensure that the external supplier receives responsibilities over processes that are not critical for the creation and preservation of the competitive advantage. Thus it would be necessary to reason in perspective and try to understand how changes in technology or in the market can redesign the future map of core activities.

114 Sourcing in India

The strategic evaluation must also focus on the expected goals: a sourcing project aimed at cutting costs will follow a different path from that of a project oriented towards qualitative improvement or the acquisition of external competencies. 4.2.1.2. Evaluation of the level of outsourcing propensity and offshoring propensity The next stage involves the study of two decisive variables in order to choose the localization and ownership of the productive assets: the ‘‘outsourcing propensity’’ and the ‘‘offshoring propensity’’ of the activities/ processes considered. The two variables are linked to some factors shown (see Tab. 4.2), many of which are closely interdependent. Level of standardization of the activity.2 Standardization, which is not only a feature of the activities considered but also a possible result of their re-planning, goes hand in hand with the stability of input, output and repetitiveness of their realization. Activities of this type are clearly considered good candidates for both domestic and international outsourcing. GlaxoSmithKline, for example, resorts to offshoring for some repetitive back office services such as the management of pay sheets and the internal call centre. In this company, standardization precedes aggregation, i.e. the identification of the activities that are related to each other and can be potentially grouped into one. Through the composition of a critical volume of purchases and coordinated Table 4.2: Factors determining the level of outsourcing propensity and level of offshoring propensity (the correlation with the macro-variable is shown in brackets) Outsourcing propensity (Possibility of externalization)

Offshoring propensity (Possibility of a location on a global scale)

Need of proximity between buyer and supplier () Level of separability (þ) Need of linguistic competencies () Comparison of internal and Contractual/legal restraints () external performances () Digitalization level (þ) Risk of negative repercussions () Need to know the client’s context () Number of suppliers (þ) Level of standardization of the activity (þ) Available control instruments (þ) Risk of losing process knowhow and control () Level of buyer–supplier interaction required to carry out the activity () Level of tacit knowledge ()

Planning and Starting an Offshore Project in India 115

management of the activities outsourced by its various units, GSK greatly improved the results of its sourcing process. Available control instruments.3 The difficulty or impossibility of defining parameters and efficient tools to monitor the process performance limits offshoring. The ex-ante contractual agreement is more incomplete and ex-post verification more uncertain. However, in this case the difficulty may also be due not only to the intrinsic characteristics of the process, but also to managerial and organizational deficiencies. The level of buyer–supplier interaction required to carry out the activity.4 The resort to offshoring is hindered by the need for frequent buyer–supplier interactions. There can be a large number of reasons for this requirement: the level of tacit knowledge, inter-functional and interdisciplinary character, the modular complexity of the service-product considered (especially if distributed among a variety of external subjects), the comparison of unforeseen inputs (resulting from market analyses, competition analyses, etc.), and the pace of technological innovation. The need for interaction can be reduced by rationalizing the processes, standardizing the activities and improving documentation. Risk of losing process knowhow and control.5 The risk of losing the knowhow of an internal activity can have a powerful influence on the in/outsourcing choice. This decision can be strongly swayed by the fear of excessive dependence on the provider,6 the wish to influence the type of supply and the level of irreversibility of the outsourcing process. Level of tacit knowledge.7 The level of non-codified knowledge is one of the most critical aspects. Documentation regarding the processes can increase the learning rate of the supplier. To undervalue this aspect can lead to greater coordination costs to such an extent as to compromise the cost advantages of the entire initiative. In the case of IDS, for example, in spite of the great amount of internal documentation available, coordination activity (and relative costs) was much weightier than foreseen due to the slow transfer of some noncodified knowledge. Level of separability.8 The more an activity is linked to others, the more difficult it is to separate it and entrust it abroad. In this case the firm must evaluate the possibility of outsourcing an entire group of activities. The re-planning of a process and its activities leads to the reformulation of the existing organizational interdependences,

116 Sourcing in India

identifying the parts where the links are weakest and so more easily separable. An example is offered by IDS: re-planning (and consequent modularization) of their software has enabled the firm to outsource the development of certain codes previously developed internally. Comparison of internal and external performances. The comparison between internal work performances and those offered by the local/ foreign supply sources, (when possible) is evidently useful. It can concern several aspects: production/distribution costs, times, quality, continuity of service, overall productivity.9 Also in this case an adequate knowledge of the process is needed: the clearer the cost of each single item, process parameters and times and results obtainable, the more useful the comparison can be. It is really more difficult to estimate the transaction costs, especially in the case of offshoring projects.10 The IDS case shows how educational and informative investment and the costs related to the definition of the contract and coordination with the remote unit were greatly underestimated when starting relations with the Indian partner. The incidence of the cost variable however depends on the kind of offshore activities: decisive for low value-added ones, not subordinated to the qualitative aspects for the others. Risk of negative repercussions on the firm deriving from outsourcing.11 One aspect that should not be neglected is the possibility of repercussions on the climate of the firm. The policy of reducing staff – at times linked to outsourcing – can have a negative effect on employees due to a lack of faith in their future prospects. This can result in lower productivity with a consequent mitigation of the advantages obtained by offshoring. Number of suppliers. The presence of a number of alternative suppliers is a fact that must be remembered when making a make-or-buy decision, especially if it implies operating abroad. The choice of a certain area leads to some country-specific investments whose level of irreversibility lowers when it is possible to substitute the current source with others present in the same region. Moreover the presence of a sufficient number of producers indirectly shows the level of progress and competitiveness of this industry in the location considered. The need for proximity between buyer and supplier.12 Some activities cannot be carried out abroad because they need direct contact between user and supplier. Examples are the facility management services (cleaning, maintenance, etc.), transport and front-office services.

Planning and Starting an Offshore Project in India 117

Need for linguistic competences.13 Linguistic knowledge is important for the development of certain activities (for example call centre and help desks) and linguistic understanding is needed for their transfer. This requirement can drastically reduce the number of locations or impose heavy effort for translation. Evidently this variable is less restrictive for firms operating in English-speaking markets. Language, a topic treated in Chapter 3, is one of the main strengths of the Indian market. Contractual/legal restraints.14 A series of legal or contractual restraints can impede the externalization of certain activities. As an example, relevant restraints may be connected to the legislation on work, as well as contrasts with trade unions. Digitalization Level. This condition is directly linked to the transferability of the activity through the telecommunication system. Among the highly-digitalized processes there are various financial, administrative and informatics services. Software development was among the first offshoring candidates due to its easy transfer through the world wide web. Need to know the context where the client works.15 Knowing the client’s background (mostly Western, in the cases examined) is vital for carrying out certain activities. In this case, resorting to an offshore provider completely outside the organizational, normative and cultural domestic situation becomes a problem. For example, in the legal ambit, knowing the laws of the country where the client operates is a fundamental prerequisite for many services linked to its assignment. 4.2.1.3.

Choice of the sourcing form

Having determined the activities’ level of outsourcing propensity and offshoring propensity, and considered the purchased volumes as an additional variable, it is possible to start the decision-making process that will define the most suitable form for sourcing. According to our experiences, the pathway now forks (Fig. 4.5). For core activities, which cannot be outsourced for obvious strategic reasons, the choice only concerns the place of production (inhouse or in a captive foreign unit). Non-core activities on the other hand can have different destinations: outsourcing on the domestic market, international outsourcing, onshore or offshore insourcing.

Continuous

Every 2–3 years

Every 6 months

Strategic analysis

Offshoring and outsourcing propensity analysis

Preventive analysis

A

Choice of the location

Domestic insourcing

Creation/updating of documentation B

Plans of internal improvement Standardization C

Spot

re

Co

Captive offshoring Domestic insourcing

Activity No nc or

e

Domestic outsourcing Captive offshoring Offshore outsourcing Make or buy analysis

Figure 4.5: Overall view of the strategic and planning stages and their timing

118

Frequency

Planning and Starting an Offshore Project in India 119

Volumes

Offshore Insourcing

Inhouse

Offshoring propensity

Figure 4.6: Forms of sourcing for core activities

Figure 4.6 shows the (two) different options in the case of core activities. The choice is limited to insourcing, for the reasons mentioned previously, and mainly consists in carrying out the activities/processes inhouse or transferring them to captive foreign units. The choice depends on the level of offshoring propensity and the volumes involved. A high level of offshoring propensity (and therefore limited buyer– supplier interactions needed to carry out the activity, the absence of laws restraining the transfer, high levels of digitalization of the activity, etc.) favour offshore insourcing. Also the volumes involved condition the choice: only adequate volumes can justify the investments required to start an offshore equity business. In the case of non-core activities, since there is no need to control strategic competencies, there are more options: captive offshoring, offshore outsourcing, in house production or domestic outsourcing. As shown in Fig. 4.7, when choosing a sourcing form for non-core activities it is necessary to assess, together with the offshoring propensity and the volume of activities involved, also the outsourcing propensity. If this is low, the situation is similar to that described for core activities: the impossibility of having an external provider carrying out the activities makes it necessary to keep them inside the firm, either in a domestic or an offshore captive unit. If the analysis reveals a high outsourcing

120 Sourcing in India

Volumes

Offshore Insourcing

Inhouse

Offshoring propensity

Offshore Outsourcing

Domestic Outsourcing Outsourcing propensity

Figure 4.7: Forms of sourcing for non-core activities

propensity, the options also include domestic outsourcing and offshore outsourcing. In Fig. 4.8 some of the analysed activities are organized in the proposed model. An example of offshore insourcing is that of the research and development activities carried out by GSK. Since these are characterized by a significant technological content, the absence of interaction with the final client and a high level of separability, GSK established a subsidiary in India. In this firm, strategic procurement – considered a core activity, but characterized by a modest level of offshoring propensity and reduced volumes – is developed in the Western world. As far as research and development are concerned, IDS followed a different path. This firm prefers to develop these activities inhouse (rather than relying on offshore insourcing), given the volumes involved (which would not justify an equity investment) and the level of interaction required by the clients during the designing phase.

Planning and Starting an Offshore Project in India 121

Volumes

GSK (R&D)

GSK (Strategical procurement) IDS (R&D)

1

5

10

Offshoring propensity

Figure 4.8: Examples of core activities in the sample investigated

As far as non-core activities are concerned, Fig. 4.9 maps out some examples with reference to the variables here proposed. In order to make the figure clearer, the figure on the left shows the activities with low degree of externalization ability, whereas the right one shows those with higher externalization ability. The activities that are outsourced abroad are characterized by a high level of offshoring propensity and/or large volumes. GSK, for example, outsources its call centre service. NCR outsources what it defines as its ‘‘transaction processes’’ (e.g. recording the cash flow of bankcard operations or purchases in shops). IDS transfers the development of secondary applications for its software (an activity characterized by low volumes, but great separability). As far as the choice of outsourcing on the domestic market is concerned, Fig. 4.9 shows how it is linked to smaller volumes and low offshoring propensity. This is the case of the Help Desk of GSK Italia, the administrative functions carried out by Comau and the Tax Consulting activities of GSK. 4.2.1.4. Selecting the international destination The selection of the international destination for a international sourcing project has already been described in Chapter 1, whereas Chapter 3 lists the factors that make India the ideal country for service offshoring.

122 Sourcing in India Volumes

Volumes

NCR (Transaction Processes) GSK Italy (Help Desk)

NCR (ITS Development)

NCR (Help Desk)

Offshoring propensity

Comau (Administration) 5

10 5

Outsourcing propensity

GSK (Customer Service)

10

GSK (Tax Consulting)

Offshoring IDS (Software propensity Development) 10

Outsourcing propensity

Figure 4.9: Examples of non-core activities in the sample investigated

4.2.1.5. Forms of offshore insourcing and offshore outsourcing in India This section describes the main alternatives available on the Indian market. Offshore insourcing in India. The main offshore insourcing forms available in India are (Tab. 4.3): Wholly Owned Subsidiaries (WOS), companies where 100% of the capital is foreign; • Joint Ventures (JV), joint-stock companies in which two or more partners collaborate to develop a common entrepreneurial project; • BOT (Build-Operate-Transfer), solutions where a provider starts an offshore service centre whose ownership passes to the buyer after a period of time (defined by contract).16 •

The common feature shared by these three (equity) solutions is that – unlike offshore outsourcing (described in detail in the next section of this book) – they ensure greater control over the activities. The three forms differ among each other in a number of aspects, and the choice must take into account their positive and negative features (Tab. 4.3), the characteristics of the activities to be transferred abroad, the company’s internal competencies and the experience matured in service offshoring projects. Joint Ventures, and to a lesser extent BOT (Build-Operate-Transfer) solutions, offer the advantages linked to the cooperation with a local operator: knowledge and easy insertion into the local juridical, social and

123 Volumes Volumes

Offshore Insourcing

Offshore Offshore Insourcing Insourcing

Offshoring propensity

Inhouse Offshore Offshore Outsourcing Outsourcing Offshoring propensity

Domestic Outsourcing

Core activities Outsourcing propensity

Non core activities

Figure 4.10: Offshore insourcing

Offshore Insourcing

Table 4.3: Types of offshore insourcing enterprises in India Solution

Main advantages

Main disadvantages

Wholly Owned Subsidiary (WOS)

. Greater control . Greater uniformity with the values, standards, policies and culture of the company . Better protection of intellectual property . Greater security

. Greater initial investments . Longer start-up time . Need to understand the local market, industry and legislation . Not possible in some sectors

Joint Venture (JV)

. Access to the resources and competencies of the local partner . Risk sharing . Reduced initial investment . Easier access to the local market

. Lower protection of the knowhow transferred . Less rapid decisionmaking processes . Need to train the counterpart’s staff

. Access to the resources and competencies of the local partner . Reduced initial investment . Shorter start-up time

. Less control over the operations during the first stages of the start up . Higher costs than WOS and JV

BOT

124 Sourcing in India

industrial context, access to its productive and trade resources, more rapid set-up times. These are important advantages in an articulated and complex region such as India, but are partly counterbalanced by limited ownership and the presence of a partner who may not fully share the objectives of the Western party. In our sample, Banca Sella established a Joint Venture with an Indian company so as to exploit its expertise in the field of banking. An alternative to Joint Ventures is provided by BOT. The reason for comparing the distinctive BOT solution with the JV is that it also offers the opportunity of accessing the partner’s technical knowledge and web of local relationships. Presuming that the new centre, once set up, will become the buyer’s ownership, BOT can be considered as a fully equity investment. When analysing the cases, it emerges that the BOT solution is associated to less control over the processes when compared to the other equity forms and to higher overall costs. On the other hand it has many advantages, such as shorter set-up time, lower initial investment, greater operational flexibility and access to the partner’s experience. Finally, WOS allows greater control over activities, more rapid decisionmaking and greater homogeneity with the values, standards, policies and culture of the parent company. However, the absence of a local partner can limit access to competencies unavailable inside the company and to the local web of relationships. The risk of failure is therefore higher when the company has not yet matured great experience in the country chosen or in offshoring projects. Moreover, the investment required and its irreversibility threshold are higher than those for the other forms. As regards the establishment of a WOS, as well as the shares possessed in a JV contract, it is necessary to keep in mind the restraints set by the Indian government that limits direct foreign investments in some sectors. It is furthermore useful to assess the numerous incentives given by India to foreign investors, such as for example in the Export Processing Zones and in the Special Economic ones. These aspects will be described in detail in Chapter 6. Offshore outsourcing in India. In the presence of high degrees of externalization ability and global level allocability, the most suitable solution is offshore outsourcing (Fig. 4.11). The corresponding forms are: Pure Offshore Outsourcing; Dedicated Offshore Centre. • Third Party Transparent. • •

Planning and Starting an Offshore Project in India 125

Volumes

Offshore Insourcing

Inhouse

Offshoring propensity

Offshore Outsourcing

Domestic Outsourcing Outsourcing propensity Non core activities

Figure 4.11: Focusing on offshore outsourcing

Pure offshore outsourcing consists in employing an independent supplier in order to buy services characterized by high standardization levels, limited complexity and reduced need for control (e.g. pay sheets management, feeding data into a database, call centres and so forth). This is a sourcing activity that does not require significant integration with the provider. The activity is of limited complexity and therefore the risk of unreliability is limited. The time horizon of the relationship is usually a medium-term one: since switching costs are limited, the customer can easily switch provider depending on the opportunities arising in the international markets. This type of sourcing shares some common features with the ‘‘traditional direct sourcing’’ of material goods (Nassimbeni and Sartor, 2006), but has one substantial difference. While the purchase of goods involves catalogue codes and does not require collaboration for product development, services impose cooperation between buyer and supplier even when these are standardized.

126 Sourcing in India

When greater control of processes is required or more complex activities must be developed, it is advisable – in a logic of balancing control and flexibility – to establish a dedicated offshore centre. The provider creates an operational centre where staff work full time for the client. This way he achieves long-term contracts. The stability of the relationship and the work devoted to it promote expertise exchange, constant improvement and process control (see IDS case). On the other hand, this type of solution implies that the purchasing company is responsible for joint development of the activities, and must therefore possess sufficient expertise concerning the processes carried out. When this expertise is lacking, the most suitable solution is an intermediary (third party transparent). This third party mediates the relationships between the (Indian) supplier and the (Western) customer, and can provide the latter the competencies in international sourcing, as well as a consultancy service for redefining the company’s processes and the management of the transition. Moreover the mediation can be an efficient and relatively safe method for testing the foreign (i.e. Indian) market, disclosing other forms of sourcing once experienced in the foreign context. The disadvantages are the cost of intermediation and the difficulty or impossibility of interacting directly with the sources. An example of this is that of NCR. This American company resorted to a global provider in order to reduce the risks brought about by its limited experience in the field of offshore and benefit from the supplier’s competency in the management of the transition stage and process development in low-cost countries.

4.3. Stage 2: Selection of the suppliers and definition of the contract When a company decides to resort to offshore outsourcing, first of all it must find and select the suppliers. 4.3.1.

Research and selection of the suppliers

The first step (Fig. 4.12) consists in defining the criteria to be used for the selection process. On the grounds of experiences analysed, the criteria that are most investigated when identifying the source basin are: Costs.17 As observed, the wish to cut costs is one of the main drivers behind the choice of offshore supplying. In India this reduction is

Planning and Starting an Offshore Project in India 127 2.1.2 2.1.2

2.1.1 2.1.1 Definition of the parameters to be used in the suppliers’ selection process

Figure 4.12:

Study of industrial geography of the foreign location

2.1.3 2.1.3 Individuation of a list of potential suppliers

2.1.4 2.1.4 First analysis of suppliers through RFI

2.1.5 2.1.5 Onsite visit at the suppliers and RFP

2.1.6 2.1.6 Evaluation and selection

Process of research and selection of the suppliers

mainly due to low labour cost; the price of equipments and consumables being similar to that in the Western world. The quality and competencies supplied. The cost advantage must however be accompanied by adequate qualitative standards, in other words, an adequate competency profile. In the cases examined, quality and competences are the key selection criteria for suppliers based in India, since it is presumable that the cost advantage is already ensured by the choice of the sourcing basin. The need for quality is particularly felt in the case of a close collaboration with the provider or a long-term agreement. Flexibility. The supplier’s flexibility is another key factor in the selection of the supply source. A provider must prove its ability to meet with changes in the required volumes and rapidly modify the service offered in response to the different requirements of the customer. The cases examined seem to indicate that India provides a good degree of flexibility as regards the volumes required and mix of services. Certification.18 This aspect is closely linked to the quality offered and technical competencies possessed by the supplier. As mentioned in Chapter 3, India – in particular regarding the fields of ITO and BPO – has a large number of certified enterprises (ISO 9000, SEI-CMM Level-5, etc.). This policy oriented towards quality – initiated in the Nineties by the leading Indian enterprises in order to increase the trust of foreign operators regarding the services offered – has nowadays become common practice. International presence.19 Another possible aspect that should be taken into account when choosing a supplier is its international presence, especially in the case of activities requiring frequent interaction. GSK, for instance, poses as a fundamental prerequisite in the selection of

128 Sourcing in India

some Indian suppliers their operational presence (development and/or trade terminal) near its English headquarters. Experience in the management of offshore relationships.20 An important aspect is also the supplier’s expertise in the field of offshoring and its past and present customer portfolio. The matured experience can be a useful support also in managing the delicate stage of transition (see next paragraph). Figure 4.13 illustrates the results of a survey made by Accenture (2004),21 which reveals the importance given to a series of offshore suppliers’ selection criteria. The results emerging from this case study substantially confirm this ranking: quality, flexibility and both competency and expertise are just as important as cost advantages. A further element that is used to select the supplier refers to its location in India. As mentioned in Chapter 2, the country is really heterogeneous: the states forming it differ in terms of incentives and fiscal aid given to the (foreign) operators, industry specialization, and infrastructures. The choice of the location is therefore as critical as when opting for insourcing. The analysed enterprises used different information sources (Italian or Indian institutional sources, consultancy firms, websites) to define a list of potential suppliers (Fig. 4.12 (2.1.3)). Request for Information (RFI) then Quality

86%

Flexibility

81%

Cost

78%

Knowledge of the sector

75%

Ability to gain trust

74%

Reputation

69%

Cultural compatibility

55%

Creativeness

51%

Members of the outsourcing team

50%

Geographical presence Previous relationship Knowing the supplier Offshore experience

39% 36% 34% 30%

Figure 4.13: Importance of the criteria in the selection of an offshore supplier Source: Accenture, 2004. Reprinted with permission.

Planning and Starting an Offshore Project in India 129

follows, i.e. a questionnaire is sent to the suppliers in order to characterize their profile. RFI gathers general information on the size of the company (turnover, staff, export volume), competencies and production features, localization, certifications possessed and customers served. A problem that can be encountered during this phase is the truthfulness of the data communicated. Frequently, suppliers underline the quality of their services by displaying a number of certifications, but omit information concerning the processes through which they were obtained. In the cases investigated, the information contained in the RFI was verified and integrated by directly auditing the most attractive suppliers (Fig. 4.12 (2.1.5)). Finally an RFP (Request for Proposal) is issued, requesting an offer regarding the activity in hand. The proposals are a further datum that can be used to make the definitive choice of the supplier on the grounds of the parameters identified at the beginning of the selection process. The cases described in the second part of the book offer examples of auditing, RFI and RFP procedures.

4.4.

Implementation and control

Having selected the supplier and defined the contract, the next step is implementation. This process can be divided into two stages (Fig. 4.14): a period of transition from the original organizational structure to 3.1

3.2

Transition 3.1.2

3.1.1

Pilot project execution

Ongoing Management 3.2.1

Transfer of activities and resources

Management of the relationship

3.2.2

3.1.3

Supplier control

Staff training

TIME

Figure 4.14: control

Activities carried out during the processes of implementation and

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its new form followed by management of the relationship with the supplier.

4.4.1.

Transition stage

Offshore services, particularly those concerning activities that were previously carried out inside the company, can determine radical changes in its organizational structure. It is therefore necessary to carefully plan and manage the transition period. Empirical cases reveal that usually this stage lasts for a period of three to nine months, according to the complexity of the activities that will be transferred, the number of persons involved, the inclination to change, and the overall value of the investment. During this stage it can be useful to set up a pilot project so as to clarify the dynamics and effects of the change on the internal organization of the company (Fig. 4.14 (3.1.1)). The pilot project tests the transfer by acting gradually on two parameters: the number of activities that will be relocated and the number of employees involved. As regards the first variable, the pilot project can be limited to simple activities that can be more easily monitored, whereas in the second case, it can concern a small number of persons before being extended to the whole organizational unit previously in charge of internal production. This experimental stage is also important for defining or perfecting the objectives of the project and the parameters used to measure the results. The next stage is the gradual transfer of the activities involved in the project (Fig. 4.14 (3.1.2)). During this stage the supplier acquires, as well as a growing work load, greater responsibilities. The duration of this phase in our sample differs extensively according to the complexity of the activities that are transferred. For well-documented activities, with clearly-defined organizational links (e.g. call centres or routine backoffice activities) the transition lasted from four to eight weeks, whereas more complex activities required longer periods of time. Together with the migration of activities it is necessary to manage the transition of the staff previously involved in the execution of these activities. Their redeployment must take into account the company’s new organizational structure: a few will be in charge of helping or monitoring the supplier. Others will be assigned to new tasks. When carrying out the pilot project (or a few weeks beforehand, if the activities are rather complex) it is possible to begin staff training (Fig. 4.14 (3.1.3)). This should focus not only on technical aspects, but also culture and language.

Planning and Starting an Offshore Project in India 131

The transition process is probably the most delicate stage of the implementation of a service offshoring strategy. The problems encountered during this phase by the companies analysed are numerous: work interruptions; loss of data; • spreading of uncertainty and loss of motivation by the firm’s employees; • complaints issued by the trade-unions. • •

These problems are also frequently accompanied by errors made when estimating transition costs: those concerning training, internal and external staff mobility and temporary duplication of the activities are often underestimated. An example of this can be seen in the IDS case: due to communication problems the company was often forced to bring the employees of the Indian provider to the Italian headquarters, thus encountering unpredicted costs. The difficulties encountered in the development of the relation with the provider and delays in the implementation of the project are further problems that can contribute to additional costs and, over a long period of time, can compromise the payoff gained by offshoring. It is therefore useful to plan, together with the supplier, this transition period, taking care to define an accurate activity plan and control systems for the results brought about by the change. An aspect that must not be underestimated is the provider’s expertise in the field of offshoring. An expert provider can guide the client through this delicate stage. Having defined the numerous problems characterizing the transition stage, it should be remembered that the latter, and more generally the (out)sourcing project, can provide the opportunity of identifying latent organizational problems and (re)engineering activities in a more efficient and rational way.

4.4.2.

Ongoing management

Once transition has been completed, the project enters the stage of ‘‘ongoing management’’ (Fig. 4.14 (3.2)). The need to control the outsourced processes, monitor the progress of the project and predict technological and organizational updates stresses the importance of the relationship and collaboration with the provider. So the relationship with the provider (Fig. 4.14 (3.2.1)) has to be strengthened by sharing managerial and work policies, making an effort to

132 Sourcing in India

understand the different organizational dynamics, mitigating cultural differences and adapting to the new leadership style. As well as managing the relationship with the provider it is also necessary to have an adequate system of performance control (Fig. 4.14 (3.2.2)). The monitoring phase implies a precise definition of the aspects that must be assessed, as well as the parameters used to measure them and the objective-values used as terms of comparison. The variables that are usually assessed are punctuality, costs, quality, problem-solving ability, safety and flexibility. The alternatives offered for controlling the provider’s activities are: remote monitoring. This system is particularly suited to control IT activities or IT-enabled services. The IDS case shows how it is possible to verify the progress of an offshore-developed process using software tools; • domestic monitoring. This system – that can only be used when the firm has chosen a provider who is also present in its country (see the GlaxoSmithKline case) – ensures greater ease in the monitoring process by interfacing with the onshore unit; • abroad monitoring. The buyer’s staff is at the provider’s enterprise and is in charge of controlling the processes. •

4.5.

Relationship and negotiation dynamics

Relationship and negotiation dynamics concern all the stages mentioned previously. These dynamics are decisive for every sourcing process, but on an international scale they present country-specific criticalities linked to local laws and culture. The latter includes both internal and external elements, implicit and explicit assumptions, conscious and unconscious perceptions. It is difficult to fully understand these complex factors and give general indications, in India more than anywhere else. We will try to provide some information, but more details can be found in the literature (Sinha (1985), Laugani (1999), and especially Kumar and Worm (2004) and Kumar and Sethi (2005)). 4.5.1.

Aram and artha

‘‘Each cliche´ on this country and its people has an opposite that is equally true’’ (Rampini, 2006). Hinduism has an ‘‘heterogeneous’’ character; it does not have a uniform doctrine but consists of a plurality of attitudes, influenced in the past by Islamic rule and British colonization. It is therefore difficult to summarize the eclectic character of India and

Planning and Starting an Offshore Project in India 133

one should not attempt to make univocal statements. These considerations usher us into the complex dimension of the values connected to business activities. The literature on this subject contains contrasting opinions about the value that this context assigns to the business activity. Some authors emphasize the ascetic dimension of Hinduism and its renouncement of material goods, whereas others find a precise invitation to seek material welfare. Therefore some believe that economic activity is repressed, or at least not favoured by the main cultural canons, whereas others underline the contents that promote it. As regards the first tendency, Sinha (1985), Kumar and Worm (2004) and Kumar and Sethi (2005) observe that one of the most recurrent themes in Indian philosophy is the illusory nature of the material world. In Hinduism, Laungani (1999) states that ‘‘the ultimate scope of life is to transcend the illusory physical existence, renouncing the world of material aspirations and reaching an elevated state of spiritual consciousness’’. In brief, this is the culture of aram: ‘‘rest’’ and ‘‘distension’’ are the keys to spiritual fulfilment. The second current stresses that Hinduism also venerates Lakshmi, the goddess of wealth, who urges the quest for material welfare. Dehejia and Dehejia (1993), for instance, claim that the Indian religious attitude, too often stereotyped as a mystical dimension, deals, in addition, with the problems of ‘‘this world’’ and that the ultimate reality of Hindu tradition (Brahman) is not only transcendent and impersonal, but also immanent and personal. The scope of life is not only moksa, or spiritual freedom, but also artha, or in other words, material satisfaction. In this sense the Indian religious tradition does not ignore or detach itself from secular questions, but is firmly rooted in political and business activities as well. Another aspect that must be taken into account is the attitude of Indians towards the external (business) interlocutor. There is still a certain amount of scepticism towards foreign investments and investors, which is evident in the country’s ever-changing attitude (at least up to 1991) towards its opening to international trade. This could be correlated to past colonial domination. 4.5.2.

Rationality and spirituality

‘‘The development of mathematics in India was not the result of philosophical divagation, but from complicated social and commercial questions such as taxation, debts, exchange rates, determination of gold pureness and so forth’’ (Kumar and Sethi, 2005). The mathematical bent of Indians expresses a propensity towards decision-making processes

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that rely on rigorous logical principles, and can lead to a form of ‘‘hyperrationality’’ to find the best solution – a very ‘‘analytical’’ type of reasoning, that ‘‘separates the object from its context and relies on formal logics to find the propositions’’ (Kumar and Worm, 2004). Analytical thought deals with problems systematically, defining concepts, premises and sequences. It encourages a moral inclination towards problem-solving: if the logical solution is also the ideal one, it must somehow be morally legitimate. Various authors describe the Indians as good arguers, subtle opponents in a discussion, who rarely make instinctive decisions since they need to analyse each step with thorough logic. Their approach to problem solving can therefore be very rigid, not inclined towards compromise, and can increase the risk of paralysis, especially when linked to high aspirational goals (i.e. seeking the optimal solution). Even in this field however, the multifaceted culture of India reveals other elements: the emotional component is not an alternative to the more rational one, but intertwines with it. Unlike other Asian countries, in India people freely show their emotions. The emotional component of the decision-makers can be at least partly connected to their moral orientation towards problem-solving, the individualistic component (next paragraph) of the society, its pride in the progress made both in the past and in its post-liberation era. The combination of rational and emotional aspects can determine swings in the relationship that may confuse the Western interlocutor and make the decision-making process less linear, with steps forward followed by reassessments and corrections (Kumar and Sethi, 2005). 4.5.3.

Individualism and collectivism

Individualism, defined by Hofstede (1994) as the degree by which people learn to act as individuals rather than members of a group, is one of the five fundamental dimensions identified by this author that characterize the cultural distance between two countries. The prevalence of ‘‘individualistic’’ members of the Indian society is another controversial subject. Kumar and Sethi (2005) observe that Indian culture is traditionally considered to be collectivistic, but in reality it has clear individualistic connotations. Indians behave collectivistically when interacting with the members of their own family or clan, but display considerable individualistic traits when interacting with others (Kumar and Worm, 2004; Kumar and Sethi, 2005). This dualism can have a significant influence on team-working dynamics and in general on inter-organizational relationships, such as those between teams, work groups, or functions. The interaction between

Planning and Starting an Offshore Project in India 135

foreign organizational units (customers) and local ones, which is affected by this ambivalence, requires careful preparation and team-building, so common goals can be shared and a sense of belonging created. Various examples examined in this research stress the need for stable interlocutors, i.e. persons that closely follow the Western projects and clients, thus ensuring the continuance of expertise and consolidated organizational routines. Only through frequent meetings and communications is it possible to build a ‘‘collective perception’’, which should then be cultivated and nourished also outside the work place. Having briefly identified some cultural aspects of this environment, an attempt will be made to (synthetically) describe negotiation dynamics. The first observation regards the analytical viewpoint of the Indian negotiator, who turns the negotiation into a problem-solving exercise subjected to logical analysis aimed at defining the optimal solution. In terms of argumentation and expected results the negotiation process risks becoming excessively long, inflexible and with interruptions in communications. The quest for the (presumed) optimal solution may lead to the exploration of an infinite variety of contingencies, and the raising of excessive expectations. It implies a tedious and excessive collection of data that are not only used to clarify the negotiation, but also to prove one’s point. A quest for the ‘‘optimum’’ is positive when it helps trace the road to improvements, but can also move the possible meeting point further from that tolerated in advance (Kumar, 2004; Kumar and Worm, 2004). The dualistic behaviour of Indians, i.e. the mixture of individualism and collectivism, can also affect negotiation dynamics. The negotiator is influenced by the different interests he has to work for: those of the work group, function or division, context where the quality and density of his relations (and therefore the ‘‘collectivistic’’ component) can be different. When negotiating with an Indian counterpart, we suggest being as open as possible, accepting the rationality attitude of the interlocutor but trying to avoid competition. Agree with ‘‘optimal’’ hypothetical results but progressively move the objective towards more reasonable solutions that are profitable for both parties. It is important not to be caught off balance by apparent hardening of positions or aggressive behaviour, but patiently create a climate of understanding and develop a sense of belonging. Here more than in other country the ‘‘friendship’’ dimension influences the outcome of the negotiation. The behaviour of Indians is strongly affected by the environment, and it is on this, as well as the clauses in the contract, that the Western operator must work.

5 Foreign Investments in India: Modes and Legislative Constraints

5.1.

Introduction

The regulation frame foreign investors find in India is diversified. It was born as legacy of the colonial period and it was influenced by the English law system; then it experienced openings and closures according to the political orientation in force, and in 1991 it followed a liberalistic orientation that maintains some limits till now. The system of licenses, the control stock limits, the several supervisions and the numerous authorizations required by central government are now departing for an easier and faster regulation. Direct foreign investments are today allowed in many sectors according to automatic procedure; the procedure of licenses has been downsized, such as the share limits of foreign capital. The approval of the Competition Act (2002), the liberalization of the commercial policy, the reforms of the financial sector, the laws protecting intellectual property are other examples of important initiatives made in these years in order to solve problems limiting the inflow of foreign direct investments. In this chapter we want to provide a synthesis of the most important aspects related to this issue. The subject we deal with is described in many publications (Koch, 2001; Mukherjee and Sengupta, 2001; Osland et al., 2001; Alvarez, 2003; Eapen and Hennart, 2004; Ekeledo and Sivakumar, 2004). Useful information can be found in Indian institutional sources (Secretary for Industrial Assistance (SIA1), Indian Chamber of Commerce, Indian Embassies) and the website of legal consultancy companies. We suggest an analysis of this literature for further investigations.

136

Foreign Investments in India 137

5.2.

Entry modes into the Indian market

A foreign company interested in investing in India can follow different entry modes. Fig. 5.1 shows the main ones. 5.2.1.

Liaison office

This solution consists in the opening in India of an office that cannot perform any production or selling activity, or any kind of profitable activity2. Activities that a Liaison Office can perform include promotion, market analysis, suppliers research, after sales services, general services for the headquarters. The opening of this office is authorized by the Reserve Bank of India (RBI). The licence is assigned for a period of three years and can be renewed. It is not possible to purchase real estates in order to create a Liaison Office. Lease contracts longer than 5 years must be authorized by the RBI. 5.2.2.

Branch office

Branch Offices are offices set on the Indian country that must respect the regulations of the Exchange Control Manual of the Reserve Bank of India. These regulations include some bonds depending on the

Local office

1

Liaison Office

2

Branch Office

3

Project Office

4

Joint Venture (JV)

5

Wholly Owned Subsidiary (WOS)

6

Technological Cooperation

Indian company

Other options

Figure 5.1: Main entry modes

138 Sourcing in India

industrial sector to which the company belongs to. Usually, an Indian branch office can carry out: entertainment activities; warehousing, buying and selling, import–export operations; • research. • •

It can also promote financial and technical cooperation between foreign and Indian companies. 5.2.3.

Project office

The Project Office is a kind of Branch Office approved by the Reserve Bank of India and temporarily established for the execution of a specific project. Activities of a project office cannot be extended apart from the aims of the project it has been established for. In order to do that a list of activities justifying its establishment is created and the office has to respect it. The penalty is the revocation of the authorization for all the office activities. This solution is generally adopted by building contractors or companies creating turnkey plants (ICE, 2004). 5.2.4.

Joint Venture (JV)

A joint venture is a joint-stock company formed between two or more parties to undertake economic activities together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship. The maximum share of capital stock owned by the foreign partner in an Indian joint venture depends on the sector: in most cases limits put in the past expire; in others they still exist. 5.2.5.

Wholly Owned Subsidiary (WOS)

Wholly Owned Subsidiaries are companies whose stock is entirely owned by another company. As far as the strong points and weaknesses of this entry mode are concerned, there is a wide literature, comparing this solution with that of the Joint Venture (Mukherjee and Sengupta, 2001; Alvarez, 2003; Eapen and Hennart, 2004) (Tab. 5.1). Summarizing, WOS seems to offer greater decision-making autonomy, better control on knowhow and decision-making rapidity, while Joint Venture allows access to all the partner’s resources (for example his already existing distribution, sales and marketing

Foreign Investments in India 139 Table 5.1:

Advantages of JV and WOS

JV Advantages

WOS Advantages

. Possibility of using already existing distribution, sales and marketing channels of the partner . Facilitated credit (reserved to Joint Ventures) . Easier creation of a local network of acquaintances . Access to the supplier’s competences

. Greater decision-making autonomy . Better decision-making rapidity . Easier intellectual property protection

channels and his competences) and to facilitated credit. JVs have also the advantage of allowing an easier entry in the local relational context. 5.2.6.

Technological cooperation agreements

Technological cooperation agreements are another frequently used entry mode in the Indian market. This solution implies the technology transfer from the foreign company to the Indian one, without the establishment of a new firm. The agreement is typically signed by the foreign investor interested in testing the (usually productive) partnership with a local company, before creating a Joint Venture with it. The authorization for a technological cooperation agreement takes place through an automatic procedure or a government authorization. Indian companies interested in signing an agreement can obtain automatic authorization by making the request to the Reserve Bank of India, which verifies in a short time (usually in less than two weeks) the presence of some conditions: the value of the agreement must not be greater than 2 million USD; goods produced in the agreement don’t have to call for an industrial license and don’t have to be reserved to small ‘‘small scale industries’’; • foreign partners don’t have previously signed agreements in the same sector or in similar sectors. • •

Cooperation proposals not respecting these conditions can be sent to SIA, which evaluates them and decides if the authorization can be granted (this procedure usually lasts 4–6 weeks).

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5.3.

Corporate typologies

Indian company law, based on the Companies Act (1956), states that companies in India can belong to two categories defined as ‘‘private companies’’ and ‘‘public companies’’. These two categories cannot be compared to ours, as they refer to the ‘‘individual’’ or ‘‘collective’’ feature of the company. ‘‘Private companies’’ have some limits, beyond which they belong to the category of ‘‘public’’. These limits include: two as the minimum number of shareholders; 50 as the maximum; restrictions of the share transference; • impossibility of holding more than 25% of a public company; • no share or bond issues; • impossibility of making annual turnover higher than 100 million rupees.3 • •

‘‘Private companies’’ don’t have to publish their financial data and have favourable tax regimes and government incentives. In India a board of directors is provided both for public and private companies. The administratorship can be entrusted also to a foreign person; in any case the Indian government has the power of electing state administrators with the task of acting for the common good. Both in ‘‘public’’ and ‘‘private’’ companies, internal control boards are not provided for law, while there is an obligation that states that at least one auditor has to be appointed with the task of informing about correct compiling of registers and auditing of the balance sheet. Differential policies are planned for individual concerns (‘‘only proprietorship’’) and SMEs (‘‘small scale industries’’) that the government wants to protect as they – representing a significant part of the Indian industrial system – strongly contribute towards the export and employment of the country. 5.3.1.

Individual concerns

‘‘Sole proprietorship’’ is the solution more frequently adopted in India for the establishment of a new company. The success of this solution can be understood by looking at the many advantages it has, among which are few official papers needed for starting the activity, the lack of obligations about the ledger, and tax reliefs. The main disadvantage of this solution is the particular distinction between personal and corporate assets.

Foreign Investments in India 141

5.3.2.

Small Scale Industries (SMIs)

‘‘Small Scale Industries’’ are business units that have plants and equipments of no more than 10 million rupees4 and with the holder’s equity not owned for more than 24% by another (foreign or Indian) company. The two conditions acts independently: if the limit of 24% is surpassed, the company loses privileges related to the status of a ‘‘small company’’ even if the total investment does not exceed 10 million rupees. The Indian Government – in order to protect these enterprises – plans a number of tax reliefs and reserves for them5 the production of about 500 products.6 Moreover small scale industries are free of restrictions on the facilities’ location (see paragraph 5.4.3). By registering in the Department of Industries at the Indian state of venue, these companies can also have other advantages, such as prime rates, public loans and tax reliefs. The (voluntary) registration allows district government and the central one to monitor sectors in which these companies operate in order to better define annual plans of incentives. As far as incentives for ‘‘small scale industries’’ are concerned, common opinion is that these started a vicious circle in India, which brought entrepreneurs to prefer establishing micro-companies in order to exploit these advantages. It is frequently the case in India that the distribution of activities in some micro-companies belonging to the same owner releases economies of scale in order to maintain SMI’s incentives.

5.4.

Procedures for foreign direct investments approval

In India two procedures of approval for a foreign direct investment (FDI) exist: the automatic and the government one. Automatic procedure – easier for the foreign investor, but with some bonds about its use – is different if the investment is addressed to a new company or an existing one. Therefore, in this section we provide some information about each of the existing options: 1. 2. 3.

Automatic procedure for the approval of direct investments addressed to a new company; Automatic procedure for the approval of direct investments addressed to an existing company; Government procedure.

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5.4.1.

Automatic procedure (FDI addressed to a new company)

Foreign direct investments assigned to the constitution of a new company are usually approved through the automatic procedure (i.e. through a simple authorization granted by the Reserve Bank of India). Exceptions are: 1.

2. 3.

Foreign investments which don’t satisfy the limits of foreign capital established by the sectorial policies or which refer to sectors for which FDIs are not acceptable; Entrepreneurial initiatives in which the foreign partner already has in India a company (or a cooperation) in the same sector; Foreign investors’ investments that bring to the buyout of the shares of an already existing Indian company.

If the investment is not included in these exceptions, the foreign investor can ask for an approval to the competent local office of the Reserve Bank of India, that usually issues its approval in 15 days.

5.4.2. Automatic procedure (FDI addressed to an already existing company) Automatic procedure for the approval of a foreign direct investment can be adopted also by already existing companies that want to have foreign share capital. In order to monitor these activities, the Indian government plans a number of bonds that are continually updated. We can mention for instance the obligation to make the investments exclusively using foreign currency of the project belonging to sectors authorized for the automatic procedure. 5.4.3.

Government procedure

For all the investments that don’t fulfil the obligations needed for the automatic procedure, the approval of the Indian government granted by the Foreign Investment Promotion Board (FIPB – Ministry of Finance) is compulsory. Requests must be forwarded to the FIPB or to the Entrepreneurial Assistance Unit (EAU). The approval usually requires 4–6 weeks. Once the investors have obtained the approval of central government, they must obtain other approvals by the government of the state in which they invest. Even if it’s less complex, this procedure lasts for a longer period.

Foreign Investments in India 143

5.5.

Some other aspects of FDIs in India

In this paragraph we will introduce some normative aspects of particular interest for foreign investors: some rudiments of work rules, the policy of industrial licences, and the location of facilities. 5.5.1.

Work rules

India has a wide normative framework protecting workers from unfair dismissal and obliges the payment of an indemnity when the employer–employee relationship ends. In the case of termination of the relationship determined by retirement from business, this indemnity can include the payment of the salary of the worker until the achievement of another job. In any case the Industrial Dispute Act (1976) states that a company with more than 10 employees must obtain the public authorities’ approval in order to stop or reduce an activity. The key regulations are the following: •

•

•

• • •

Payment of Wages Act (1936) and Minimum Wages Act (1948), regulating the workers’ wages in terms of maximum daily working hours, days of rest and overtimes; Factories Act (1948), regulating labour standards in mechanized factories with more than 10 employees and in non mechanized plants with more than 20 employees; Employees’ State Insurance Act (1948), guaranteeing an indemnity in the case of illness, motherhood and industrial accident, besides favouring health care for workers and their families; Employees’ Provident Fund Act (1952); Payment of Bonus Act (1965), fixing for the employees a production bonus depending on profits and production; Payment of Gratuity Act (1965), imposing on the employer the payment of a retirement bonus for some categories of workers at the end of the employer–employee relationship.

5.5.2.

Industrial licences

The reform of industrial policy developed by the Indian government tried to surpass the system of licences that made the start up long and onerous. In some sectors this system is still in force (SIA, 2004). They are sectors considered strategic for national, social and environmental interests (weapons, military ships and airplanes, atomic energy, coal, oil, railway transports, etc.) or reserved to small companies (see paragraph 5.3.2).

144 Sourcing in India

In these cases the company must have an industrial licence that can obtain forwarding of the request (directly or through the Indian Embassy) to the Secretary for Industrial Assistance (SIA). Industrial licence is issued by government considering the information coming from the Licence Committee; the decision regarding the request usually comes rapidly (4–6 weeks starting from the presentation of the request). 5.5.3.

Localization policy

Companies in India are free to choose the place in which they want to localize their facilities with some exceptions. If the selected area is less than 25 km from a city with more than one million inhabitants, the company has to obtain an industrial licence. This bond is not compulsory if the area is an ‘‘Industrial Zone’’, if the activity belongs to sectors defined ‘‘not polluting’’ and for ‘‘small scale industries’’ (see Paragraph 5.3.2). The location of the facilities also has to respect provisions of townplanning schemes, laws about the use of land and environmental regulations valid in the selected area.

5.6. 5.6.1.

Facilitated zones and governmental incentives Export Processing Zones (EPZs)

The Indian government, being aware of the need for boosting its exports, has planned since the 1990s some incentives for companies that produce goods destined for exportation. In order to do that, preferential areas were created, i.e. the Export Processing Zones (EPZs), where some advantages are given to companies that operate here and export most of their productions. These areas are like enclaves: they are subject to better tax regulations, simplified bureaucracy, tariff support policies and are served by an infrastructural system created for them (ICE, 2004). Seven Export Processing Zones (EPZs) operating in India are the following: Santacruz electronics Export Processing Zone in Maharashtra; Kandla export Processing Zone in Gujarat; Falta Export Processing Zone in West Bengal; Madras Export Processing Zone – Chennai; Cochin Export Processing Zone in Kerala; NOIDA Export Processing Zone in Noida – Delhi; Visakhpatnam Export Processing Zone in Andra Pradesh (Fig. 5.2).

Foreign Investments in India 145

PAKISTAN

NOIDA NOIDA Export Processing zone

NEP A

CHINA (TIBET)

L

BHUTAN

BANGLADESH

GANDHIDHAM Kandla free Trade Zone

MYANMAR KOLKATA Falta Export Processing Zone VISHAKHAPATNAM Vishakhapatnam Export Processing Zone (VEPZ)

MUMBAI Santacruz Electronics Export Processing Zone (SEEPZ)

ARABIAN SEA

BAY OF BENGAL CHENNAI Madras Export Processing Zone Export Processing Zones

COCHIN Cochin Export Processing Zone

Figure 5.2: Export Processing Zones in India

5.6.2.

Special Economic Zones (SEZs)

Having tested with success the solution of Export Processing Zones, taking into consideration also the successful Chinese experience, the Indian government (through the Export & Import Policy – 2004) has started the creation of Special Economic Zones (SEZs). Indian SEZs are considered free zones, where the production of goods destined for exportation is free from custom duties and from the regulations and restrictions in force in federal states. The Indian government offers many incentives to companies interested in operating in these zones. Among these are: income tax exemption for a five-year period; 50% reduction of other taxes for a two-year period; • facilitated credit; • •

146 Sourcing in India

no limits on foreign investments on goods reserved to ‘‘small scale industries’’; • exemption from obligations related to industrial licences for goods reserved to the ‘‘small scale industries’’; • customer duties exemption for the import of capital goods, raw materials, customer goods, spare parts, etc.; • indirect tax exemption by central government on the purchase of customer goods and raw materials in the national market. •

For establishing a company in a SEZ, it is necessary to forward the investment proposal to the competent Development Commissioner. He gives the automatic approval (if the project respects standard parameters) or, on the contrary, he sends it to the Board of Approvals (BoA) of the Department of Commerce (Government of India). The decision is usually taken and communicated in a short time (6 weeks on average). 5.6.3.

Export Oriented Units (EOUs)

Indian government grants incentives similar to those of Special Economic Zones for Export Oriented Units (EOUs), i.e. companies that must export at least 66% of their production (the remaining can be sold inside the country by payment of some taxes). Even if EOUs benefit from similar incentives of companies located in Special Economic Zones, they have an important advantage over them: a better autonomy in the localization of the investment (that can be localized near suppliers or main ports). In India there is the possibility for every company to change into an export oriented unit. It is possible following an automatic procedure only when a company is able to fulfil the obligations expected for these units.

5.7.

Intellectual Property protection (IP)

In this paragraph we will provide a brief overview of some aspects concerning intellectual property protection in India (Fig. 5.3). 5.7.1.

Patents

Patents in India are regulated by the Patent Act passed in 1970 (and subsequently modified several times – last one on the 1 January 2005 – in order to respect the TRIPS agreement7). It’s a law that confers the right of exclusive use of a patent to its owner or licensee.

Foreign Investments in India 147

IP protection

1

Patents

2

Trademarks

3

Copyrights

Figure 5.3: Main solutions for the protection of intellectual property

In India there are three patents typologies: 1.

2.

3.

Ordinary patent: This is the traditional patent and it’s granted only to the inventions that can be industrially produced and have prerequisites of originality and usefulness. Additional patent: this is requested when a company wants to protect an invention linked to another already registered, or when there is a variation to a previous invention. The additional patent is granted for the same period of the main patent, expiring with it. Patent coming from an international convention: is the extension of a patent already existent in the Indian market. It can be requested within 12 months from the presentation of the primary request in one of the countries belonging to the Paris Convention for the protection of industrial property. Since 3 January 1995 it is possible to extend a patent in India also on the basis of a primary request registered (after this date) in one of the countries belonging to WTO.8 India has also special bilateral agreements regarding patent priority rights with Australia, Canada, Ireland, New Zealand, Sri Lanka and United Kingdom.

In the case of violation of a patent exclusive rights, the patentee can file a petition with the competent District Court. The patentee is entitled to be indemnified for the loss suffered, which can be also evaluated considering profits achieved by the counterfeiter. The patentee has also the right to recur to urgent injunctions in order to stop the falsification and to the refund of legal expenses. 5.7.2.

Trademarks

The registration of trademarks is regulated in India by the Trademark Act (1999), becoming effective on 15 September 2003. The brand owner has the exclusive right of user for the registered goods.

148 Sourcing in India

To register it, it is necessary to forward a request to the Registration Office. India is divided into four zones; in each of them there is a Registration Office. The central office is in Mumbai; other offices are in Kolkata, Delhi, and Chennai for ‘‘domestic trademark applications’’. Once examined by the Registration Office, the request is published in the Trade Mark Journal. Petitions have to be presented within three months from the date of publication. The request can be indefinitely renewed. Companies asking for the registration of a trademark must have the intention of using it and not of granting it to third parties. In this case the sanction is the cessation of the patent because of its lack of use. In the case of falsification, the trademark owner can appeal to the competent District Court in order to obtain an injunction to stop the activity of falsification and guarantee the destruction of counterfeited goods.

5.7.3.

Copyrights

Copyrights in India are regulated by the Copyright Act passed in 1957 (and subsequently emended by the Copyright Act (1999) in order to the respect the TRIPS agreement). Thanks to the owner has the exclusive sales rights for his work. Works protected by Indian copyright are literary, music, artistic, cinematographic ones and software. As far as the latter is concerned, according to the Copyright Act, user manuals, magnetic tapes, and punched cards are protected. On the contrary algorithms are not protected. India signed two of the most important multilateral international conventions about copyrights: the Berne Convention for the Protection of Literary and Artistic Works (firstly adopted by Switzerland in 1886) and the Universal Copyright Convention (adopted at Geneva in 1952). These conventions establish that a work produced in one of the subscriber nations is protected in all the other subscriber nations. Copyright registration can be carried out at the Copyright Office at the Ministry of Human Resources Development (HRD) in New Delhi. In this office is stored a catalogue containing all registered works, in particular their titles, information on authors, editors and copyrights owners. The registration is not compulsory, but can be taken as evidence in Court. The Law provides copyright owners with the rights of protection both in the civil and penal fields.

Foreign Investments in India 149

As far as civil sanctions are concerned, the copyright owner can – in the case of violation – appeal to the civil court in order to obtain the cessation of the violation, attachment of illegal goods and the recovering of damages. Penal sanctions can be from three months up to 6 years imprisonment and the payment of a fine from 50,000 to 200,000 rupees.

6 Transport and Communication Infrastructures in India1

6.1.

Development of transport in India

The transport system in India – covering a surface of 3.3 million square kilometres – is nowadays one of the largest in the world. The situation before 1991 – i.e. the year of the Indian economic opening – was different. The Indian territory had serious infrastructural lacks which represented a big obstacle for foreign investors. Northern states did not have infrastructures able to connect to the most industrialized cities; 40% of rural villages were not connected to the nearest towns; the infrastructural network was inadequate to manage the traffic on the busiest routes. This inadequacy caused a slow pace in the transportations of goods, frequent delays and high costs. The Rakesh Mohan Report on Infrastructure (1996) estimated that at the beginning of the 1990s the annual losses caused by the limits of the Indian infrastructural network amounted to 300 billion rupees (6.5 billion USD). The reasons of this inadequacy were mainly three (World Bank, 2002): 1. 2.

3.

The lack of independent studies able to provide objective evaluations on projects to be developed; The fragmentation and overlapping of institutional responsibilities, that determined on the one hand difficulties of coordination of projects in different areas of the country, on the other hand a insufficient readiness in the application of the choices made; The inadequacy of public and private resources assigned for the development of the infrastructural network.

150

Transport and Communication Infrastructures in India 151

Beginning from the 9th five-year plan (1997–2002), the efforts of the Indian administration increased, including (World Bank, 2002): the increase of state financing; the creation of the Central Road Fund2 aimed at the development of the road network; • the amendment of the National Highway Act in order to speed up the process of land expropriation and support private financing;3 • the creation of the National Infrastructure Commission, formed in order to better coordinate infrastructural development. • •

These initiatives brought about in a few years – the development of significant projects, such as the Golden Quadrilateral, the North–South and East–West Corridors and the Port Connectivity (we will later discuss all of them). Incisive interventions are also planned in the future in order to strengthen the entire road network of the country. In fact, the actual situation still has many criticalities which makes Indian logistics one of the most expensive in the world (transport in India today are 11% of landed costs;4 the worldwide average value is 6% (DHL, 2006)). During the recent Indian Infrastructure Summit in 2005, the Indian Minister of Commerce and Industry, Shri Kamal Nath, confirmed the need for infrastructural growth and a closer partnership between the public and private sectors for the development of the economy. As far as private ventures are concerned, the Indian transport sector was characterized by a relevant inflow of foreign direct investments over the last years. The most often used solution is BOT (Build, Operate, Transfer).5 This means that the infrastructure is created by a private firm, which manages it for a period to grant recovery of the initial investment and the achievement of an adequate net profit; subsequently the company transfers the property to the government.

6.2.

Air transport

Air transport in India has undergone a remarkable growth in the last ten years regarding both cargo (annual average growth of 11%) (Fig. 6.1) and passenger transport (Airport Authority of India, 2006). Such growth was supported through a programme of liberalization that the government has promoted since the 1990s. Nowadays, among the most significant results of this programme, there is the chance for the airlines to operate both on internal and

152 Sourcing in India

900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 05 4 –0 6

2

20

20

03

–0

0 20

01

–0

8 19

99

–0

6 19

97

–9

4 19

95

–9

2 19

93

–9

0 19

91

–9

8 19

89

–9

6 19

87

–8

4 19

85

–8

2 19

83

–8

0

–8

19

81

–8 79

19

19

77

–7

8

0

Figure 6.1: Trend of cargo transport in Indian international airports (Data in thousands of tons) Source: Airport Authority of India, 2007.

international markets. Moreover the entries of some low cost companies (Air Deccan, SpiceJet, etc.) have determined an increase in the average quality of the services offered, a reduction of fares and a relevant growth of connections6 (Chetana’s Institute of Management & Research, 2006). Among the incentives aimed at stimulating foreign investors’ entry, the adoption of the policy defined ‘‘Open skies’’ was useful, erasing the bond that previously forbade airlines to make flights from and to India having a stop in a country different from their own. As far as the liberalization of the civil aviation sector is concerned, the government also adopted a progressive privatization of the two main national airlines, i.e. Air India and Indian Airlines. As far as the geographical distribution of airport infrastructures is concerned, in India there are 346 airports (12 international ones) (Fig. 6.2). The main cargo terminals are: Mumbai, Delhi, Chennai, and Kolkata. The geographical position of the international hubs allows to easy reach over all the country. The international airport of Mumbai, where 34 leading airlines operate, is the main Indian hub, with 403 flights, 36,000 passengers and 892 tons moved per day (Airport Authority of India, 2006). Indira Gandhi International Airport of New Delhi is the second airport of the country. It has three terminals, 41 national and international

Transport and Communication Infrastructures in India 153

AMRISTAR

DELHI GUWAHATI AHMEDABAD

KOLKATA

HYDERABAD MUMBAI GOA CHENNAI BANGALORE COCHIN THIRUVANANTHAPURAM

International cargo airport Other international airport

Figure 6.2: Locations of the main Indian international airports Source: Airports Authority of India, 2006.

airlines operating inside it and about 22,600 passengers per day (Airport Authority of India, 2006). Notwithstanding this, goods and persons transportation (Tab. 6.1) managed by the two most important Indian airports is limited if compared to the one handled by the main Chinese hubs, where three airports manage more than 500,000 tons per year (e.g. the Capital Airport of Beijing alone transports a similar number of goods to the whole of India). Infrastructural growth of the airport sector seems today to be still not sufficient to support the increasing traffic of the country; airports are full both in terms of timetables and runways and terminals capacity (DHL, 2006). Governmental investments in the sector should guarantee a more adequate development of airport infrastructures in the future. Once again the government’s aim is the involvement of the private sector, through a system of incentives and fiscal reliefs for companies involved in projects of improvement of these infrastructures, of safety services and handling, and technological support for traffic management.

154 Sourcing in India Table 6.1: Goods moved in the main Indian airports International cargo airport

1979–80

1984–85

1989–90

1994–95

1999–00

Total Mumbai Delhi Chennai Kolkata

127,511 68,950 33,210 18,722 6,629

222,609 123,559 71,017 19,816 8,217

296,001 160,964 94,019 27,884 13,134

357,848 159,111 133,221 49,026 16,490

469,856 208,298 162,653 75,423 23,482

International cargo airport

2000–01

2002–03

2003–04

2004–05

2005–06*

Total Mumbai Delhi Chennai Kolkata

491,712 211,013 173,601 82,028 25,070

555,362 224,068 197,432 106,836 27,026

584,005 233,980 204,210 119,563 26,252

687,890 273,265 237,923 146,443 30,259

762,387 288,960 273,410 167,853 32,164

Data in tons. *Estimate. Source: Airports Authority of India, 2007.

450,00 400,00 350,00 300,00 250,00 200,00 150,00 100,00 50,00 6 –0

5 20

05

–0

4 04 20

20

03

–0

3

2

–0

20

02

–0

1 01 20

20

00

–0

0

9

–0

19

99

–9

8 19

98

–9

7

97

19

–9 96

–9 19

95

19

19

94

–9

5

6

0,00

Figure 6.3: Sea transport: cargo traffic (data in million tons) Source: India Ports Association, 2007.

6.3.

Sea transport

Indian sea transport has grown since 1991 with an annual average rate of 10% (Fig. 6.3). However this growth is lower than the one registered in

Transport and Communication Infrastructures in India 155

other growing economies. This limit seems to be caused mainly by the incapability of the national structures to guarantee the effectiveness needed to achieve international appreciation. Therefore Indian hubs seem to be weaker if compared to the biggest Asian hubs, that today are among the most important in the world (Hong Kong, Singapore, Shanghai and Shenzhen are some of the foremost hubs of the global ranking considering the managed TEUs7). The Indian government – determined to improve its port system – stakes in addition to public investments (790 million Euros planned for the five years 2002–2007), also the attraction of private and foreign investments. In order to do that, they have recently adopted a programme of incentives addressed to joint ventures working for the creation and maintenance of port infrastructures (and structures connecting them with the internal areas of the country). This policy seems to have already given important results. Propelled also by these incentives, many western companies have run already existing port structures under a sort of leasing arrangement, have created new structures (container terminals, quays for specialized cargo, container freight stations) and have managed services for ship industries and for safety in naval traffic (DHL, 2006). As far as the presence of port infrastructures is concerned, the country today has 197 ports: 12 ‘‘major ports’’ and 185 ‘‘minor ports’’. Major ports’ development and management policies are decided by the central Government, whereas ‘‘minor ports’’ depends on the local state policies. Data of the Economic Survey 2004–2005 (Ministry of Finance, 2005) show that 75% of volumes moved by Indian ports belongs to the 12 ‘‘major ports’’8 (Fig. 6.4; Tab. 6.2). As far as container traffic is concerned, 70% is moved by ports on the Western coast; nevertheless, major development rates belong to the ports on the Eastern coast (Kolkata, Tuticorin, Chennai), that have a favourable position considering the maritime route connecting the country with China. Along this route, the traffic of containers directed to the east (Indian exports to China) has registered an annual average growth rate of 65%; that directed towards the west (Chinese exports to India) grew by 56%. Containers moving towards Indian ports are actually sorted in foreign ports localized near the main international routes. Goods coming from Europe and directed to ports on the Indian western coast usually stop in Dubai (United Arab Emirates); loads directed to the Indian eastern coast pass through Singapore, while goods going out from India and directed to European markets are usually sorted at Colombo’s hub (Sri Lanka).

156 Sourcing in India

KANDIA

KOLKATA MUMBAI

PARADIP

J.N.P.T. VISAKHAPATNAM MORMUGAO ENNORE NEW MANGALORE

COCHIN

CHENNAI

Freight traffic

TUTICORIN

Figure 6.4: Localization of the Indian ‘‘major ports’’ Source: India Ports Association, 2006.

These indirect paths determine extended delivery times and can affect transport safety and quality (DHL, 2006). In order to solve this problem, the Indian Government has recently decided to concentrate investments on the development of two national hubs: Jawaharlal Nehru Port – JNPT (on the Western coast) and Chennai (on the Eastern coast). The interventions consisted in the drainage of land and the extension of infrastructure capacity for the movement of containers, in order to be able to effectively manage bigger ships. In the Indian sea freight sector, there are 5 public companies (Shipping Corporation of India, Cochin Shipyard Ltd., Hindustan Shipyard Ltd., Hooghy Dock and Port Engineers Ltd., Central Inland Water Transport Corporation). As far as moved tons is concerned, 40.08% (2,697,000 GT, 87 ships owned, and 41 managed) belongs to the Shipping Corporation of India (a public company founded in 1961). The remaining regards private

Table 6.2:

Goods traffic in the main Indian ports (data in million tons)

Main ports Total Vishakhapatnam Kolkata Chennai Kandia Mumbai New Mangalore JNPT Mormugao Paradip Tuticorin Cochin Ennore

1994–95 1995–96 1996–97 1997–98 1998–99 1999–00 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06 197.26 30.03 20.53 29.46 26.50 32.05 8.01 5.01 18.88 10.12 8.04 8.63 0.00

215.33 32.82 21.51 30.72 30.34 34.05 8.88 6.87 18.10 11.26 9.29 11.49 0.00

227.25 34.50 23.12 31.85 33.73 33.73 12.45 8.07 17.31 11.58 9.17 11.74 0.00

251.50 36.01 28.16 35.53 38.90 32.10 15.28 8.90 21.18 13.30 9.97 12.17 0.00

251.73 35.65 29.38 35.20 40.64 30.97 14.21 11.72 18.02 13.11 10.15 12.68 0.00

271.92 39.51 31.02 37.44 46.30 30.41 17.60 14.98 18.23 13.64 9.99 12.80 0.00

281.11 44.69 30.00 41.22 36.74 27.06 17.89 18.58 19.63 19.90 12.28 13.12 0.00

287.57 44.34 30.39 36.12 37.73 26.43 17.50 22.52 22.93 21.13 13.02 12.06 3.40

313.55 46.01 35.80 33.69 40.63 26.80 21.43 26.84 23.65 23.90 13.29 13.02 8.49

344.83 47.74 41.19 36.71 41.52 30.00 26.67 31.29 27.87 25.31 13.68 13.57 9.28

384.42 50.15 43.88 43.81 41.55 40.58 33.89 30.42 30.66 30.10 15.81 14.09 9.48

418.51 55.80 49.99 47.25 45.91 44.41 34.45 35.65 31.69 33.11 17.14 13.94 9.17

Source: India Ports Association, 2007.

157

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societies, among which the Great Eastern Shipping Co. Ltd (17.15%, 1,191,454 GT, 62 ships owned) and Essar Shipping Ltd (10.53%, 731,492 GT, 39 ships owned) have the main role (Ministry of Shipping, 2005). 6.3.1.

Internal navigable routes

India has many internal navigable routes extending for 14,500 km. The most important ones are the three ‘‘National waterways’’ (No. 1, No. 2, No. 3) (Fig. 6.5): National Waterway No. 1: extending for 1,620 km along the Ganga, Bhagirathi, and Hooghly river systems, it connects the port of Haldia with the city of Allahabad; • National Waterway No. 2: extending for 891 km along the Brahmaputra river, it connects Sadiya and Dhubri; • National Waterway No. 3: constituted of a series of water routes (West Coast Canal, Champakara Canal and Udyogmandal Canal) between the cities of Kottapuram and Kollam; 168 km long. •

Management of Waterways 1 and 2 is entrusted to the Central Inland Water Transport Corporation (CIWTC) – a public company founded in 1967 – and to the Inland Waterways Authority of India, i.e. an independent institution founded with the aim of favouring the growth and regulation of the waterage. Despite a number of navigable routes, waterage is limited (0.1% of total loads are moved in this way) if compared to that of other countries such as the USA and China. These data are influenced by the inadequacy of Indian infrastructures (depth and length of shipways), lack of adequate structures for the moving of loads, lack of supports for daily and nightly safety (DHL Global Forwarding, 2006). In order to solve these problems, the Indian Ministry of Shipping in 2001 has issued a plan of interventions that should bring important results by 2010.

6.4.

Road transport

At the moment the Indian road network is 3.3 million km long (CIA, 2006). This datum makes India the second country in the world considering the length of the road network (the USA holds the first position; China holds the third one). It is composed by national highways (managed by central Government), governmental motorways (administered by the local states), county roads and local roads.

National Waterway No. 1 Ghanghra River Ganga River

NEPAL

Kosi River

UTTAR PRADESH BALLIA Yamuna River Son River

BIHAR CHAPRA Ganga River BANGLADESH VARANASI MUNGER BERHAMPUR PAKUR Bhagirathi River Padma River WEST JHARKHAND BENGAL KOLKATA HALDI Hoogly River Bay ORISSA

of Bengal

National Waterway No. 3

National Waterway No. 2

Arabian Sea

Periyar River KOTTAPURAM Udyogamandal Canal CEPZ Champakkara Canal ERNAKULAM

Vembanad Lake ALAPPUZHA

2

CHINA TIBET

1

VAIKOM KERALA CHERTHALA

BHUTAN

VATTAKKAYAL Pamba River

TRIKUNNAPUZHA KAYAMKULAM

SADIYA

BANGLADESH

Localization of the Indian national waterways

Source: Ministry of Shipping, Road Transport and Highways – Department of Shipping, 2006.

159

Figure 6.5:

Dihang River ARUNACHAL PRADESH DIBRUGAR Brahmaputra River

Burhi Dihing DHANSIRI MUKH River TEZPUR NAGALAND ASSAM DHUBRI PANDU MEGHALAYA

3

CHAVARA

Dibang River

160 Sourcing in India

If nowadays India is the country with the second most important transport system in the world, 50 years ago it had a system lacking road infrastructures (Fig. 6.6). Investments in this sectors have been relevant in the last years and have allowed India – with a current density of 0.75 km/km2 (Department of Road Transport and Highways, 2006) – to have today a transport system comparable to that of the most industrialized Western countries. This density guarantees a good cover along the whole national surface, except for some regions in the centre-north of the country, such as Chhattisgarh, Jharkhand, Jammu, Kashmir and Arunachal Pradesh (Fig. 6.7). Despite the capillarity of the road system, the existent Indian infrastructures don’t seem to be yet adequate to support a further economical growth of the country. Today one third of the roads and national highways are not asphalted; 80% of the highways have one single lane. Highway cover is not sufficient as it constitutes only 6% of the total road system (Fig. 6.8), even if supporting a relevant part of the entire traffic9 (Ministry of Finance, 2005). If we consider that the Indian road network supports 85% of passenger traffic and 70% of goods transport inside the nation, it is easy to understand the need for an expansion and modernization of the entire system (NCAER, 2006). The ‘‘National Highways Development Project’’ (NHDP) – i.e. the most expensive road project in the history of the country – was designed considering this objective. All in all the project plans: •

the ‘‘Golden Quadrilateral’’ (GQ, 5,846 km), connecting the four major Indian cities: New Delhi, Mumbai, Chennai and Calcutta (Fig. 6.9);

3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006 Figure 6.6: Development of the road transport system (data in millions of km) Source: Planning Commission of India for years 1950–2000; Department of Road Transport and Highways for years 2001–2006.

Transport and Communication Infrastructures in India 161

North–South and East–West Corridors (NS–EW, 7,300 km), the first between Srinagar and Kanyakumari, the second between Silchar and Porbandar; • the Port Connectivity and other projects (PC and others, 1,133 km). •

The Golden Quadrilateral project is very interesting in particular considering the aspects regarding intermodal transport, as it connects the 4 main

JAMMU & PUNJAB KASHMIR

HIMACHAL PRADESH

HARYANA

UTTARANCHAL

DELHI

SIKKIM RAJASTHAN

ASSAM

UTTAR BIHAR

GUJARAT

MADHYA PRADESH

MAHARASHTRA GOA

ARUNACHAL PRADESH

ANDHRA

MEGHALAYA WEST BENGAL JHARKHAND

ORISSA

CHATTISGARH

KARNATAKA

KERALA TAMILNADU

More than 0.75 km/kmq of road From 0,50 to 0,75 km/kmq of road From 0,25 to 0,50 km/kmq of road Less than 0,25 km/kmq of road network Figure 6.7: Density of the road network on the country Source: Department of Road Transport and Highways, 2005.

NAGALAND MANIPUR MIZORAM TRIPURA

162 Sourcing in India

2% 4% 14%

80% National Highways/Expressways

State Highways

District Roads

Rural Roads

Figure 6.8: Composition of the Indian road system Source: National Highways Authority of India, 2007.

Indian cargo airports, as well as three of the most active ‘‘major ports’’ (considering the movement of goods). As far as logistic operators are concerned, the sector of goods road transport is today totally managed by private companies. It is very fragmented, being constituted as 80% by small companies each one owning less than 5 articulated lorries. The fragmentation of the sector – also determined by the complicated system of local licences and the restrictions for the protection of the environment – causes a series of inefficiencies to local operators both in terms of cost and quality of the service. Operators are characterized by a limited range of competences and geographical cover. This fact causes bigger management complexity and higher transport costs. Scarce geographic coverage of single operators brings the use of more than one company in the case of international routes, with the consequence of an increase in costs and difficulties of coordination of all the logistic activities.

6.5.

Railway transport

The history of the Indian railway began on 16 April 1853, when a train composed of 14 coaches with 400 passengers on board left Mumbai for Thane, greeted by an English platoon. A few years later, in 1880, the railway network had already achieved relevant development, but was still localized in the surroundings of the main cities of the country (Mumbai, Chennai, Kolkata). When India obtained Independence in 1947 the

Transport and Communication Infrastructures in India 163

Golden Quadrilateral

SRINAGAR

North–South Corridor

1A

Jammu

East–West Corridor National Highway Number

Jalandhar

1A

2

1

DELHI

Sonepat

Gurgaon

Agra Lucknow Gorakhpur 8 Siliguri Etawah Jaipur 28 Muzaffarpur Kishangarh 36 Kanpur Gwalior 3 57 37 Fatehpur 35 76 Guwahati 54 Varanasi Samakhiali Kota 75 Islampur 2 Palanpur 25 Purnea Sikandara Shivpuri 26 Jhansi SILCHAR 8A Panagarh 15 14 Chittorgarh 7 Udaipur Sagar 8A 2 8B KOLKATA Ahmedabad Bypass 6 Rajkot Lakhnadon Vadodara PORBANDAR 60 Kharagpur Nagpur 5 Surat 8 DIU ISLAND Bhubaneshwar MUMBAI Pune

I

N

D

Visakhapatnam Eluru Vijayawada Chilakaluripet

5

Nellore 4 46

EEP HADW LAKS DIA) (IN

Salem

BAY OF BENGAL

CHENNAI Poonamallee Ranipet

47 7

Madurai

7

KANYAKUMARI

R BA ICO ND N ANDAMAN A IA) S (IND ISLAND

7

ARABIAN SEA

Kochi

A

5

7

Satara Hyderabad Belgaum 4 Kurnool Sira Tumkur Bangalore Hosur Krishnagiri Coimbatore

I

Figure 6.9: National Highways Development Project Source: National Highways Authority of India, 2006.

railway network already exceeded 50,000 km. Today the network consists of 63,140 km (Fig. 6.10). Through the railway network today annually more than 500 million tons of goods are moved, with 5% of an annual average growth (Fig. 6.11). This trend originates more from the global development of Indian economy than from the supremacy of the railway transport on other transport solutions. Loads moved on rail are, in fact, a limited part of the totals moved in the country; the growth registered in this sector is modest if compared for example to the road one.

164 Sourcing in India 67500 60000 52500 45000 37500 30000 Electrified Network 22500

Railway Network

15000 7500 0 1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

Figure 6.10: Evolution of the railway network (data in km) Source: World Bank for years 1950–2000, CIA for years 2001–2006.

600.00 550.00 500.00 450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Figure 6.11: Loads of railway transport (data in millions of tons) Source: World Bank for years 1980–2000, CIA for years period 2001–2004.

As you can see in Fig. 6.12, the Indian railway network nowadays covers almost uniformly all the territory, except for some peripheral and mountainous areas like Jammu, Kashmir and Arunachal Pradesh. The major part of the network is broad gauge that, having a wider distance between the rails, allows a higher average speed. Despite this, the low percentage of electrified connections and the backwardness of the infrastructures, make average train speed modest, extending the handling times. The railways of the country are almost full, especially on the busiest routes (such as New Delhi–Mumbai10 and other routes belonging to the Golden Quadrilateral). The problem is also heavier for the transport

Transport and Communication Infrastructures in India 165

Broad Gauge Metre/Narrow Gauge

Figure 6.12:

Indian railways

Source: CIA, 2006.

of containers, especially between the ports of the west coast and north inland (DHL, 2006). For solving this problem, the Government planned – as part of the 10th five-year plan for 2002–2007 – public investments for the modernization of the network; these investments are focused in the area near the Golden Quadrilateral that, even representing 16% of the entire national network, supports 66% of goods transports and 55% of passenger transport.

166 Sourcing in India

As far as the strengthening of railway transport is concerned, another process of liberalization of the sector has been started: for example it has been announced by the Indian Ministry of Railways of an opening to private operators that will stop the present public monopoly.

6.6.

Indian communication infrastructures

Typically one of the solutions adopted in emerging economies in order to solve the problems caused by the inadequacy of traditional telecommunications infrastructures is recurring to wireless services (Jain and Sridhar, 2003). India, as we will see later on, is not different, being one of the countries in which this technology is most developed. Before analysing the actual situation of telecommunications infrastructures in the country, it is useful to briefly illustrate the reforms this sector has experienced in India in the recent past. 6.6.1.

Main reforms in the sector of telecommunications

In the period following the start of the new Indian economic policy (1991), the development of adequate systems of telecommunication was not considered a critical activity for economic growth. At that time this sector was very underdeveloped because of the long presence of the state monopoly (since 1885) and the continuous cuts in public investments. Since the second half of the 1990s the government became aware of the importance of these infrastructures for the support of one of the most blooming activities of the country – i.e. the development of software, IT enabled services and business processes – and started some reforms that brought rapid development in a few years. Among these reforms – for their importance – we mention: National Telecom Policy (1994) For the first time the need for developing the sector of telecommunications was stressed in order to achieve the growth planned by the New Industrial Policy. The aim is to make available high level communication services, developed over the whole national territory and at low cost. The way identified for the achievement of this aim is the opening of the sector to private operators (before that, services of telecommunications were totally managed by a public company: DoT). Even if the necessity of this opening clearly emerged in the text of the reform, this did not include a clear development plan. Moreover the

Transport and Communication Infrastructures in India 167

implementation was entrusted to the monopolist (DoT) that did not have interests in the opening of the sector to private capitals. Three years later (in March 1997) when the government realized the reform managed by DoT was not producing the expected results, it created a new regulating authority: TRAI (Telecom Regulatory Authority of India). TRAI and regulatory reform (1997) The TRAI creation became an important step in the achievement of the goals stated by the National Telecom Policy (1994) and the ones imposed by WTO, to which India belongs (1995). The TRAI has the task of creating and guaranting a real competition among the providers, safeguarding the interests of the users. New Telecommunications Policy (1999) The New Telecommunications Policy is probably the most important reform in the sector of Indian telecommunications. Its aim is to spread over the country the possibility of access to the Internet, providing a high speed data connection to all cities with a population of over 200 thousand inhabitants and to the most important industrial zones. The reform includes the goal of a tele-density of 7% by 2005 and 15% by 2010, without neglecting the diffusion of communication technologies in rural zones (the aim in this case is bringing the tele-density from 0.4 to 4.0%). The reform plans: • • • • • • •

•

no limits to the number of Service Providers operating in the sector; no restrictions to the number of licenses owned by the service providers; the chance for the Internet Service Providers (ISP) to create their own international gateways; the possibility for ISP of providing direct connections with radio and optic fibre technologies; the possibility for ISP of providing services through the use of cable TV infrastructures and operators; no tributes for the achievement of the ISP licence; the automatic authorization for foreign investments up to 100% for ISP without international gateways and up to 74% in case of international gateways; national and international long distance services deliverable by private companies.

168 Sourcing in India

Tariff Reform (1999) In 1999 TRAI understood the need for regulating the price system enacting the TTO (Telecommunications Tariff Order). This control activity on fares aims at approaching the incomes of each provider to its real costs. A standard package of services and the highest applicable fares are so defined. The strong consequent reduction of costs boosts the sector. Local Loop Wireless and limited mobility (1999) In June 1999, the public operator MTNL announced for the first time in the country a service based on the Wireless Local Loop (WLL) technology. This event represents a very important step in the development of Indian telecommunications infrastructures, as customers are now able to access the Internet without the need of a (often not available) physical connection and at low price. Broadband Policy (2004) This reform aims at promoting the development of a network of telecommunications that, through several technologies (DSL, optic fibre, cable TV, DHT, etc.), is able to provide broadband services almost all over India. The programme aims at achieving 3 million connections in 2005 and 9 million in 2007. In order to do that the liberalization of wireless technologies is also planned. 6.6.2.

The internet

The first Internet connection was established in India in 1992 and was characterized by a data rate of 9.6 kbps. In 1995, the public VSNL became the first commercial operator able to provide internet connections. Local access points were activated in Kolkata, Chennai, Mumbai and New Delhi, enabling ‘‘dial-up’’11 connections through the public operator DoT (afterwards MNTL). During the first two years 75,000 subscriptions were signed, which became 150,000 during the following two years (Kumar, 1998; Pai, 1998). In the second half of the 1990s, the rate of the reforms quicken considerably: the success of the Bharatiya Janata Party in the elections of 1997 caused a greater attention to the development of IT and the Internet. It became one of the government’s priorities (Wolcott, 2005). So the New Telecommunications Policy was promulgated in 1999. Thanks to it the number of licences granted for the startup of new Internet

Transport and Communication Infrastructures in India 169

Service Providers grew steadily until 2000 (the date in which the number of 400 approved licences was passed), then becomes stable and after that knew a decrease for the selective consolidation of this activity and the loss of enthusiasm concerning the dot-com phenomenon. Figure 6.13 represents the number of licences (A, B and C class)12 granted from 1998 to 2003. The grey zone represents the number of actually working ISPs. These companies, as shown in the picture, are numerous but not as much as the number of societies owning a licence. In fact many societies – discouraged by the high costs of rent they would face and that make the investment profitable only if there are many customers – decide not to start the activity, even if they own a license (Wolcott, 2005). The rapid growth since 1999 of the number of working providers determines a rapid increase of cover and quality of services, which causes a rapid growth of the number of customers. From 1998 to 2003 the number of cities with a point of presence grew by one order of magnitude (Fig. 6.14), passing from 45 to almost 500. This phenomenon goes together with the birth of competition among ISPs in the cities: in 1999 for the first time a city (i.e. Hyderabad) had more than 10 ISPs. In 2000, 5 cities are served by more than 20 ISPs: Bangalore, Chennai, Delhi, Hyderabad and Mumbai.

500

Total

Number of Licenses

400

300

Class C

200

Class B 100

Class A Active ISPs (Est.)

0

1998

1999

2000

2001

2002

Year

Figure 6.13:

Number of licences granted from 1998 to 2003

Source: Wolcott, 2005.

2003

170 Sourcing in India 600 Total Cities 500 Cities with 1 ISP

Cities

400 300 200

Cities with 2–4 ISPs Cities with 1 ISP

100

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

2003

Cities with 11–20 ISPs Cities with ⬎20 ISPs

0

Year

Figure 6.14: Cities served at least by one Internet Service Provider Source: Wolcott, 2005.

A comparative analysis of Figs 6.13 and 6.14 shows that during the two-year period 2001–2002 the rate of growth of the number of cities served by at least one ISP is for the first time bigger than the providers’ growth. This fact demonstrates that in this period service providers start supplying for the first time areas not considered before. In fact, while in 1994 the government opened the market to free competition in order to allow a rapid spreading of Internet services over the whole Indian country, the market initially invested at the major urban areas, which assured the achievement of rapid and consistent incomes in the investments. Only thanks to the investments made by government through public companies, was is possible to spread technology also in the less populated and more underdeveloped areas. As far as the international connection bit rate is concerned, the situation in India has significantly improved since the laying by VSNL of the first submarine cable connecting Chennai and Cangi in Singapore. The cable has a capacity of 5.12 terabits (tbps), is 3,175 km long and required almost one year for its construction and laying (from November 2003 to September 2004). VSNL signed in the same period agreements for the use of foreign companies’ cables, such as SEA-ME-WE II, SEA-ME-WE III (40 GBPS), FLAG (10 GBPS) and SAFE (40 GBPS). Nowadays the bit rate seems to be adequate for supporting the activities of foreign investors. A further improvement is also expected in the next future. Other private operators plan the laying of other high speed submarines cables which will allow a further development of the bit rate from and to India by 2009.

Transport and Communication Infrastructures in India 171 60

53,34

50 39,45

40 26,88

30 20,74 20

16,03

4,29 1,21 2

3

12,74

5,11 1,49

8,95

7,02 1,57

1,73

1,86

1,86 7 –0

6

06 20

05

–0

5 –0 04

20

4

Urban Tele-density

20

–0 20

03

–0 02 20

20

01

–0

1 –0

Total Tele-density

14,32

0,93

00 20

99

–0

0

0,68

19

–9

3,58

2,86

9

8 98 19

97

–9

7 –9 19

96 19

19

95

–9

6

0

10,37 12,2

8,23

6,87 5,78 4,76 3,95 1,94 2,33 1,56 1,28 0,29 0,34 0,43 0,52

10

Rural Tele-density

Figure 6.15: Indian tele-density Source: Department of Telecommunications, 2007.

200 149,60

180 160 140

78,08

120 48,01

100 80 60 40 20

0,34

0

14,54 1997

1,20

1,88

17,8

21,16

26,65

1998

1999

2000

0,88

Land Phones

Figure 6.16:

6,43

3,57 32,7 2001

38,54 2002

12,99

41,31

44,88

47,71

40,32

2003

2004

2005

2006

Mobile Phones (including WLL)

Relationship between land telephones and mobile phones

Source: Department of Telecommunications, 2007.

6.6.3.

The telephone

One of the greatest telephone networks in the world is located in India: there are more than 150 million telephone users registered in the nation (Department of Telecommunications, 2007). But if we consider a population of more than one billion persons, the Indian tele-density, even if rapidly growing, is modest (16.03% of the population has the telephone). This data makes India one of the countries where the spreading rate of these services is among the most limited (e.g. China had 16.69% of tele-density in 2002).

172 Sourcing in India

There are also great differences between rural (1.86%) and urban density (53.34%) (Fig. 6.15). In the most recent years (from 2004 until today), in contrast with the decrease registered in the growth of users of land telephones, the number of mobile telephone users has increased, surpassing in 2004 the number of land phone users (Fig. 6.16). The development rate of mobile phones in India is even more surprising if compared to the Chinese one. Ten years after the introduction of this technology, China registered only 13.2 million users in contrast with the Indian 48 millions.

The Case Studies

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Accenture Strategy and Configuration of a ‘‘Service Global Delivery Network’’ Massimo Nelci

1.

The company

The Accenture case study, analysing the organizational best practices of a well known international service provider, allows the study in detail of the strategy of providing offshoring/outsourcing services through a western intermediary. Accenture is a world leading consultancy firm specialized in Strategy, Operational Excellence, IT and outsourcing services, with about 175,000 employees across 49 countries and consolidated revenues of about USD 19.7 billion in 2007 (Accenture 1). The Accenture Indian subsidiary employs 35,000 workers and in 2007 registered more than 700 millions  in revenues. The company serves its customers at a global level through five operating groups, all of which are focused on a specific industrial segment (Accenture 2): • • • • •

Communication & High Technology: Telecommunications, Electronic and High Technology, Media and Entertainment; Financial Services: Banks and Financial Services, Insurance, Capital Markets; Public Services: Central and Local Public Administration & Services; Products: Automotive, Consumer Goods and Services, Industrial plants, Pharmaceutical, Distribution, Transport and Travel; Resources: Chemicals, Energy, Forests, Metallurgical and Mining Industries, Utilities.

The organization of the company is also structured by service typology, with strategic services provided by service lines specialized by function 175

176 Sourcing in India

Area North and South America

8.500

Europe/Middle East/Africa

9.500

Asia Pacific

1.700

Total Accenture 1:

FY 2007 revenues (USD millions)

19.700

Accenture revenues’ geographical breakdown

(Accenture 2): Management Consulting, System Integration & Technology, Outsourcing & BPO. These service lines, operating crosswise over the industrial segments described above, look at the innovation and quality of the services, pledging both the need of tailor made solutions with high volumes in order to assure high value added services and low costs. The Management Consulting service line provides business management consultancy services: • • • • •

Customer Relationship Management: development of strategies and methodologies for retention of customer1 loyalty; Finance & Performance: support services for business and financial management; Human Performance: implementation of strategies and methodologies for human resource management; Supply Chain Management: development of operational models for supply, production and distribution management; Strategy: support services for the definition of long and short term management strategies.

The System Integration & Technology area is composed by the following services: Information Management Services: data management services developed in order to improve the quality, reliability and ability of information to support strategic decisions for the company. • Enterprise Solutions: implementation of software applications, from more commonly used ERP (SAP, Oracle) to specialized software; •

Communication and high tech

Financial services

Public services

Products

Resources

Management Consulting

System Integration & Technology

Outsourcing and BPO

Accenture 177

Accenture 2: Accenture operational model

178 Sourcing in India • • •

•

• •

Integration: integration and rationalization of processes, systems and information through platforms, web services and other IT technologies; Infrastructure & Technology Consulting Services: optimization and management cost reduction of IT infrastructures; IT Strategy & Transformation: definition of IT strategies of the company in line with strategic objectives and market evolutions in order to convert IT in a competitive lever; Microsoft Solutions: through partnership with Microsoft and a specific company structure (Avanade), Accenture provides software solutions based on the more recent Microsoft technologies; Mobile Solutions: development and implementation of solutions for entering companies’ applications through mobile platforms; Research & Development: a specific structure (Accenture Technology Labs) develops business solutions based on innovative technologies, besides seminars for customers on the use of technological innovations.

The Outsourcing & BPO service line provides three kinds of services: Business Process Outsourcing: management of entire company processes or functions, typically after the transformation of the processes involved, the spin-off of company branches or the creation of Joint Ventures; • Application Outsourcing: customers’ applications management (a step which always comes after the development and the implementation of such applications); • Infrastructure Outsourcing: this service is normally provided with one of the two services previously described, in order to assure to the company a single interlocutor and an all-inclusive package with well-known costs. •

2.

Global Delivery Network

The Global Delivery Network involves more than 50,000 employees belonging to 40 centres localized in more than 30 countries in the world (Accenture 3). The Strategic Delivery Model (SDM), the organizational model adopted by Accenture to provide strategic services to the customers in various regions is represented in Accenture 4: there are three project management configurations: onsite, nearshore and global offshore. •

Onsite teams are fractioned units which follow the project with the customer.

Riga (1) Toronto (1)

Montreal (1)

UK (1) Bratislava (2)

Dalian (2) Prague (2) Hyderabad (1) Chicago (1) Shanghai (1)

Spain (2) Cincinnati (1)

Manila (8) Mumbai (3) Houston (1) Bangalore (3))

Chennai (1)

Wilmington (1)

São Paulo (1) Mauritius (2) IT Centre BPO Centre

Accenture 3:

Accenture Global Delivery Network

179

IT and BPO Centre

180

Onsite & Nearshore Workforces

Client Sites

Delivery Centres

Delivery Centres

Onsite Delivery

Chicago, Atlanta, Toronto, London, Bratislava, Prague, ...

India, Philippines, Spain, China

Multi-disciplinary Teams Methodology, Tools and Architectures Accenture 4:

Global Delivery

Accenture Strategic Delivery Model

Accenture 181

Nearshore delivery centres are Accenture operational centres localized near the customers (usually in the West) and characterized by advantages of costs (e.g. low labour or infrastructure costs) or of specialization (availability of human resources with specific competences in the activities developed by Accenture). • Offshore delivery centres are operational centres which provides services that don’t need a geographical proximity with the customer and that can be managed where costs and specialization advantages are more relevant (e.g. India, Philippines, China). •

The choice of managing the project onsite, nearshore or offshore is influenced by many factors, such as the dimension of the project, the need for frequent interactions with the customer, the ability and knowhow of the local delivery centre, the labour cost. The main factors which affect the choice of the delivery mode are shown in Accenture 5. The choice of the delivery mode could be changed during the life of the project. Activities in which the involvement of the customer is more relevant are usually concentrated at the first steps of the project. In this phase the management of the project at onsite level is predominant. As the project proceeds the interaction with the customer typically decreases, enabling the service provider to involve one or more Delivery Centres (nearshore or offshore) in order to increase management flexibility and reduce costs.

Delivery

Onsite

Nearshore

Offshore

Key factors • Need of interaction with customer • Project short lead time • High strategical content • Preference expressed by the customer • Regulatory requirements • Need of interaction with customer • Reduction of possible language difficulty due to offshoring • Local competences linked to application platforms not present in other countries • Relevant project volumes (thousands of labour hours) • Indifference of the customer regarding the place • Low need of interaction with customer • Low strategical content of the activity

Accenture 5: Key factors in the choice of the delivery model

182 Sourcing in India

The choice of the most appropriate delivery centre for any single activity follow the analysis of a series of factors, in primis the location of the customer (language, computer, etc.) competences needed, costs, and the availability of the delivery centre to absorb the workload. This approach permits the combination of local with offshore management. This result is obtained also through a continuous homogenization of competences and methodologies among the different international units. In this way, employees of Delivery Centres can focus on more projects simultaneously (this does not happen in onsite teams, where resources are dedicated to a single customer), obtaining relevant savings due not only to location costs, but also to advantages linked to the sharing of activities common to different projects. An example of the distribution of activities onsite or offshore/nearshore is shown in Accenture 6, where is detailed the case of a process of development and maintenance of IT applications. As we can see, the first macro-phase called ‘‘Development and Implementation’’ is the one in which the onsite management is more relevant: this is because activities as concept, design and implementation2 need an intense sharing of information and data with the customer, which is made through an Accenture team located onsite.

3.

Outsourcing services

The relevance of the outsourcing division in terms of revenue for the group has grown in the last 15 years; in 1998 the incidence of this business on the total incomes of Accenture was equal to 16% (USD 1.3 billions); in 2007 the incidence increased by more than 40% (Accenture 7). Today Accenture provides and manages outsourcing services for 400 customers in 21 different industrial sectors through more than 30 thousand employees. The outsourcing services offered by Accenture are summarized in Accenture 8, classified by the value (strategic or tactic) of the activities involved. 3.1.

Business Transformation Outsourcing (BTO)

This is the more complex solution carried out by Accenture, and is addressed to companies with a relevant (technological or process) deficit that can affect entire company departments. Accenture supports the company in the achievement of planned objectives, directly operating this function and modifying it through an outsourcing management that, for relevant projects can last 5–10 years. At the end of the contract

Onshore

Development and implementation

Concept design Functional design

Offshore/Nearshore

100%

Concept Design

70% 20%

Requirements analysis

Implementation

Maintenance

75%

Support services

Construction

70%

Integration test Offshore workforce localized onshore development support

25%

Development

25%

Realization

Report

100%

Report creation

Update

100%

Development of new applications

Monitoring

100%

Continuous monitoring

Applications analysis

Technical analysis

50%

Support to the analysis

20%

Failure analysis

80%

Failure mode analysis

Daytime management

20%

Management support

80%

Management h24

Daytime support services

20%

Management support

80%

Support services h24

Onshore vs. offshore localization of the activities in a process of development and maintenance of IT applications

183

Accenture 6:

50%

80%

Test

Implementation

75%

Requirements analysis and Functional design

Applications analysis

Construction

30%

Acceptability test

Offshore workforce localized onshore

30%

184

8,2

9,5

9,8

11,5

11,8

11,9

13,7

19,7

15,5

20 16 11,9

Revenues (USD billions)

14 12

9,5 8,6

10 8 6

6,9

8,2

8,3

9,0

9,5 8,3

7,8

4 2

1,3

1,3

1,5

2,0

2,8

1998

1999

2000

2001

2002

3,6

2003

5,1

6,0

2004

2005

0 2007

Consulting Outsourcing

Accenture 7:

Trend of Accenture consulting and outsourcing revenues

Strategical value

Business transformation outsourcing Business processes Business process outsourcing

Business service provider

Business applications Application management

Application service provider

Technology infrastructure Tactical value

Information technology outsourcing

Managed hosting

Accenture 8: Accenture outsourcing services classification

Accenture 185

the customer can decide to maintain Accenture’s management of the department or manage it directly, keeping the advantages conceived during the transformation process. A company which turns to BTO wants to overcome a simple outsourcing, obtaining a radical transformation of the department through the acquisition of the competences and knowhow of the service provider. 3.2.

Business processes

In this area Accenture provides two categories of services: Business Process Outsourcing (BPO) and Business Service Providers (BSP). While BPO consists in the outsourcing of an entire company process, BSP is more circumscribed and concern the externalization of one single activity. Considering for example Human Resources management, a BPO project means outsourcing the entire function (staff selection, education, hiring management, payment management, etc.), while a BSP solution involves a single service, such as recruiting management or payment management. 3.3.

Business applications

Compared to BPO, BSP and BTO, this area involves more technological aspects, linked to systems management, hardware maintenance, and development and sharing of software. In particular, Application Management (AM) consists in managing the entire IT department of the client (assets and employees included). The service comprehends on the one hand the management of the IT services of the company (hardware maintenance, application performance management, etc), and on the other hand the development and delivery of support services for users. ASP (Application Service Provider) is a service which puts into effect the idea of payment of the application calculated on the basis of utilization. This means determining a ‘‘pay per use’’ rate which allows the company to use standard applications contained in Accenture’s servers. 3.4.

Technology infrastructure

Information Technology Outsourcing (ITO) is the management of the entire IT function of the client (asset, staff, etc.). Managed Hosting is, instead, a low value added service, consisting in the outsourcing of the client hardware management. Accenture tends to combine this service with others of major complexity and a higher value added, such as ITO or AM.

186 Sourcing in India

4.

Transition management

The ‘‘Delivery Method for Service Transition’’ is a methodology developed by Accenture to manage the transition process of activities. It is normally used in the following situations: outsourcing of activities previously performed by the customer; relocation of the service development from one client plant to another; • relocation of a service development from one Accenture Delivery Centre to another; • development of a new service. • •

The main steps of this methodology are described in Accenture 9. The management of transition begins from the collection and analysis of data from the company, the analysis of the process to be transferred and of the links of this with other company activities/processes. In this way the service provider could identify the main requirements necessary to start the process, obtaining key input for the definition of the transition management programme. After termination of these activities, the transition process enters in the execution phase. This phase comprehends a series of activities such as: •

Communication Management: the creation, development and execution of an informative interchange programme with all the Transition Management Programme Analysis

Execution Communications Management Service Management Implementation Financial Management Implementation Contractual Management Implementation Operational Management Implementation Human Resource Management Knowhow Transfer

Accenture 9:

Accenture delivery method for service transition

Exit

Accenture 187

•

•

• •

•

•

stakeholders involved in the process (in particular employees and service users); Service Management Implementation: implementation of the service management structure; creation of a control and report management system; Financial Management Implementation: identification of key financial drivers; definition and implementation of financial instruments and processes; Contractual Management Implementation: definition of contractual terms linked to the new organization; support in contracts drawing up; Operations Management Implementation: planning of structures and processes of the new function; development of all the activities necessary to provide the service; transfer of the activity from the original organization to the new one; Human Resources Management: definition of human resources requirements for the new group; evaluation and placement of existing staff; development of a recruitment strategy and definition of human resources management policies; mapping of actual competences and competences to be developed; identification of criticalities in human resources management; training for each employee involved in the transition; Knowhow Transfer: identification of employees with key competences; identification of transferable competence from the old to the new unit; definition and implementation of a transfer programme.

Finally, there is an exit stage, consisting in the definition of some activities according to first results collected and in the establishment of operations in the new configuration.

5.

Global Sourcing Approach

The Global Sourcing Approach was developed by Accenture in order to support clients with the definition and rationalization of their supply network. This model has multiple areas: Strategic sourcing (rationalization of suppliers, development of processes of analysis of the industrial environment and of suppliers’ performances, creation of a costs policy in the selection of suppliers); • Make or buy evaluation (development and support to the implementation of a methodology for make or buy decisions); •

188 Sourcing in India •

•

• • • •

Evaluation of transition costs and process costs (development of methodologies for the reduction of transition costs, process costs, supplier interaction costs, transport costs, etc); Organization (development and implementation of organizational models for strategic sourcing, study of the balance between organizational centralization and decentralization); Value engineering and standardization (implementation of methodologies for value creation); Global sourcing (study of a global supplying strategy involving emerging countries); Evaluation and development of suppliers; Competences development (evaluation of staff competences, implementation of specific training sessions, etc).

In order to study this model in depth, we describe its application in a real case of supply network expansion performed by Accenture (Accenture 10). The process started with the identification of the specifications of the services to be purchased (grouped in homogeneous categories). Then a list of new potential suppliers was identified located onshore and in foreign markets. For this purpose Accenture managed a supplier database (located all over the world and grouped by sector), continuously updated through information obtained by its customers, by databases of industrial associations, by researches commissioned to specialized companies or to international purchasing offices (e.g. Accenture Procurement India). This database is a key instrument in order to support customers in the identification of new suppliers. Adding the existing suppliers of the client to a list of potential suppliers the expansion (or restructuring) of the supply network is obtained. Then, starting from needs expressed by the customer, criteria of selection are identified. Among these, the most relevant, besides the most obvious cost saving are: • • • • •

production quality/level of production (quality of materials used, existence of quality standards for the processes, supply quality, etc); design capability (capability of design and development of new products, infrastructures for R&S, quality of technical staff); managerial competences (technical and managerial competence of managers); financial stability; existence of after sale support services;

List of existing suppliers of the customer

Analysis of requirements of the services to be purchased

Accenture 10:

Identification of potential new suppliers (Accenture Database)

Definition of a list of potential suppliers

Definition of selection criteria

Suppliers evaluation

Order placement

Management of the supply relationship

Example of activities involved in the revision of the supply base

189

190 Sourcing in India •

production flexibility (ability of supporting changes in volumes, flexibility of different production mix).

The next step is visiting plants of selected suppliers in order to verify their characteristics according to the parameters of selection. In this process of supplier analysis, Accenture recurs to its offshore units; these teams, located in the main supplying areas, are an important link for the customer and can also be used when the process has already started. As suppliers are selected, the process enters the implementation phase, in which take place activities such as negotiations, the first pilot order, verification of the first supply, and contract drawing up. Once the contract is signed, the supplier relationship management starts: supplier performances are evaluated on the basis of the existing contract, in order to define and implement supplier upgrade and integration processes for aligning quality standards of suppliers with those of the client and guaranting a continuous improvement of the supply process.

6.

The choice of the Indian market

Accenture was one of the first companies to invest in India. Today this is an important competitive advantage as regards the so called ‘‘war for talents’’, a ‘‘war’’ in which multinationals fight in India for hiring young graduates. The recruiting and training process is considered strategical by Accenture, according to the high relevance of competencies in the activities performed by the group. Regarding the training process, the company planned for its graduates, selected from the best Indian Universities, a path of improvement in a school created in cooperation with Jamshedpur Business School, one of the most important management schools of India. This structure is right for the professional growth of young graduates in the most interesting areas for the company: Information Technology and Business Process Outsourcing. Once these graduates have been educated, it is crucial for Accenture to establish a long term relationship with them, in order to guarantee an appropriate continuity in the development of the projects; Accenture pursues this aim through an accurate planning of career opportunities for hired people, an high level training programme, the increase of responsibilities and the definition of work opportunities outside India.

Accenture 191

Today Accenture has more than 36 thousand employees in India, offering services to many multinational and local companies, mainly in the following industries: Automotives, Oil & Gas, Industrial Equipment, Textiles, Chemicals, Banks and Insurance, Petrochemicals, Pharmaceuticals, Telecommunications etc. From October 2007 India is the first location in terms of employees for Accenture. The Company operates in India through 10 Delivery Centres, two of which are fully dedicated to Information Technology (Hyderabad & Pune) while the other ones are able to provide both BPO services and IT applications (3 in Mumbai, 3 in Bangalore, 1 in Chennai and Gurgaon) (Accenture 11). All the Indian Accenture Offices have CMM level 5 certificates, while one of the centres in Bangalore has a certificate level 3 in the eSourcing Capability Model for Service Providers (by Carnegie Mellon University).

Gurgaon

New Delhi

Mumbai Pune Hyderabad Bangalore

Chennai

Accenture 11:

Accenture in India

192 Sourcing in India

Accenture attaches importance to these certificates, which are the instrument to guarantee to the customer the quality of services locally developed. Today India is for Accenture the favourite location for IT and BP offshoring. Together with the increase of these kind of services managed in India, there is an increase of the strategic value of the services developed through Indian offices: beginning with call centres, help desk and support services, and standard transaction management, today in India more sophisticated activities are provided also near to the company’ core business. Accenture, following this evolution, maintains a differentiation between Western Delivery Centres and offshore ones. As far as services offered by Accenture in outsourcing are concerned (Accenture 8), we can observe how Indians Delivery Centres are involved marginally in BTO projects, being preferred in providing services in the field of ITO, Managed Hosting and Business Applications. Regarding BPO, Indian units are involved in those projects that don’t need an onshore presence or a deep knowledge of dynamics characterizing the local market and regulations (as for example in supply chain management or transportation management). Indian centres are preferred for providing administration or accountancy services, for which it is sufficient to have a general knowledge of the regulation scheme of the country of destination. Anyway, it is evident how India, thanks to the wide availability of young graduates with IT competences, fluent English and a lower cost compared to western colleagues, will become an even more strategic point inside the global network of Accenture. The availability of a qualified labour force – even though with the mentioned recruiting, training and turnover reduction problems – allows Accenture to maintain high flexibility and assure the possibility of dimensional growth in the Indian units, unlike the limited capacity in other countries (such as Eastern Europe), where the availability of appropriate profiles for Accenture is lower. As far as services provided to Indian companies are concerned, Accenture’s customers are 7 of the 10 major local groups. This demonstrates on the one hand the relevance of this country as a channel of trade, and, on the other hand, how an outsourcing intermediated development approach is also widely utilized inside the Indian market.

GlaxoSmithKline International Rationalization and Delivery of the Service Portfolio Diego Michielan

1.

The company

Thanks to its 100,000 employees, a turnover of around 33.4 billion euros in 2006, and a market share of 7.1%, GlaxoSmithKline – an English multinational born in 2000 by the fusion of Glaxo Wellcome and SmithKline Beecham – represents the second largest pharmaceutical company in the world. In the company, research and development activity is performed by more than 1,500 researchers (spread in 24 research centres set in 11 countries) and absorbs almost 5 billion euros investment equal to 14.9% of company turnover (data 2006). In Italy alone in 2004 GSK invested in research activities of more than 114 million euros, 4 million more than the previous year and 8 more than 2002. In Italy the company employs more than 3,000 people (GSK 1). In Verona, together with the historical headquarters (established in 1932), is also located a Research Centre where, at the end of 2004, more than 500 researchers were working. This site plays a strategic role within GSK group since it represents one of the 7 world centres in Drug Discovery of the group. Starting from 2000 the two pharmaceutical manufacturing functions of Glaxo Wellcome and SmithKline Beecham merged into one single organization (Global Manufacturing and Supply – GM&S): the field covers primary pharmaceutical plants (for active principles production) and secondary pharmaceutical plants (for the production of pharmaceuticals addressed to the market). These organizations employ more than 35,000 people, spread across 82 plants (situated in 37 countries). The two production plants in Italy with their 728 employees supply more than 100 markets throughout Europe, the USA and Asia. 193

194 Sourcing in India

GlaxoSmithKline consumer healthcare S.p.A. Consumer Healthcare Over-the-counter and widely consumed products

GlaxoSmithKline S.p.A Pharma Scientific information, marketing, commercialization, and services R&D Research & development

GlaxoSmithKline manufacturing S.p.A. GM&S Production processes

Allen S.p.A.

Allen Generic drugs

GSK 1:

GlaxoSmithKline in Italy

The Consumer Healthcare division is sited in Baranzate, which, with 135 employees and a turnover of more than 150 million euros (data 2004), is the focus for all activities related to over the counter drugs and basic commodities products (dental hygiene in particular). The GSK supply base in Italy includes about 3,000 suppliers (primary goods and Consumer Healthcare suppliers not included), mainly Italians. The Italian division’s annual expenditure for direct and indirect materials in 2004 was around 300 million euros, subdivided as shown in GSK 2. 2. Current level of offshoring and opportunities in the pharmaceutical industry The pharmaceutical industry employed approximately 1.7 million individuals worldwide in 2003 and, based on current projections by industry experts, this number is expected to grow by 2.8 per cent annually, resulting in an estimated 2 million jobs by 2008 (US Department of Commerce, 2003). Employment varies by country with 79 per cent of industry employment concentrated in developed nations. The United States leads in industry employment (41 per cent), followed by Europe (25 per cent), and Japan (13 per cent) (Farrel et al., 2005). Consequently,

GlaxoSmithKline 195

Research and development € 38.164.291 Global manufacturing and Supply € 131.635.468 Pharma € 71.995.785

Consumer healthcare € 66.598.493 GSK 2:

Total € 308.394.037

GSK Italy spending for materials and services in 2004

Source: Annual Report 2004: economic, environmental and social GSK in Italy, 2005.

IT 3%

Rest of the World 21% US 41%

Japan 13%

Procurement 3%

General & Administrative functions 6% Manufacturing 31%

Europe 25%

Supply Chain Management 2%

Sales and Commercial activities 40%

Research and Development 15%

GSK 3: Global pharmaceutical employment by region Source: McKinsey, 2005; and by function Ernst and Young, 2004.

only 21 per cent of industry employment is located in less developed nations, but this trend is beginning to reverse as more firms embrace outsourcing and offshoring opportunities (GSK 3). The employment distribution by function is mainly concentrated in three areas (GSK 3): commercial (40 per cent), manufacturing (31 per cent), and research and development (15 per cent). Sales agents represent the largest percentage of the workforce (35 per cent total; 88 per cent of commercial), while the remaining 14 per cent of employment is involved with back office services such as general and administrative functions (G&A) (6 per cent), IT (3 per cent), procurement (3 per cent), and supply

196 Sourcing in India

chain management (2 per cent) (Ernst and Young, 2004). Also occupational distribution is expected to be impacted by offshoring initiatives as companies start to take advantage of skilled labour in low-wage countries (Ernst and Young, 2004). In fact, even if the pharmaceutical industry has been slower to embrace offshoring, over the last few years this trend has begun to reverse with significant movement toward global sourcing. Most multinational corporations based in the United States, Western Europe, and Japan have experimental programmes in various countries or have outsourced labour-intensive functions such as IT and G&A. In 2003, an estimated 10,000 jobs were offshored but this number is projected to double to 21,200 jobs by 2008, reflecting the growing adoption of offshoring strategy (Pascal et al., 2005). But not all functions within the pharmaceutical value chain register the same degree in offshoring initiatives. Certain positions are not appropriate for being offshored since they require a local, physical presence (as sales agents), local knowledge for marketing and product development or regulatory filings and procedures. In addition, jobs that entail complex interaction among product developers, sales representatives, and drug researchers are not suited for being performed remotely. However, unlike many industries, the pharmaceutical sector is uniquely positioned to remotely execute one of its core competencies – R&D, which represents 74 per cent of offshored employment (Pascal et al., 2005). R&D covers a variety of areas but the activities currently performed in less developed nations include clinical trials, clinical statistics, data management, medical writing, and discovery. In particular, clinical trials has been recognized as an area with the greatest potential for cost-savings and expansion (FICCI, 2005; Bakhle, 2003; PWHC, 2004). Although globally sourcing a core function such as R&D is inherently risky, pharmaceutical companies have made it clear that they are more than willing to follow in the footsteps of industries that have successfully utilized offshoring. After R&D, IT is the next largest offshored function, with 22 per cent of employment performed abroad by pharmaceutical companies, even if it only constitutes 3 per cent of total pharmaceutical employment. A significant portion of application development, data management, and maintenance have been offshored while fewer activities that require investment in new infrastructure have been relocated. The smallest job function to be offshored by pharmaceutical companies (2 per cent) is G&A, which includes basic financial operations such as payroll, finance, and accounting. Together with R&D and supporting functions, more traditional manufacturing activities have also been subject to offshoring strategies.

GlaxoSmithKline 197

In the pharmaceutical industry, the manufacturing process of a drug product includes the following stages (Pore et al., 2006): Active pharmaceutical ingredient (API), also referred to as bulk drug Final dosage formulation (secondary manufacturing) • Finishing and packaging. • •

These stages are often performed at different sites and may be broken down into further steps. For example, in API manufacture, it is common for chemical intermediates to be supplied by one company to another. The technical and regulatory requirements of the manufacturing facility will depend on whether the drug is a chemical or a biological product. High potency drugs and biologicals typically require more containment and hence infrastructure. The volume of the drug will depend on the nature of the disease area and whether the drug is a prescription product (either branded or generic), or whether it is sold over the counter (OTC). Active pharmaceutical ingredient (API) manufacturing is typically offshored by outsourcing to a third party and is motivated by costefficiency. India is the third largest global manufacturer (after China and Italy) and is expected to generate sales of $4.8 billion by 2010 from $2 billion in 2005, at an average yearly growth rate of 19.3 per cent, according to a study conducted by Italy’s Chemical Pharmaceutical Generic Association. The APIs manufactured by offshoring are almost all generic or off-patent products, as this is when the cost of manufacturing starts to be a competitive advantage and IP concerns are lower. (GSK 4) Low-cost structures and the growth of domestic pharmaceuticals markets seem to be the drivers of secondary manufacturing offshoring growth. The low manufacturing cost structure in India, for example, enables companies to sell medicines to the local population fostering also the penetration into other developing markets where costs of pharmaceuticals are prohibitive, such as South-East Asia and Africa (Pore et al., 2006). 2.1. Motivations for offshoring growth in the pharmaceutical industry Draining pipelines, expiring patents, increasing R&D costs, declining productivity and the drug price pressure are all factors that challenged pharmaceutical companies during the recent past. In 2002–04 only 58 new drugs received marketing approval from FDA, a 47% drop from the peak of 110 new drugs in 1996–98 (Pore et al., 2006). In contrast, R&D spending increased from $2 bn in 1980 to $43 bn in 2006 (Pharma, 2007). As a result, only three out of ten marketed drugs produce revenues

198 Sourcing in India

R&D

• Target identification & validation • Lead generation & optimization • Preclinical/ toxicology

Industrial operations

• New production development • Procurement • Planning and manufacturing • Supply chain management

• Clin. Dev. & trials • Phase I • Phase II • Phase III

• Performance monitoring & control

• Data management

Commercial operations

Support functions

• Strategic & commercial business planning (pre-launch)

• Finance & accounting

• Commercial analysis

• Human resources

• Pricing & health economics

• Legal

• Market a product (new & legacy) • Customer relationship management

• Information technology

• Legal counselling advocacy & litigation • Intellectual property counselling

• Sales force support

• Customer & consumer services • Sales management • Logistics & distribution

Offshore potential

• After sales services

GSK 4: Offshoring potential in the pharmaceutical value chain

that match or exceed average R&D costs (Pore et al., 2006). At the same time, the patents of many drug products are expiring and thus the competition from generic manufacturers becomes harder. Under such circumstances, more and more multinational pharmaceutical companies consider offshoring R&D work as an effective way to reduce the actual cost of research, compress the period of drug development, and try out more research. Additionally, the pressures are causing companies to re-evaluate their cost structures throughout the value chain. Manufacturing has been an area where many industries have realized great cost-savings by moving abroad. But for the pharmaceutical companies, as well as other industries, there is an added incentive to manufacture abroad: doing this they can access the growing markets for healthcare products in developing economies. 3.

The GSK purchasing organization

GSK purchasing activities are managed by PCM (Procurement & Contract Manufacturing) organization, responsible for the definition of sourcing strategies for every kind of goods and services. This organization, which employs about 1000 people, manages a purchase portfolio of 14.5 billion dollars (43% in North America, 44% in Europe, 13% in the rest of the world). PCM (GSK 5) is led by the Senior Vice President and is organized by product purchase type (sourcing group), geographic area (Europe, USA,

GlaxoSmithKline 199

Global Procurement & Contract Manufacturing

Senior Vice President Programme Manager

Vice president Global Systems & Operations

Vice President International

GSK 5:

Executive Assistant

Vice President Commercial & General

Vice President Production

Vice President Contract Manufacturing

Vice President R&D

Director global IT

Director Communications

Procurement organization in GSK

International) and peculiar activities (communication, technologies and processes). In detail: The Commercial & General division (C&G) is responsible for the supplying of indirect materials and services. These include a vast range of supplies going from consumables to strategic consultancies. Directly to C&G Vice President report the Procurement Directors of 5 European countries (selected on the basis of purchasing volume and their relevance for business strategy), one Procurement Director for the remaining European nations, one for the USA and two responsible for purchases in the rest of the world (each one focused on particular material classes); • The Contract Manufacturing division has the responsibility of supplying direct materials for the production of semi-finished products for the pharmaceutical and consumer sectors; • The Research & Development division manages the purchase of materials (laboratory consumables such as solvents, reagents, equipment, etc.) and services (consultancy, equipment assistance and maintenance, clinical research, etc.) to support the 24 development and research centres. •

200 Sourcing in India

GSK 6: Galaxy portal screenshot

The International division has the responsibility of supplying direct materials for each branch located in Africa, Asia and South America; • The Information Technology division manages the supply of materials and IT services at international level; • The Global System & Operation division plans and implements solutions supporting purchasing activities (e-procurement, e-sourcing, e-collaboration, etc.); • The Communication division has the responsibility to design tools and solutions to foster effective communications to increase knowledge, share objectives and results both inside and outside the PCM organization. •

All these activities are supported through an internet-based platform (called Galaxy – GSK 6), that enables information and knowledge sharing during the entire buying process: suppliers research and selection phase (RFI, RFP), activities planning, results measurements, contracts storing and management, internal customer satisfaction level. In 2003 the Chartered Institute of Purchasing and Supply Management (CIPS) gave an award to GSK for the best use of technologies supporting the purchasing organization (e-procurement, e-sourcing, e-knowledge sharing, etc.).

GlaxoSmithKline 201

4.

Outsourcing/offshoring strategies in GSK

There are two dimensions drive offshoring decisions in GSK: one internal (the characteristics of the activity to be supplied) and one external (supply market opportunities). From one side the company’s need is to deeply understand the process that is potentially to be externalized; on the other side, they perform an analysis of the opportunities offered by the global supply market verifying the potential impact of an external development instead of an internal one. In accordance with this approach, GSK first evaluates its internal processes, classifying them on the basis of their added value and their interaction with the other company activities. As result of this periodic analysis, GSK is able to classify company activities within three simple macro classes (see GSK 8 further below) as follows: back office activity, with a low added value and a high repetition and standardization level; • core activity, unlike the previous one with an high added value and a low standardization level; • ‘‘service’’ activity, as an intermediate degree between the previous two. •

For GSK, supply options for back office activity include both domestic and offshore outsourcing and internal development performed by owned offshore branches. For this type of activity outsourcing is recognized having many advantages, such as allowing more flexibility, more focus on company core competencies and, in particular with an offshore solution, greater cost saving. However, an equity type offshoring is preferred whenever an activity needs many man hours to be developed or requires a detailed control level together with large and complex communications; all factors which, considering the Total Cost of Ownership (TCO) in accordance with Williamson Transactional Cost Economy, make an insourcing solution more convenient than an outsourcing one. As result, at operational level, the first decision GSK has to take is geographical, between domestic outsourcing and offshoring. In order to do that, the company evaluates service peculiarities and the risks associated with a re-location. If offshoring is the selected strategy, GSK starts the location selection process, supported by risk assessment studies made by specialized companies.

202 Sourcing in India

Once the location has been selected, two alternatives are possible: captive solutions or a third-party supplier. To support this decision process, the company analyses the features of the process to be outsourced together with the level of knowledge inside the company. These analyses are performed through a tool specifically developed by GSK, which consists of a questionnaire (GSK 7) (completed jointly by the project manager and the procurement manager) with the aim of highlighting the following aspects:

CRITERIA

HIGH SUITABILITY = LOW RISK

ASSESMENT 1

Who

How

What

Objectives

Score

Risk

7

•

3

•

6

•

Service well defined and managed.

9

•

Excellent Forecasting, tightly controlled process times

5

•

7

•

Metrics defined, regularly reported and reviewed.

8

•

Deliverables are defined under a standard methodolgy.

9

•

Documented & enforced processes.

10

•

7

•

9

•

8

•

10

Clearly defined objectives are available for the Outsourced opportunity, they are definable, measurable and realistic

Objectives undefined

Objectives defined and regularly reviewed

Process Uniqueness

Industry standard or configured processes with standard technology, supporting a common process.

Highly proprietary, supporting exclusive process

Configured standard package

Process Complexity

Measure of the complexity of process and underlying technology e.g. enhancement, integration, no. of technologies/processes

Service Levels

Service Levels are well defined and can be agreed between provider/recipient. Service Quality is well defined and managed through the SLA

Service Volumes

Service volumes are quantifiable and well understood (i.e. volume of workflow is clear)

Service Stability

SLA’s are currently consistently met or exceeded. Process are mature and changes are planned

Metrics

Metrics for monitoring project/service delivery performance are (or can be) defined.

Deliverable Definition

Process deliverables and outputs are well defined and understood.

Processes

The processes to be used to produce required outputs are clearly understood and defined.

Cost Baselined

The Project/Service Cost baseline and its composition is understood for the existing service/processes

Complex processes, highly modfied and integrated. Service requirements undefined Unpredictable volumes, process times unknown Firefightingunstable system No metrics defined Deliverables to be produced are not known. Inconsistent & Undocumented processes Current Costs unknown

Simplest and alone system.

Stable system with planned changes.

Current costs fully understood

Communicatio ns

Nature of required communications is understood. Mechanisms to overcome remote working and time zone difference scan be implemented.

Frequent, ad hoc, face to face communction required

Predictable and structured communication

Governance

Clear governance structure in existence or a new governance structure is capable of being implemented between GSK and an outsourced provider.

No governance mechanism exists

Governance processes defined and understood

Skills mix

Skills to be retained in-house are clearly understood. Skills to be outsourced are non-core and can be separated from the retained skills.

Roles and associated skills undefined

Retention Strategy

Retained staff and their roles are clearly defined. A communications plan can be/has been developed.

Management Sponsorship

Management buy in and sponsorship exists to outsource the project/service.

Retained roles undefined No management sponsorship

Roles distinct & well defined

6

•

Retained roles well defined and communicated

8

•

Complete management buy in

10

•

OVERALL ASSESSMENT GSK 7: GSK questionnaire for outsourcing decision (sample)

62 %

GlaxoSmithKline 203

Process main features (what); The requirements needed to successfully outsource the process (how); • Subjects involved (who). • •

Each area has sub-questions aimed at identifying volumes, objectives, performance measurement levels, communication required, etc. This process allows the collection of information (knowledge level, available documents, links among processes, etc.) related to the activities under analysis, and an evaluation of the suitability of an offshore outsourcing strategy. GSK management highlights this has not to be considered as una tantum process: a low score obtained by a specific activity doesn’t necessarily indicate that it would be impossibile to adopt an outsourcing strategy, but instead it points to potential risks and/or areas to improve before proceeding with an outsourcing strategy. A captive offshoring initiative is realized thorough GSK organizations (like International Purchasing Offices – IPOs) or Wholly Owned Subsidiary (WOS), if available in the selected country. On the contrary, in case of pure offshoring, sourcing is implemented through foreign suppliers and/or ‘‘Western Clone’’, western companies with offshore branches. In accordance with company strategy, GSK does not outsource core processes. In this case, the decision is mainly related to selection of the best place to perform the activities (headquarters or wholly owned foreign unit).

In House

Core

Criteria What?

Score

Criteria 1 Criteria 2 .... Criteria n

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

How?

Service

Criteria 1 Criteria 2 .... Criteria n

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Who? Back Office

Criteria 1 Criteria 2 .... Criteria n

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Total score

DOMESTIC OUTSOURCING

GSK 8:

Risk

CAPTIVE OFFSHORING

Internal dimension in offshoring choice

PURE OFFSHORING

204 Sourcing in India

The selection is mainly made on the basis of volume involved (man hours needed to perform the activity) and whether the activity is suitable to be performed remotely (communication degree needed, interaction with other activities and business process, regulatory constraints, etc.). These two aspect must be jointly considered. In fact, if the volume involved highlights significant savings opportunities, this fosters an internal re-organization process with the aim of improving offshoring suitability of the activities (for example by rationalization and partial standardization of the process, or simplifying communication through better documentation, etc.). Finally, for ‘‘service’’ processes, GSK can adopt the entire spectrum of sourcing strategies described above. By evaluating the characteristics of any activity, the company selects the most appropriate strategy on a case by case basis. Sometimes for this type of processes GSK adopts a hybrid solution, using different sourcing models for different activities even within the same function. For example, within the human resource department, the pay-roll process (back office activity) is outsourced offshore; while decisions about salary dynamics (service activity), which deal with longer term decisions, are retained inside the company.

5.

Supplier selection

GSK performs market analysis on a regular basis to explore the offshore supply base. To do this type of activity properly, the company considers it fundamental to separate out the main drivers for supplier selection (cost, quality, flexibility, etc) from the marginal ones. In the case of India, the main drivers are cost and flexibility. The supplier selection process (GSK 9) starts with the identification (through the internet, government bodies, internal or consultancy company databases, etc.) of a group of potential suppliers, which, at this stage, are likely to be quite numerous (at least 20 companies). Then a pre-selection is made on the basis of information available online and in the same databases used for the identification of suppliers during the previous step. In this phase, the number of potential suppliers is hugely reduced (GSK 9). As an example, in the Indian supply market, the following questions have been used to screen the first list of potential suppliers with particular emphasis on site location decision: • •

Is the supplier near to an Indian major city? Is there confidence there will be a site Network Plan over the next 5 years?

GlaxoSmithKline 205 6 months

Potential Supplier Identification

Pre-Selection

RFI

On site analysis and RFP

Contract Finalization

Suppliers involved 20⫹

10⫹ 3–4

1–2

Project resource, Procurement Human Resource, Information Technology, Quality Assurance, Finance Legal Internal resources involved

GSK 9: • • • • • • • •

GSK supplier selection process

Socio/political risk: Is the site outside known high risk (terrorism/ flood/war) areas? Does the site have sufficient headcount base to incorporate a Regional Service Centre? Has the site the ability to recruit local/regional resources to create a capability? (Resource availability including high language capability.) Has the site the ability to recruit local/regional resources to create a capability?( HR organization at site.) Does the site have the ability to work 24  7? Does the site have experience in handling complexity? Does the site have a good infrastructure, to allow expansion? Does the site have a good IT infrastructure, i.e. good linkage to the GSK IT network?

Following initial screening, an RFI (Request for Information) is issued to selected suppliers containing questions about different aspects of their business (e.g. number of employees, location of plants, certifications obtained, main customers, etc.). During this stage there is no direct interaction with the suppliers involved as the information provided by the company questioned is

206 Sourcing in India

being thoroughly analysed and completed, if necessary, inside GSK. Through the analysis of information collected, 3–4 suppliers with the best profile are selected. During this phase, one of the most frequent problems encountered is that potential suppliers tend to emphasize the quality of the service offered, by showing off many certifications, but often omitting information about the scope of such certifications (e.g. for which processes or which plants have they been obtained, etc.). To verify and deepen information collected through RFI, very often GSK representatives use an on-site survey with the specific aim of involving different areas of the supplier organization (mainly human resources, IT, quality and finance). GSK staff are supported in this phase of supplier analysis by a tool named Supplier Audit Questionnaire. This questionnaire aims to collect more detailed information about financial stability, equipment, competencies and projects of the supplier. This analysis is performed not only for the specific purpose of the study, but also for all possible activities that may interest GSK, in order to populate a complete database that can be shared amongst all the group companies through the webbased platform. Finally, a RFP (Request for Proposal) is issued, requesting an economic offer from the supplier. This offer can be used to initiate the supply process or as basis for sealed bids. This is the final step in the supplier selection process that usually lasts about 6 months. All the data collected during the above phases are stored in the Galaxy web-based platform; the results can thus be shared within the entire GSK purchase organization, easing the development of similar offshore projects. The following step deals with the definition of contract. This activity, which also involves the legal department of the group, defines service specifications and prices together with other terms and conditions placing emphasis on support to start up phase, production modalities and schedule, liquidity damages for non-compliance or delay, and intellectual property issues. In India, GSK has 7 manufacturing plants (GSK 10): four in Thane, Nashik (Maharashtra), Mysore and Bangalore (Karnataka) addressed to the Pharma sector and three in Sonepat (Haryana), Nabha (Punjab), Rajahmundry (Andhra Pradesh), for the Consumer Healthcare division. In terms of Indian Supply Market opportunities, GSK 11 show a potential supplier analysed by the different services required. GSK is investigating the Indian Market for sourcing a wide range of activities, going from IT to Business Process right up to R&D. For the latter, great importance

207

GPM

Srinagar

PAKISTAN

HIMACHAL PRADESH PUNJAB Shimla Nabha Dehradun

CHINA [TIBET]

BDS

Biomedical Data Sciences

CDCMI

Clinical Data Mgmt Centre India

DM

Data management

HARYANA UTTARANCHAL Sonepat Gurgaon Delhi NEPAL UTTAR RAJASTHAN PRADESH Jaipur Lucknow GUJARAT Gandhinagar

Global Pack Management

UK SFS UK Shared Financial Services

JAMMU & KASHMIR

ARUNACHAL PRADESH SIKKIM

BHUTAN Itanagar

ASSAM NAGALAND Dispur Kohima MEGHALAYA Imphal BIHAR BANGLADESH MANIPUR MADHYA PRADESH WEST Ranchi Bhopal Aizawl BENGAL Indor JHARKHAND MIZORAM CHATTISGARH Calcutta Gangtok

Patna

Nashik ORISSA Raipur Thane MAHARASHTRA Bhubaneshwar Mumbai (Bombay) Secunderabad Rajahmundry

GSK India HQ ARABIAN SEA

Hyderabad GOA ANDHRA Panaji KARNATAKA PRADESH Bangalore Mysore

- IT - CDCMI - BDS - DM

IT GPM UKSFS

GSK India BAY OF BENGAL

Chennai (Madras)

Distribution centre Sales office Manufacturing site

KERALA TAMILNADU Thiruvananthapuram

GSK 10:

GlaxoSmithKline in India

Offshore Suppliers to GSK

Spend category

A

B

IT Applications Development and Support

X

X

IT Infrastructure services

O

O

IT Web Development

X

O

C

O

HR Services

O

Transactional Processing

O

Data Analysis O

Call Centres General BPO services

D

E

F

G

H

I

X

O

O

O

O

X

X

O

O

O

O O

O

O

X

O

O

O

X

O

O

O

O

SEPARATE R&D SUMMARY

R&D Services

Current GSK Suppliers

X

Potential GSK Supplier under evaluation

O

Not Evaluated

GSK 11:

GSK current and potential Indian suppliers by spend category

208 Sourcing in India

was given by both parties to the extension of the agreement between GSK and Ranbaxy, the biggest Indian pharmaceutical company. Under the original agreement signed in 2003, Ranbaxy conducted the optimization chemistry for progressing drug leads to the stage of candidate selection. Under the new agreement dated February 2007, Ranbaxy will advance leads beyond candidate selection to completion of clinical proof of concept. GSK will then conduct further clinical development for each programme through to commercialization. Ranbaxy could receive more than $100 million in milestone payments for any products subsequently launched by GSK, as well as royalties on sales. Ranbaxy will retain the right to co-commercialize the products in India. The milestones and royalties will apply to future drug discovery programmes as well as Ranbaxy’s two current programmes under the original GSK agreement. While recognizing the performance and clinical-development capabilities of Ranbaxy, it also conforms to the strategy of GSK’s Centre of Excellence for External Drug Discovery (‘‘CEEDD’’).The CEEDD, created after the initial agreement between Ranbaxy and GSK, is a small, dedicated team that contributes to the GSK pipeline solely through the efforts of its external alliances. The CEEDD effectively ‘‘virtualizes’’ a portion of the GSK pipeline; namely, from target to clinical proof of concept, by forming multiple risk-sharing/reward-sharing alliances.

6.

Offshore outsourcing typologies in GSK

When considering offshore outsourcing decisions, different options can be identified according to the complexity of the activity and the degree of control needed. As an example, for ‘‘IT support’’ activities developed offshore, the company adopts a three-level classification system, with the main variables being the complexity of development and fruition of the service. In particular: Level 1 activities deal with help desk functions; Level 2 activities deal with the support to customized GSK applications and to back office functions; • Level 3 activities deal with the development and implementation processes of IT solutions. • •

While for levels 1 and 2 GSK adopts a pure outsourcing strategy, for activities of level 3 (more critical) the company jointly develops the process

GlaxoSmithKline 209

with the Indian provider. In detail, this approach means that project specifications defined in GSK are sent to the supplier, for development of the application which will be finished by GSK. For level 3 activities, GSK has had successful experiences with the ‘‘Western clone’’ solution: western suppliers which develop the project using a consolidated supply base in India. In this case, the supplier manages the entire project and gives a turnkey solution. This solution allows a reduction of the organizational-managerial complexity of the process, and shorter development time, but, on the contrary, it reduces the cost advantages compared to an Indian independent supplier solution. There are some differences in GSK sourcing strategy between Information Technology Offshoring (ITO) and Business Process Offshoring (BPO). In the first case, the complexity of outsourced processes made the group focus on a limited number of suppliers, so that the company can focus on developing relationships characterized by a high degree of interaction and control. Such relationships call for a significant level of support that is hard to replicate for a high number of suppliers. In contrast, in the Business Process Outsourcing sector, activities outsourced in India are generally characterized by low complexity and high standardization level. As a consequence, the supply base tends to be enlarged enabling competition within the local supplying market with the aim of a progressive cost reduction.

7.

India’s pharmaceutical industry

India currently represents US $6 billion of the $550 billion global pharmaceutical industry but its share is increasing at 10 per cent a year, compared to 7 per cent annual growth for the world market overall (KPMG, 2006); this trend will bring the internal market to about $20 billion in 2015 (Pascal et al., 2005). While the Indian sector represents just 8 per cent of the global industry total by volume, putting it in fourth place worldwide, it accounts for 13 per cent by value, and its drug exports have been growing 30 per cent annually (FICCI, 2005). The ‘‘organized’’ sector of India’s pharmaceutical industry consists of 250 to 300 companies, which account for 70 per cent of products on the market, with the top 10 firms representing 30 per cent (KPMG, 2006). However, the total sector is estimated at nearly 20,000 businesses, some of which are extremely small with approximately 75 per cent of India’s demand for medicines met by local manufacturing (FICCI, 2005). These figures convey the importance India’s pharmaceutical sector has attained and highlight that Indian pharmaceutical companies have already achieved a

210 Sourcing in India

degree of sophistication that surpasses that needed to simply perform basic tasks. The Indian pharmaceutical industry is welcoming working relationships with leading global firms and, since R&D is such a critical function, firms are now partnering with Indian biotech and pharmaceutical companies to leverage their low cost of innovation. According to a McKinsey Quarterly study, R&D costs for Indian pharmaceutical firms are 75 per cent less than those of a multinational firm (Quinn and Hilmer, 2004). Furthermore, India is an ideal destination for clinical trials accounting for more than 66 per cent of total R&D costs (Bakhle, 2003). India boasts not only cost-competitiveness but also a worldclass infrastructure of healthcare professionals: 500,000 well-trained English-speaking doctors, 16,000 hospitals, 171 medical colleges, and a heterogeneous pool of genes, making it a well-suited location for conducting clinical trials. India’s uncontaminated, ‘‘drug naive’’ patient population, is another factor contributing to the growth of clinical research outsourcing. It is also less expensive to recruit patients, nurses, and investigators. However, there are regulatory barriers limiting the growth of clinical research outsourcing to India. The Drugs and Cosmetic Rules (Schedule Y) dictated that permission for clinical trials would be given for one phase behind the developmental status in the rest of the world – meaning that, if the compound was undergoing Phase III in its source country, it would grant permission for only Phase II in India. It is predicted that the Indian government will revise this legislation in the near future. Until then, multinational firms are primarily outsourcing Phase III trials, which are extremely costly and involve a large number of patients (1,000–3,000, on average). 7.1.

Intellectual property rights

The drug industry, as well as the software industry, is based on information, protected by trademarks, patents, trade secrets, and copyrights. Without adequate intellectual property rights (IPR) protection, no level of cost savings could motivate pharmaceutical or biotech companies to operate in low-wage countries. Such concerns were a principle factor in dissuading pharmaceutical and biotech firms from sourcing operations in India – the risk of losing protected information was too great (Bakhle, 2003). IPR insecurity can be the result of inadequate enforcement mechanisms and opposing political pressure – as is the case in most of the developing world – or an IPR regime that simply does not recognize certain types of patents (e.g. product patents in general or patents on pharmaceutical products specifically). Between April 1972,

GlaxoSmithKline 211

when the Indian Patents Act (1970) came into effect, and March 2005, when India’s parliament passed the 3rd Amendment of the Patents Act, India did not recognize product patents for pharmaceuticals (Chandhuri et al., 2006). Recognizing only process patents meant that a drug patented in the US, Europe, or Japan could legally be produced in India as a generic. This process-only system had two important effects. First, it encouraged the development of a large and highly successful domestic pharmaceutical industry adept at reverse engineering drugs produced by foreign pharmaceutical companies (and under patent protection elsewhere), and able to cater to the low-income population of India. As a result India’s pharmaceutical industry became a world leader in generics and performs many functions at the calibre necessary to collaborate with major global pharmaceutical companies on complex projects. However, it has almost no capacity to conduct the type of R&D that is responsible for the generation of the drugs it copies. Second, India’s process-only patent regime discouraged foreign pharmaceutical companies from conducting work or investing in India; doing so exposed them to an unacceptable level of risk of IPR loss. This all changed with the adoption of a WTO agreement on IPR called TRIPS (Trade Related-Aspects of Intellectual Property Rights). In 1994, WTO member countries adopted the TRIPS Agreement, which mandates that member countries adopt minimum standards of IPR protection creating also an enforcement mechanism for resolving disputes between countries. One of the most significant victories in TRIPS for the pharmaceutical industry was the inclusion of pharmaceuticals as patentable inventions. Membership in the WTO and acceptance of the TRIPS agreement has generated political turmoil in India. In 1996, India became a signatory to the TRIPS agreement but had no obligation to comply at all for one year, except for article 70, sub-clauses (8) and (9) which mandated the immediate establishment of an interim mechanism to provide exclusive marketing rights for agricultural, chemical, and pharmaceutical products. However India did not comply with this obligation generating the frustration of the US and injunction by the Dispute Settlement Body of the WTO. In order to comply with the interim mechanism for granting exclusive patent rights as required by the WTO the Patents Act of 1970 was amended by the Patents Act of 1999. However, India was still not compliant with TRIPS under article 70(9), and passed the second Patents Act in 2002. Basically, India was not required to fully comply until 1 January 2005.

212 Sourcing in India

Although TRIPS provides patent protection for pharmaceuticals, its adoption has not and will not result in the collapse of India’s generic pharmaceutical industry. India did not recognize patent protection for pharmaceuticals in existence prior to 2005 and TRIPS does not require it to do so retrospectively. As a result India can still make generically all drugs in existence prior to 2005, even if such drugs might be introduced into the market as late as 2015. The disconnect between the spirit of TRIPS and India’s present IPR regime betrays India’s reluctance to embrace robust intellectual property protections. While TRIPS will certainly alter the pharmaceutical industry in the long-term, its short-term effects will be delayed by enforcement difficulties, especially a lack of qualified patent examiners. However, India’s compliance, despite being so complicated, has improved its appeal as a location for offshoring and pharmaceutical companies are already increasing investment in India even with its limited reforms.

Finmeccanica Innovating the Approach to the Global Sourcing of Engineering Services Giorgio Mosca and Paolo Falletti

1.

The Finmeccanica group

Finmeccanica is the main Italian industrial group operating globally in the Aerospace, Defence and Security sectors, and is one of the world’s leaders in the fields of Helicopters and Defence Electronics. It is also the European leader for Satellite and Space Services as well as having considerable knowhow and production capacity in the Energy and Transport fields (Finmeccanica 1). The Headquarter is located in Italy, but the Group is rapidly expanding its presence across the world both from the viewpoint of its clients’ portfolio and of commercial and delivery capabilities. Finmeccanica offices are in fact present in many Western countries as well as in the Middle and Far East, while significant industrial facilities exist in the UK, second domestic market of the Group, as well as in the rest of Europe and in the USA. Finmeccanica has a workforce of almost 60,000 people, 42,600 in Italy, 9,100 in the UK, 3,300 in France, 2,000 in the US and about 3,000 in the rest of the world (Finmeccanica 2). Technology and innovation are the keystones of Finmeccanica’s success and competitive edge in the global markets. For this reason, the Group invests 1.8 billion a year in R&D activities (representing 14% of revenues), making Finmeccanica the leading Italian investor in hi-tech sectors. As far as the core business is concerned, investments amount to 20% of turnover – a percentage that is higher than some of its main competitors. The relevance of the international markets for Finmeccanica is easily appreciated if we consider that recently almost all significant acquisitions

213

214

Aeronautics

Helicopters

Space

Electronics

MEF (⫹Golden Share) 32.4% Shareholding structure Public 67.6%

17%

21%

6%

28%

2006 consolidated data Defence Systems

10%

Finmeccanica 1:

Transportation

10%

Energy

7%

Finmeccanica global revenues (2006)

Source: Finmeccanica Financial Reporting 2007.

% Revenues, 2006

Revenues

€12.5 bln

Purchases

€8.2 bln

Orders

€15.8 bln

Backlog

€35.8 bln

Employees

58.059

R&D

€1.8 bln

Finmeccanica 215

FRANCE 3.364 UK 9.123 USA 1.965

Rest of Europe 1.317

ITALY 42.603

BRAZIL 57

Rest of The World 134

ASIA 349

AUSTRALIA 531

Finmeccanica 2: Finmeccanica worldwide workforce distribution (June 2007) Source: Finmeccanica HR Department 2007.

and alliances took place abroad, causing the Group workforce and turnover to grow more than 40% in the last four years. Finmeccanica had revenues of 12.472 billion in year 2006 (Finmeccanica 1) and is aiming at a revenue level of 16.500 billion in year 2010 largely through organic international growth: the pattern is particularly evident if one observes the expected behaviour of the Group’s orders acquisition in that period (Finmeccanica 3). In synthesis, from being, just 5 years ago, mainly a financial holding, Finmeccanica is rapidly becoming an integrated industrial Group, capable of competing (or cooperating) with the major players of the Aerospace & Defence industry and rapidly expanding its presence worldwide in order to address all opportunities for organic growth and focused acquisitions. This situation is well represented by the relative positioning of Finmeccanica within the A&D industrial scenario (2006) where it appears as: 2nd worldwide player in Helicopters 1st player in Europe and 3rd worldwide in Satellites manufacturing and services • 2nd player in Europe and 6th worldwide in Defence Electronics • 9th worldwide player in the overall market for Aeronautics, Defence & Security. • •

216 Sourcing in India

5% €bn

19

17 15.5

Total 9.5 (56%)

11.5 (61%)

9%

0%

Exports

8 (52%)

Domestic

7.5 (48%)

7.5 (44%)

7.5 (39%)

2006A

2008E

2010E

Export Finmeccanica 3:

Domestic: Italy ⫹ UK

CAGR

Expected Finmeccanica Group orders’ intake pattern

Source: Finmeccanica Investor Day 2007.

2.

The Shared Services organization

Starting from the year 2003 Finmeccanica has built, through several steps, its internal Shared Services organization, whose goal is to contribute to the overall improvement of the Group’s performance. The process set off with the creation of a programme targeting the generation of cost efficiency in ‘‘non-core’’ supplies (i.e. indirect materials such as IT equipment, TLC services, office materials, travels, etc. and direct commodities such as fasteners, electrical equipment, electronic components, glues, paints, etc. ). The programme, initially incubated within Finmeccanica Corporate, started to collect data about Finmeccanica Companies’ purchases and to regroup people coming from all the different Group’s companies around one single table in a period in which Finmeccanica was just moving its first steps on the path leading

Finmeccanica 217

from financial to industrial holding. For this very reason the most important part of the programme setup was to create an environment allowing all the companies belonging to the Group to work together in a cooperative way, sharing resources and experiences and learning to work together after a long period of complete industrial independence and of repeated companies’ acquisitions, mergers, de-mergers and sale. The analysis of Finmeccanica procurement that was carried out by the programme led to the creation of two main streams of activities: the realization of Group Framework Agreements with major suppliers in the area of ‘‘non-core’’ categories mentioned above and the implementation of ‘‘e-procurement’’ tools to generate the conditions for higher efficiency and transparency in ‘‘core’’ categories. The success of the programme, that was able in its first three years of activity to generate a saving on cash flow of more than 100M, led to its consolidation from ‘‘sourcing programme’’ to shared services’ permanent organization and to the widening of its scope (from procurement to other shared services). The areas approached following procurement were: •

•

•

•

•

ICT: where the scope was expanded from supply to demand management, enterprise architecture and business process methodologies and tools, the extension being formalized through the issue by Finmeccanica of a policy for ICT Governance Energy: where the scope was expanded from supply to demand management through cooperation with the companies, the generalized execution of energy assessments, the planning of interventions to improve energy efficiency and the analysis of alternative energy sources Logistics: where the scope was extended from transportation contracts to integrated logistic models, also in cooperation with the Group’s companies operating in this field Global Service: where the scope was expanded from contract negotiations to integrated service models and to the research of opportunities for the strengthening of the industrial partners in this field Real Estate, Property Management, Environment, Health & Safety; where activities previously executed only for Finmeccanica Corporate by a captive organization were progressively extended to the Group and to the rationalization of Finmeccanica realty assets.

Today, the main areas of activity of the Group’s Shared Services Organizations (Finmeccanica 4) are in fact: Purchasing, ICT, Global Service, Logistics and Energy, managed by Finmeccanica Group Services and

218 Sourcing in India

FINMECCANICA

FINMECCANICA

FINMECCANICA

GROUP SERVICES

GROUP REAL ESTATE

Global services

ICT

Purchasing

Property management t

Logistics

Finmeccanica 4:

Environment health safety

Energy

The Shared Services companies of Finmeccanica Group

Source: Finmeccanica Group Services Company Profile.

Property Management, Environment, Health and Safety, managed by Finmeccanica Group Real Estate. The Shared Services organizations mission continues to be based on the following strategic objectives: generation of value by reducing running costs and rationalizing invested capital, • optimization of Group’s ‘‘non-core processes’’ and improvement in efficiency, • improvement of service levels both for internally managed and outsourced activities. •

These objectives are pursued in close coordination with the relevant organizational units both of the Corporate and of the Group’s companies and in compliance with Finmeccanica strategy from the viewpoint of international development and of the guidelines for improving industrial performance and competitiveness. The fact that the Shared Service Organization depicted above is the result of the merger of the structures and initiatives that originated from the specific programme aimed at developing synergies among

Finmeccanica 219

the Group’s companies in the area of ‘‘non-core’’ sourcing is particularly relevant to the discussion of this case study. The Global Sourcing programme that will be discussed further on can indeed be considered to be the natural extension of that approach, of the capabilities generated and of the relationships built with the companies, to the ‘‘core’’ materials and global markets. In the rest of this case study when referring to Finmeccanica Group Services or the Group’s Shared Services we will mainly focus on the Purchasing and ICT units of that company and on their direct involvement in the current activities on the Indian market.

3.

The Group’s global sourcing approach

Global sourcing is not a new concept for the Finmeccanica Group both in the light of the previously described internationalization of the orders’ portfolio and also because the sector in which the Group operates very often ‘‘forces’’ the market players to procure goods and services on the target market because of the so called ‘‘offset obligations’’1 included in many contracts. Many of the Group’s companies have therefore established sourcing links in several markets in the past and are continuing to do so as a part of their overall industrial policy, but this has almost always been done on the basis of single opportunities or of specific markets penetration. The process through which these engagements have so far been conducted is absolutely standard (Finmeccanica 5), as we will see in the paragraph describing the Indian engagement of Alenia Aeronautica, and has so far led to strings of independent activities performed separately by all the involved Group’s companies with the internal cooperation of all the required organizational units, namely: procurement, engineering, ICT, quality, legal, administration. From the pure sourcing viewpoint, Finmeccanica faces the Global Sourcing game in a phase in which many of its competitors are already well positioned, both with captive organizations and with long-term relationships or JVs, and cost reduction is not anymore the only offshoring driver.

Market analysis

RFI

Suppliers site visit

Shortlisting

RFQ

Quality assurance

Finmeccanica 5: The ‘‘standard’’ sourcing process Source: Finmeccanica Group Services – Global Sourcing documents.

Trial order

Final contract

220 Sourcing in India

In fact the ‘‘reservation’’ of scarce resources (both raw materials, technical skills and manufacturing capacity), the compression of the ‘‘time to’’ (e.g. design, change, deliver, etc.) and the quality of the product/ service are quickly becoming as important as the basic price in the search for offshore suppliers. It is therefore clear that the main driver of the success of any offshore initiative, with a particular, but not exclusive, reference to those involving the delivery of a service, is not only the simple selection of a supplier of excellence, but the speed of the engagement process, the efficiency of the ‘‘long distance relationship’’, the capability of the client’s processes to align and connect to the supplier’s processes, the reservation of the best resources for the task required. All these activities can and should not be re-invented each time. In this specific context the Top Management of Finmeccanica decided, in the first half of 2007, to launch a shared Group effort in Global Sourcing, recognizing that a coordinated industrial presence on the global markets could generate multiple positive impacts for procurement, operations and sales and considering furthermore that significant efficiencies could reasonably be obtained through a joint approach to the global suppliers as opposed to a per company / per opportunity behaviour. The objective of the Finmeccanica programme is therefore to shift a part of its supply volumes to the global market, obviously according to the opportunity connected to the different categories of materials. As represented in Finmeccanica 6 the overall spending of Finmeccanica Group for the purchasing of goods and services was around 8 billions in year 2006. This amount can be divided according to its degree of possible synergy within the Group (commonality vs. specificity) and to the availability of sourcing options on the offshore markets (global vs. local). This division allows the programme team to build a portfolio matrix showing that 50% of this amount is probably not addressable through a Global Sourcing approach, but the remaining 50% (even if in part already managed through the Framework Agreements realized by Finmeccanica Group Services) is more (12%), or less, (38%) addressable through Global Sourcing, thus bringing to the Group’s companies the benefits of this approach. These benefits have been defined as: cash flow reduction (with a foreseen impact of at least 10% at steady state), scarce resources targeting and, last but not least, support to the commercial growth in new markets. The objectives mentioned above will be reached not only by aligning the Group to the best practices of its competitors in this area, but also aiming higher at improving the results of such a sourcing approach by leveraging past experiences, both internal and external.

Billion

€ With LCC potential

• Electronic components • Mechanical components ~800–900 • Working and measure tools

~100–200

• Designed parts • Components and materials with internal specifications

Main target of Global Sourcing Programme ~800–900 ~100–200

Supply Market

~4.000

~4.000 ~3.000

Mainly local

• Indirect categories • Raw materials • Engineering • Electronic/ mechanical normalery

Common/with synergies among Companies

~3.000 • Co-supply (to be analysed) • Designed parts

Company-specific

Commonality among Companies

Further opportunities to select and address

Common/with synergies among Companies

Company-specific

Commonality among Companies

Finmeccanica 6: Finmeccanica Group high level purchasing map Source: Finmeccanica Group Services – Global Sourcing documents.

221

222 Sourcing in India

Finmeccanica is trying to reach this goal by examining what has been happening in the last years on the various markets and in particular the relative positioning of the different players (see Finmeccanica 7 for an example based on one ‘‘anonimized’’ offshore market), the different steps that led to this positioning, the results obtained, the problems encountered, the evolution in the local market and local suppliers. This analysis can be performed through many different channels since the dimensions of the players and of the projects involved is such that almost all these projects are somehow referenced and communicated to the general public. Furthermore a certain degree of direct benchmarking is frequently possible, since in the A&D market strong links exist between the companies, that are accustomed to operate not in a competitive space, but generally always in a ‘‘co-opetitive’’ space, where shared projects coexist alongside fierce opposition. Starting the game during this ‘‘second wave’’ of offshoring brings therefore the significant advantage of an already established learning curve, an advantage that Finmeccanica is trying to leverage. Consistently with the overall programme’s goals the various phases of the programme were designed to explore the potential of Global Sourcing as a Group effort, initially by bringing together some of the major companies within the Group and scouting specific categories in specific markets and then by broadening the scope of the pilot phases to other geographies and categories until reaching a truly global market coverage;

Saving/ selling potential “Produce locally to sell/buy” (minority JVs)

High INDUSTRIAL PRESENCE

“Produce locally to sell/buy” (captive)

Company 3

Company 2

COMMERCIAL PRESENCE “Buy & sell”

Company 1

Low

“Buy to save”

SPOT

Finmeccanica 7:

Relative positioning on an offshore market

Source: Finmeccanica Group Services – Global Sourcing documents.

Long term

Finmeccanica 223

the scope of the pilot phase was defined as: raw materials in Russia, electronic components and manufacturing in China, engineering services and embedded software development in India. Those mentioned above are the objectives, scope and roadmap of the programme as stated at its kick-off in June 2007, but the quick pace of change experienced in the present global landscape has been impacting on the programme since its beginning. The Programme Team is therefore called to constantly refine, and sometimes redraw, targets and approaches as knowledge of the global markets increases. Thus, for instance, some established choices about which countries to procure raw materials from have changed and markets initially considered only for engineering skills are now being considered for manufacturing activities. This shift is both a potential enrichment and a distracting challenge for the programme and for the Group, but it makes it clear that in order to be successful in such an endeavour any organization requires a not so easy to build mix of cultural savvy, organizational wisdom, business sense, flexibility, consistency bordering to single-mindedness and a very clear view of the final targets to achieve: economic efficiency, access to scarce resources, opening of new markets.

4. Alenia Aeronautica: an example of an Indian engineering offshore project prior to the Global Sourcing Programme Alenia Aeronautica, a company wholly owned by Finmeccanica, develops its core activities in the design and construction of military and civil aircraft, new generation unmanned aircraft and advanced aerostructures for civil and military airliners (Tab. 1). Through its subsidiaries Alenia Aermacchi and Alenia Aeronavali, it is also active in the field of trainer aircraft and in civil and military aircraft re-purposing, maintenance and overhaul. The company, together with its subsidiaries Alenia Aermacchi, Alenia Aeronavali, Alenia Composite and Alenia SIA, employs nearly 12,100 people, with 11 industrial sites distributed on the whole Italian territory, mainly in and around: Turin, Naples, Foggia, Taranto, Venice, Brindisi and Varese. The 2006 consolidated data show revenues of 1.980 billion and an order backlog of more than 7,500 billion, with a 13% increase from the previous year. Alenia Aeronautica is currently subject to many external and internal factors driving towards a competitive re-positioning and a reorganization

224 Sourcing in India Table 1: Alenia Aeronautica product range Product range

Products

Defence UAV/UCAV* Tactical airlifters Special missions

Eurofighter Typhoon, JSF, AM-X, Tornado SKY-X, SKY-Y, Molynx, Neuron C-27J ATR42 MP Maritime Patrol, ATR72 ASW Anti Submarine Warfare ATR 42, ATR 72 commercial airlifters in cooperation with main international manufacturers: Airbus: A380, A321, A340–500/600, A319/320/321, A300/ 310, A330/340 200/300 e A340–500/600 Boeing: 767, 777, 787, Dassault: Falcon 2000, Falcon 900EX

Commercial Aero-structures

* UAV = Unmanned Air Vehicle; UCAV = Unmanned Combat Air Vehicle. Source: Alenia Aeronautica.

Supplier Customer Risk sharing partner Supplier

AleniaAeronautica A Finmeccanica Company

Risk sharing partner Supplier

Supplier

Customer

Supplier

Customer

Finmeccanica 8:

Alenia Aeronautica’s extended enterprise concept

Source: Alenia Aeronautica – Alenet Project.

of the company value chain. The main ones are: Alenia Aeronautica’s changing role depending on the programmes it participates in, a significant increase of the workload, R&D evolution through more and more delocalized project teams, the extension of usage of ‘‘real-time’’ collaboration, new design methodologies and techniques, innovation creation through ‘‘federated’’ teams. Another key factor is the definition of an ‘‘Extended Enterprise’’ operational concept and the offset management seen both as an obligation and a lever to increase the share on foreign markets (Finmeccanica 8).

Finmeccanica 225

All these factors recently pushed the company into a transformation initiative aiming at the creation of an integrated system extended to the whole supply network, redefining the logic and the operative methodology of product identification, conception, design, industrialization, manufacturing and after-sale support. The implementation of a new PLM (Product Lifecycle Management) software has been one of the main enablers of such a transformation, allowing the company to create the environment in which to implement the defined operative models. The first practical application of this new approach has been the ‘‘Redesign to Cost’’ of a part of an ongoing project to produce a new transport airlifter. The new operative model supported the programme respecting the very strict planning for the activities related to the Front and Centre Fuselage and for the Centre Wing Box, exploiting the ‘‘Extended Enterprise’’ concept with an Indian offshore supplier. The manufacture and assembly of an aircraft is currently based on 2D paper drawings. These drawings are difficult to handle and to keep updated and limit the possibility of implementing a cost/quality effective product industrialization. One of the key steps to reduce the industrial cost of manufacturing an aircraft while also improving quality is to create 3D models of all the structural parts of the aircraft and to integrate them in a Digital Mockup (DMU). This approach allows the manufacture of most of the parts by means of Numerical Control machines, with a higher level of precision and repeatability. In addition, the creation of digital models and DMU allows the usage of a jig-less part-to-part approach for the assembly process, thus reducing dramatically the number of drilling and assembly tools. Moreover, in order to further improve the aircraft manufacturing and assembly process, the design and manufacture department could leverage the process of conversion from 2D drawings to 3D digital models to identify design modifications to be further integrated in the structural layout of the aircraft. All the activities above are realized within the framework provided by the PLM system (Finmeccanica 9). Alenia Aeronautica’s PLM is based on one of the mainstream market solutions, allowing the management of all the data of a programme during the whole product development lifecycle within a single system guaranteeing, by means of appropriate mechanisms, the access control both for internal and external user profiles, and the management of revisioning and versioning of parts and documents. In addition, some complex functionalities such as the ‘‘Multi-site Vault management’’ allow

226 Sourcing in India

Finmeccanica 9:

Alenia Aeronautica DMU environment

Source: Alenia Aeronautica – Alenet Project.

the management of ‘‘federated’’ data, i.e. of data distributed on different sites and aligned through automatic mechanisms embedded in the system itself. Another important feature regards the possibility to transfer the ownership of single or groups of data from one site to another or to perform a remote object check-out or check-in within the system. Following the employment of these functionalities, the concept of ‘‘Extended Enterprise’’ has been implemented between Alenia and the chosen offshore supplier for the ‘‘Redesign to Cost’’ project. The implemented architecture federates three Alenia Italian sites and one of the supplier’s sites in India. The two groups of sites have different databases and get ‘‘synchronized’’ daily through a product structure data exchange mechanism managed by an internal standard procedure of the PLM system. The network architecture between the two groups of sites is realized by means of a Virtual Private Network over the Internet. The approval workflow of the realized models is unique for India and Italy: it starts from India, when the offshore engineer, once the model is completed, submits it to the Alenia manufacturing approval and it ends on the Italian site with the approval of Chief Engineering. Responsibility roles and levels are reproduced in the system and rule the model validation process (Finmeccanica 10). The results of this first ‘‘Extended Enterprise’’ implementation clearly showed that, in order to guarantee the success of such an approach, the governance of these new processes of collaboration and knowhow

Design checker

Offshore Design (in work)

Manufacturing (Alenia)

Ok

Stress

In review (Mfg Ok)

Ok

Weight

Project leader

Ok

Configuration management Ok

Ko

Ko

Ko

M&P Ko Check ok Check not required

Design lead Check required Design checker Stress Ok Weight

Configuration management

Onshore Ok

M&P Manufacturing

Ko Ok

Ko Pre-released

Source: Alenia Aeronautica – Alenet Project.

Released

227

Finmeccanica 10: The offshore project main approval workflow

Chief engineer

228 Sourcing in India

sharing with a remote partner must be transformed with respect to the ones currently adopted in a ‘‘Single Enterprise’’ setting. The technological solution took some time to define with the supplier, set up at the supplier’s premises and to orchestrate, but subsequently performed well, even in the presence of complex processes and real time operations requirement and even if connectivity on the world scale still limits somehow the opportunity to adopt some sophisticated collaboration environments.

5. The Indian approach within the Global Sourcing Programme context The programme team started to target the hi-tech professional services chosen as a pilot for India, i.e.: aero-structure design, electronics design, embedded software development, software quality and testing, technical documentation. Due to the overlapping of category and market involved, the experience of Alenia Aeronautica described in the previous paragraph has been one of the starting points for the definition of an innovative approach to the offshoring of these services in the Finmeccanica Group. The need of a new governance paradigm, the competences transformation, remote collaboration and knowhow sharing that have been mentioned by Alenia Aeronautica as the major areas of change brought forward by this outsourcing approach are in fact well matched with the drivers of the offshoring second wave as mentioned before: engagement process, ‘‘long distance relationship’’, capability of the client’s processes to align and connect to the supplier’s processes. Obviously, on top to this ‘‘collaboration-side’’ activities we also have the traditional ones, as described in Finmeccanica 5, and the Finmeccanica service offshoring model aims at considering and integrating both. With this dual goal in mind the programme team started to evaluate how to create a common relation mechanism between the Group’s companies and their offshore suppliers, with the main objective of reducing elapsed time for activating new contracts and rising operative efficiency. The idea on which the mechanism is based is to re-define according to a Group standard the source / procure / deliver process in the Global Sourcing context aiming at creating a common environment for all the Group’s companies and the offshore suppliers, dubbed ‘‘engineering virtual hub’’. This ‘‘hub’’ is implemented through a specific offshore support organization, acting as intermediary and enabler of the relation between the worldwide OpCos of the Group and the service providers in the Indian market. The OpCos and the offshore organization must

Finmeccanica 229

operate according to a framework defining, via specific documents (procedures, contracts, etc.): the specific process steps, the organizational interfaces between the Group’s companies and the offshore support team and the type of contributions provided by the local and offshore organizations (Finmeccanica 11). The deployment of this framework on the companies and on the specific projects is particularly critical since through this activity all the impacts and changes required to the existing processes and behaviours are raised and brought forward to be addressed. Unfortunately sometimes, particularly in the occasion of first offshore experiences, the ‘‘internal’’ changes required are very significant and risk generating an adverse effect on the projects’ timing and accuracy, particularly if they are not correctly addressed upfront, but just ‘‘happen’’ in the course of the project. This adverse effects can mask the positive effect of the offshore activity and be the cause of unsatisfactory results and of subsequent cancellation or delay of other similar experiences. Though the definition of the right process interface and the management of its impact on the client’s processes are definitely the two core parts of the success of an offshore relation, the experience of Alenia Aeronautica also shows how a significant part of the effort has been devoted to the definition of the IT platform on which the services have to be provided by the offshore supplier. This part of the overall engagement process is also very important since: it has significant implications in term of data security, it is particularly prone to create negative economic impacts through overshooting while defining system capacity, it can generate misunderstanding on interfaces definitions and duplication of investments and it has furthermore a high potential of creating bottlenecks in the services delivery. The programme team tried therefore to evaluate how to define also for services delivery a single IT environment able to mitigate the risks previously described and to generate more efficiency in the overall process: this was done by extending the concept of the ‘‘hub’’ from the processes and the organization to the IT platform, which will become the third component of the ‘‘virtual hub’’ model (Finmeccanica 12). According to the ‘‘hub’’ analogy, the IT environment needs to be shared across the different client/supplier pairs and must therefore be compatible with a situation where common resources are managed in a shared way, though maintaining logical separation and specific access security. The IT ‘‘hub’’ should in fact have several specific characteristics: it should be hosted in a secure environment from the viewpoint of physical security, access control, logical security and business continuity, it

230

OpCO worldwide

Offshore support team

Suppliers selection

Suppliers qualification

Choice of platforms and training

Work packages assignments

Access to secure comms

Request of technical/ managerial support

WIP, PhR, progress managment

Quality control

Market analysis ⫹ suppliers selection

Suppliers (pre)qualif.

Platforms installation and training

Work packages sorting

Secure comms mgmt.

Local support

Logging, audit, (LCM&PC)

Vendor rating

Support in bid phase/selection Technical/operative support Managerial/administrative support

Finmeccanica 11:

The global sourcing revisited ‘‘source/procure/deliver’’ process

Source: Finmeccanica Group Services – Global Sourcing documents.

Finmeccanica 231

Process • Companies/hub interaction • Vendor management • Work packages dispatching • Hub/suppliers interaction

Hub

Organization • Specific roles for companies’ support • Specific roles for Suppliers’ management • Mix of captive and outsourced • Operates as part of the global sourcing team

Infrastructure • IT environment • Security enforcement • Local IT capabilities for training and support

Finmeccanica 12:

The ‘‘virtual hub’’ concept

Source: Finmeccanica Group Services – Global Sourcing documents.

should be accessible through a major and redundant telecommunication link, it should be flexible from the viewpoint of processing power, storage and allocated bandwidth, it should be compatible with various application environments according to the different tools adopted by the Group’s companies. This ideal situation can be obtained through the so called ‘‘virtualization’’, a configuration achieved through the usage of a set of software tools allowing an IT architecture to be partitioned and allocated to different tasks, with different software, applications and workspaces. In the ICT world this setup is in fact typical of Application Service Providers or of suppliers providing advanced ‘‘housing’’ services and it has therefore been natural for the programme team to think about using a major market player to provide this service instead of setting up a captive IT structure, that would require consistent investments and staffing. A specific task in the set-up of the offshore engineering pilot programme is therefore the selection of the local IT partner providing IT services to the Finmeccanica Global Sourcing Programme. According to what has been described so far, the overall ‘‘hub’’ organization is therefore composed of a mix of internal resources seconded from the Group or locally hired to manage part of the process (e.g.: market intelligence, vendor management) and of external resources and services provided by a local partner. The external services are, for

232 Sourcing in India

instance, provided for the IT environment where no investment is done, but processing capacity is leased within an existing local data centre, along with bandwidth, security and facility management, in compliance with the Group’s standards and policies. The local IT partner also provides resources with the right competences in the different type of systems required to perform distributed engineering work, namely in software for Document Management, PDM (Product Data Management), PLM (Product Lifecycle Management), CAD (Computer Aided Design), etc., that is installed and managed by the IT provider as a part of the overall IT assignment within the project. In synthesis the ‘‘virtual hub’’ is designed to be a win–win concept, bringing a consistent series of advantages both to the Group’s companies and the offshore suppliers; For the companies: •

• •

• •

sharing of a single market approach ? benefit of leveraging the Group’s image, market weight and institutional and industrial relations sharing of organizational structures ? efficiencies on resources utilization access to a qualified and loyal base of suppliers ? shorter selection times and rapid start-up of a relation through existing and proven channels process standardization ? acceleration of suppliers’ engagement mechanisms IT platforms sharing ? saving of implementation costs and of deployment time

For the offshore suppliers: contractual access to Finmeccanica ? benefit from the volumes of a large international Group • projects’ standardization ? simplification of offshore/onshore engagement model • process standardization ? definition of clear rules and operational mechanisms, well aligned to the Indian companies’ ‘‘formal’’ approach (all Indian Companies are certified according to major standards: ISO 9000:2000, ISO 12000, ISO 27001, CMMI, PMI, SAS 70, etc.) • acceleration of clients’ results ? better margins for the supplier and greater opportunity of projects extension/renewal. •

Finmeccanica 233

Though the ‘‘hub’’ concept seems to be very logical and straightforward and its benefits clearly evident and undeniable, nonetheless the application of such a standardized approach faces a series of constraints and risks. The literature and, in part, the myth of offshoring is such that we all hear or remember about successful projects and not about none or less successful ones, but true issues exist and have been considered during the project. A first constraint is the resistance to the concept of ‘‘offshore per se’’: the remote collaboration with a supplier sitting 10,000 km away from the desk of whoever is developing the business or the product is something that, though we are all accustomed to live in the Internetconnected global village, still shows some potential for improvement. A second significant attention point is the need to align ‘‘specifications to expectations’’: if the client is not willing to clearly state its need in an unambiguous way, exchanging part of the flexibility in the requirements that is sometimes so treasured with the clarity that allows the remote supplier to execute without being forced to interpret what can and should not be interpreted, the outcome of any project may be as fuzzy as the project requirement happens to be. The third major issue is the need to ‘‘mirror the organizations maturity’’: if the client is not willing to understand and accept that sometimes it has to adapt its approach and change the way it manages its processes in order to maximize the efficiency in the relation with the remote supplier, the overall efficiency sought through the offshore contract may not materialize or could be blocked by process bottlenecks downstream of the offshore involvement. The existence of these issues, for which no unique and quick solution exists, is no excuse for not approaching the offshoring opportunities: the globalization tide is not turning back and it is the market itself that clearly pushes every player in that direction. Bearing this in mind, what the Finmeccanica Global Sourcing Programme team tried to define is an approach proposing a common way forward to deal with the offshoring of engineering services, trying to: leverage existing experiences, like the one carried on by Alenia Aeronautica, • share all that can be shared, from documents, to resources to platforms, • clearly point out which are the major ‘‘change’’ issues that must be considered for this form of sourcing to be successful. •

234 Sourcing in India

The lessons learnt from this journey and the agreements and infrastructures put in place, made possible and strongly supported by Finmeccanica’s Top Management strategic vision and willingness to create value for the Group’s stakeholders at every level, will benefit the companies of the Finmeccanica Group, but could in the future benefit also the Group’s strategic suppliers, particularly in the case of the SMEs so frequent in Italy, but probably not equipped to re-create such an approach on the global market. If offshoring is, indeed, a ‘‘must’’ it is important to provide to the Group’s subcontractors the opportunity to leverage the same market opportunities, since this could improve the competitive edge of the whole value chain. This possible development will obviously take place only when the model has been thoroughly tested and stabilized, but it could represent a small contribution from Finmeccanica to the competitiveness of the Italian economic system.

IDS A Small Enterprise Offshoring Software Development Diego Michielan

1.

The company

IDS,1 an engineering system technology company for Civil and Defence markets, was established in 1980 after Mr Franco Bardelli decided to use his experience in the radar2 engineering field towards an entrepreneurial activity. During the first ten years of its life, the company provided marketengineering services for defining solutions for a variety of electromagnetic problems. The gradual diversification of activities, resulting from expansion of the original market led to the creation of two different working teams: one focused on the electromagnetic area and one focusing on structures. IDS has progressively developed the skills required in its chosen markets (naval, aeronautical, etc.) to meet the needs for increased specialization, together with the basic and traditional skills of the company (analysis and design of electromagnetic propagation, signal processing, etc.). As result, the company has organized itself into four different divisions; Naval, Aeronautical, Aero-navigation and Geo-radar, supported by a central unit: IDS laboratory. This laboratory, considered as the source of competitive advantage, includes the historical core competences of the company (electromagnetic phenomenology study, signal processing, dynamic and static analysis), together with applications and IT solutions development to support the four divisions. The main activities for each business unit can be briefly described as follows: 1.1.

Naval division

This division provides consultancy services and specific products to support civil and military ship designers in the electromagnetic analysis field. 235

236 Sourcing in India

Through a simulation tool developed by IDS, starting from the ship geometric and structural model, it is possible to build a simulation environment under the electromagnetic profile, characterizing it both from geometrical (device positioning) and electromagnetic points of views (e.g. by the analysis of constitutive materials). This complex system enables analysis and simulation, varying the parameters, of the electromagnetic compatibility (to identify possible interferences between transmission devices or between devices and instruments on board) and the evaluation and limit of the radar visibility of the ship. The Italian Ministry of Defence was the first customer of IDS Naval Division. However, over time, the company succeeded in broadening its market to include other Ministries of Defence (UK, Turkey, Brazil and France). 1.2.

Aeronautical division

This division supports the aerospace sector with multi-subject competencies (electromagnetic design, mechanical analysis, etc.); in particular, it focuses on the electromagnetic compatibility analysis, antennae design and their positioning on launching ramps and aircrafts. In the early days the aerospace division only supported the aeronautical sector by providing support in aircraft structural analysis. Later, electromagnetic propagation analysis was added to these competencies using techniques and methodologies developed in the naval area. 1.3.

Aeronavigation division and airport systems

This division develops software tools for the electromagnetic modelling of airports, in order to evaluate the performance of radio-help, telecommunications devices and radars. It also supports civil aviation operators during the flight procedures design, which are tested through proper simulators. 1.4.

Georadar division

This division produces small radars for analysing the subsoil of civil engineering,3 archaeology and research areas. Georadar is the only IDS Division that produces a physical product. These four divisions create an IDS turnover of 15 million euros (2006 data) and employ 150 persons (80% hold a degree in a technical-scientific subjects), distributed in the three sites: Pisa, Rome, Varese. Both the IDS registered office and the Geo-radar division are located in Pisa, whilst the Aeronavigation division is sited in Rome. The company

IDS 237

also has branches in England and Brazil, which were created in order to improve the customer support service (especially for the naval sector).

2. 2.1.

Sourcing in India The birth of the Indian experience

The IDS experience in India began in 1999, when the company decided to identify a business partner for its Georadar distribution. Thanks to this cooperation, IDS was able to make the Indian Ministry of Defence aware of its software products, and it soon became one of the main foreign customers for the company. As a consequence, IDS decided to intensify activities in the country, using the Indian company not only as a commercial partner, but also as a supplier for a number of software development activities. The contractual solution adopted to manage this agreement was essentially time and material. The agreement undertaken for the first two years of this new collaboration states the Indian company develops some of IDS software modules. To achieve this aim, some Indian employees were seconded to the IDS branch in Rome to learn the aims, methodologies and standards of the Italian company. This experience was considered very useful to IDS both for training Indian staff and for evaluating their real skills and capabilities. The positive results of this cooperation encouraged IDS to start a new company in India (through the signing of a new three-year supply contract), established by the partners IDS cooperated with during the previous two years. This new company, sited close to New Delhi, had a director and 7 employees. Of these, three were devoted full-time to the activities on behalf of IDS. The establishment of this ‘‘dedicated spin off’’ is viewed by IDS as the best solution to assure a better continuity in the service supply, which is considered a key aspect in a sector with such long learning curves. The support of IDS to this spin-off is the result of the deep knowledge of its staff, made up by employees the Italian company already cooperated with in the previous two years, transferring knowhow and internal methodologies to them. The ‘‘dedicated spin off’’ solution was encouraged by the low level of investments required for its realization: essentially, the rent of an office and the purchase of some computers.

238 Sourcing in India

2.2.

Indian staff management

Some characteristics of the Indian labour force constituted the main reason for IDS to begin a sourcing activity in India. Some of the main Indian workforce strengths are low labour cost, the widespread knowledge of English (considered a very important aspect in software development, because of the frequent interactions with the company headquarters), the entrepreneurial spirit (which was the basis for the new company foundation) and the presence in India of a high level Anglo-Saxon educational system. Regarding this latter characteristic, must be highlighted the importance given by IDS to the control of the recruitment process: for this reason the analogy of the Indian educational system with the western one is a very important aspect. The high Indian education level (especially in IT) allows a quicker staff training process. The very good education provided by the Indian system also reduces one of IDS’s key concerns in offshore software development, that of the transmission of specifications. The understanding of the features of the software modules to be developed remains, in fact, the most complex one for the supplier. Even if criticalities due to cultural differences in India are less than in other Asian countries (like China), some difficulties arise because of the importance Indians attach to social status. 2.3.

Outsourcing in IDS

IDS shows how a company, keeping inhouse the development of all core activities, succeeded in cooperating with domestic and foreign companies for commercial and manufacturing purposes. With reference to outsourcing with commercial aims, the IDS Indian experience (that led to the spin-off above described) highlights the importance of a partnership with a local company to achieve satisfactory commercial targets (for example, the presence of a local partner opened the way for IDS to the Indian Ministry of Defence). The outsourcing of the productive activity itself was a useful choice: it allowed cost reduction, access to a specific knowledge not available inside the company and higher volume flexibility. The company adopts different solutions for software development activity (IDS 1): inhouse production, purchase of complete suites, and manpower outsourcing (e.g. Indian). The company purchases complete suites (characterized by a high complexity level) for activities in which it doesn’t have the required

Strategic options

Purchase of complete suite Manpower outsourcing

Management complexity

In house production

Product complexity

IDS 239

Supply base

Italy or Europe Low cost countries (India)

IDS 1: Sourcing and production strategies

knowhow. In this case the reference sources are Italian and European suppliers. Core activities are retained inhouse. In this way, IDS can maximize the specific knowhow developed internally, and limit the danger of losing competitive advantages. In addition, this strategy allows IDS to keep inhouse selected competences necessary for further developments or enhancements of the solutions provided by a supplier. Some non-core activities (usually with a high repetitively level) are instead sourced in a low cost country (India). According to this solution, the software modules are committed to the supplier and executed by its staff, trained, guided and controlled by IDS. The partial externalization of software development activity is enabled by its modular nature, which allows the retention of the main framework of the programme and its core development internally, and the outsourcing of secondary modules to countries like India, characterized by high knowledge in the sector, good language skills and low labour cost. The success of this approach, as experienced by IDS, is guaranteed by the accurate documentation for each module to be developed. The process of externalization to the Indian provider, did not create for the Italian company any additional process codification or the need for any additional documentation, as Indian employees were involved in an education process inside IDS, resulting in the sharing of methodologies. The Indian staffs’ knowledge of internal processes is one of success factors of this initiative. The supplier’s involvement and cooperation simplifies the communication phase of the specifications and the correction of potential errors. Another important aspect in the outsourcing experience in India is a company policy which establishes that all technical documents and

240 Sourcing in India

reports must (even for internal use) be in English. This situation facilitated the transfer of some processes to India without affecting the normal modus operandi of the company. 2.4.

The purchase contract

The IDS experience shows that an effective purchasing contract is another key factor in implementing a successful offshore service project. The company, aware of the importance of this aspect, but without a specific knowledge of the subject, made use of experts in international contracts. The contract signed with the Indian supplier (presently lasting three years) is very exhaustive and provides a detailed description of all the aspects (even the minor ones) of the supplying process. Regarding payment, the contract establishes that, against full time hiring of a number of employees previously agreed, IDS guarantees a monthly payment to the Indian supplier. In cases of illness or any other impediments to perform the work of one or more employees, this amount will be reduced accordingly. The cost of any additional resource that IDS can use, if required is also agreed, in advance. Staff turnover inside the Indian company is freely managed by the supplier who however has to guarantee a fixed number of people dedicated daily to the development of IDS activities. The contract also establishes many clauses for the provider’s modus operandi. These clauses establish, for example, which hardware and software has to be used, the internet connection features that must be guaranteed (a very important aspect to ensure a proper communication between the headquarters and the supplier) together with a number of specifications regarding the development process. Work assignment, control requirements and acceptance criteria of the product are defined in the Work Assignment (WA). These agreements identify the specifications for the software to be produced including estimated process time, approval criteria, methodologies used for the production control and non-compliance management. These agreements are defined with the Indian counterpart and have both managerial and contractual protection purposes. Monthly costs for standard resource profiles (programmer with 5–7 years experience, etc.) and the curriculum vitae of any employees of the Indian company are also attached to the contract. In the case of new hiring, the contract also establishes that IDS has the option to evaluate all candidates’ curricula. Some clauses regulate the property of the software developed in order to protect the Company’s Intellectual Property Rights (IPR).

IDS 241

3.

The software development process in India

Software development process steps are described in IDS 2. During the initial phase, the company identifies the activities that must be outsourced and defines the related specifications. This phase is of paramount importance, since the company uses it to define most aspects of the sourcing project. Once these specifications are communicated to the supplier, the negotiation phase begins, with the main task of determining and agreeing the hours and labour force necessary for the supplier to perform the activities required. This is assessed as one of the most complex steps in the sourcing process, since the time required for software development varies on a case-by-case basis, and the only support for the buying company is provided by similar previous experiences, if any. During the negotiation process, the Italian company experienced some difficulties that it was able to manage through proper behaviours like, for example, giving a high importance to the social status of Indian counterparts (‘‘growing up in a society governed by caste, Indians expect foreigners to respect some rules’’), or trying not to hurt their high susceptibility (‘‘correcting too often the counterpart might compromise the success of the relationship’’) and of course a good flexibility in adapting to different negotiation styles (‘‘we usually have difficulties in managing long silences, on the contrary Indians often make use of these silences even during hard conversations’’). The output of the negotiation phase is the Work Assignment, an agreement where technical specifications and responsibilities, acceptance criteria, non-compliance management processes, warranties and intellectual property rights are all defined. The typical duration of an activity defined by a work assignment is two or three months. On a monthly basis, and without any contractual validity, a revision document is issued; it plans the activities on a larger timetable (usually 7 months). Once the work assignment is signed, the activity of the supplier can start together with the monitoring activities performed by IDS. Through management programmes run remotely, the Italian company can perform an accurate and timely control of the supplier activity.

Specifications definition

Negotiation

Work assignment

Supplier monitoring

IDS 2: Software development process with the Indian supplier

Testing

242 Sourcing in India

By using these tools, IDS can constantly monitor the supplier activity, verifying the state of the project and detecting potential delays. The Italian company frequently hosts Indian employees to facilitate the timely transmission of specifications. This aspect has been considered so important that it influenced the location of the Indian company, which was adjacent to an international airport in order to make travel easier and quicker. Finally IDS introduced the concept of ‘‘work provided’’ (i.e. the real productive hours spent during the development process) to ensure better control of the Indians’ productivity. In order to do that, Indian employees have to declare, under a specific form (time sheet), the effective number of productive hours, indicating also the activity performed out of the total number of hours spent working. Once the product is produced, IDS starts the testing phase and, in the case of non-compliance, the corrective activities start in accordance with the requirement of the work assignment.

4.

Future developments

Future plans of IDS activities in India are now under analysis but the experience to date is considered very positive. Considering the high volume of activities IDS performs in outsourcing, and the huge difference of cost of an Indian programmer compared to a western one, at the moment it does not seem possible to renounce to the use of offshore resources. On the contrary, the company objective is to intensify these activities in India. At present IDS is not concerned that it is making the Indian supplier a competitor, since only the product ‘‘non-core’’ components are assigned to them. Additionally, IDS does not consider it possible for a software services supplier to acquire the ability necessary to become a competitor for the company itself, like the knowledge and planning of electromagnetic propagation. As a matter of fact, the software is a component of the product supporting those key competences of electromagnetic nature. Besides, IDS is not concerned about a non-punctual performance by using Indian support. The use of this solution in the development of the software optional functions, allows the company to manage delays with the release on the market of the previous version with no risk for its product functionalities. IDS has always the option of bringing back the externalized activities because of the company knowhow to complete the job outsourced.

Stonefly An Example of Sourcing of Material Goods in India Massimo Nelci

1.

The company

Stonefly was founded in 1993 as a spin-off of Lotto S.p.A. The new company was established in order to enter the market of casual footwear, using competences already developed in the sports sector by Lotto. Stonefly’s owners early understood the need of finding their own original niche in a very fragmented market. The identified solution was the creation of an industrial product with hand crafted characteristics, in other words a shoe able to show its Italian style through attention to detail and combining beautiful aspect and comfort. Stonefly carried out a key product innovation, creating the ‘‘shock air’’ system, i.e. a device which allows a change of air inside the shoe by a pump driven during the movement. Having found this innovative product strategy, Stonefly decided to localize its production in countries characterized by low labour costs. Stonefly chose to localize all the value added activities (design, prototyping, engineering, logistics, quality control, distributions, sale support services) in Italy (Montebelluna), while the entire production was outsourced to producers in Eastern Europe, Africa and Asia. At the beginning Stonefly addressed the Italian and European market and, once becoming popular in these nations, it focused on offshore markets, in which penetration was considered more complex. In 1996 Stonefly decided to enter the US market, where the niche of comfort shoes was already developed and where the Italian style could be a cutting edge plus to gain the leadership. In 1997 Stonefly established in the USA, with pure commercial aims. In 2001, while sales in German, Spanish and French markets were rising, an agreement was signed for the distribution of Stonefly products in Japan. 243

244 Sourcing in India

In 2005 the company decided to enter the Chinese market. It established a joint venture with Scienward International Holdings, leader in the production and distribution of wearing items in the Far East. The project included the opening of 50 one-brand outlets in China during 2005–2006 (120 outlets including franchising). The agreement with China was part of a more complex and articulated programme of development in the field of retail, which prefigured the opening of one-brand shops, shop-in-shop and franchising in the most important cities of the world. By the end of 2008 the company calculates to enhance its distribution network, which will have 100 selling points in Italy, 25 in Spain and about 10 in France. This strategy should allow Stonefly to increase its turnover from 96 million euros in 2005 to 120 million euros in 2007.

2.

Historical evolution of shoe factories in Asia

In order to deeply understand the reasons that induced Stonefly to create connections with the Far East and India in particular, we must summarize the historical evolution of the shoe sector in Asia. The first footwear companies which created sourcing basins in Asia, about 25 years ago, were Americans.1 These companies looked for low labour cost countries and found in the Far East the most suitable area for intensively delocalized production (in New York, about 50 years ago, there were a number of shoe factories, which disappeared almost entirely in the following years). The reasons for an offshore localization of shoes factories are, most of all, linked to the labour intensive nature of these productions. The vamp processing needs many working hours; the numerous pieces it is made of, must be sewn one by one, one to the other. Another reason which brings big American companies (like Nike) to localize their production in Asia is a strategic choice, consisting in using savings offered by the outsourcing of production in the Far East to make more consistent investments in marketing, research and development, and design. Considering these historical reasons and the changes of the ‘‘sports’’ or ‘‘walking’’ shoes during the last 20 years, it is easy to understand that the knowhow and technology of these productions are really widespread in the Far East. In the light of that, a western company interested in producing a casual shoe is strongly encouraged to relate with the Far East.

Stonefly 245

As far as the diffusion of the phenomenon in the Asian subcontinent is concerned, we can say that even if the main American corporations firstly addressed to suppliers from Korea or Taiwan, very often they directly referred to Chinese and Indian companies, which were able to offer better (not just cost) performances. Thanks to the relevant flow of foreign investments, these countries developed a type of shoe districts, which represented a fertile ground for companies (like Stonefly) which arrived here some years later.

3.

Sourcing in India

As previously said, Stonefly from the foundation outsourced its entire production to foreign suppliers. During the first years of activity, these suppliers were predominantly in Romania and Morocco, where it is possible to combine low costs with good quality production. Even without any shareholding in its suppliers, Stonefly exercises a strong influence upon them, thanks to the trust created by signing medium-long term contracts and the relevance of the purchased goods. Even if they are satisfied with that supply basin, the increasing production drives the company to expand its supplier pool and, by doing this, Stonefly decided – following the example of the American companies – to test the Asian sourcing area. There are many reasons why Stonefly made this choice. First of all, the company needed to find suppliers able to guarantee better performances in terms of costs and quality. The labour cost in countries such as Romania in that period started increasing so much that the competitive advantages they offered were not relevant. The company needed to create a partnership able to guarantee higher service levels, first of all in terms of production flexibility, that is a key feature in a market directly affected by sudden changes of fashion. In the shoe sector, fashion forces the production of small lots for each item, both for manifold configurations (in terms of dimensions, colours, accessories), and for characteristics related to delivery (which must be frequent and timely). Moreover the production cycle is very short and characterized by seasonal peaks. Companies like Stonefly must be able to face changes, relying on a flexible supply network. Another reason for the decision to enlarge the supply basin in Asia was the desire to be close to the raw material sources. Stonefly thinks it is also useful to transfer knowhow to raw material suppliers and companies managing first leather workings. By sharing knowledge, the company is sure to obtain positive effects on the end-product quality.

246 Sourcing in India

The analysis of these factors brought Stonefly first into China and then India. The Indian market is very interesting for all the presented aspects. It is characterized by a low labour cost, and has a sub-supply system made by flexible companies of medium dimensions with a specific knowhow. The Indian market is also attractive for the production of high quality leather and hide (it is the first source for Chinese producers too).

4.

Suppliers’ selection process

Stonefly 1 shows the process adopted by Stonefly for the research and selection of suppliers in the Indian market. At first, the company analysed in depth the Indian industrial geography. This analysis – particularly complex because of the size and heterogeneity of the country – was performed in order to understand the main peculiarities of the different areas of the country in terms of communication and transportation infrastructure, presence of incentives for foreign investments, closeness to raw materials sources, and presence of shoe factories. Having identified the most attractive areas, a site visit was organized in order to meet some potential suppliers and collect information about their competences and technical specializations. Starting from this preliminary information, the company identified a limited number of potential suppliers to be analysed deeply considering other parameters. First of all, it was very important to understand if the suppliers were already producing for western customers. It was also relevant to analyse their production capability and their quality standards. These abilities were measured at the suppliers: production lines were examined, products and the production processes were evaluated. Stonefly also adopted some evaluations directly applied by the headquarters: some product samples were sent to Stonefly headquarters, where they were tested by R&D technicians. They preformed technical test on materials (e.g. resistance to wear and scratch test on components) in order to elaborate a more detailed judgement of suppliers’ quality standards.

Industrial geography analysis

Stonefly 1:

Site visits

Identification of potential suppliers

Suppliers’ selection process

Production test

Suppliers evaluation and selection

Pilot production

Stonefly 247

Then, the capacity to produce the expected volumes was analysed and the availability to provide Stonefly also with lower quantities. Considering all this information, the best suppliers were identified and a pilot production began and – only with the companies that pass this test – the continuous production started. Today in India Stonefly is provisioned by 5 suppliers – prevalently in the area of Chennai2 (Tamil Nadu) – a volume of about 300 thousand pairs of shoes each season. The process of analysis and selection of suppliers is continuous. The sale trend of Stonefly is increasing and so it is necessary to raise the number of suppliers to meet the demand.

5.

The process for conceiving and creating a collection

In order to better understand the support provided by Indian suppliers to Stonefly, it is useful to give a short summary of how the process of development of a collection takes place. This process (Stonefly 2) starts about 12 months before the release of collections in the shops. At the beginning, they carry out a survey (1) (in all the countries in which Stonefly sells its products), aimed at identifying the market needs. The survey collects data about those models and typology of shoes which could better meet customers’ desires. This information represents the starting point for the collection.3 This activity, in its first stage, is outsourced to external professionals (2a). The company thinks that an internal designer could be strongly influenced by the work environment, which could force him to propose, collection after collection, solutions similar one to the other. For this reason Stonefly prefers to commit the first phase of models planning to external designers. These designers have the fullest creative freedom, respecting only the indications resulting from the previously described market survey. The results of this work are sent to an internal designer division (2b), which must adapt the models to Stonefly’s (quality and comfort) standards. The output of these first phases of the process is not sufficient to obtain a detailed design of the shoe to be produced; in this phase the external designers tend to provide – particularly as regards materials to be used – only some general descriptions regarding colours, appearance, consistency of materials, without mentioning the best materials to obtain such effects.

248 Sourcing in India

1 Market survey 2b

2a 2a Internal designers

External designers 3 Production materials research

4 Prototyping a

b Prototype creation

Technical card creation

5 Customer agreement test 6 Creation of the bills of materials

Internal

External

Process sequence Feed-back Stonefly 2:

Conception and creation process

For this reason it is necessary to go on with a research activity to find out the most suitable materials to be used in the production of the new collection (3). This activity is outsourced to the external suppliers which will perform the production process. They are free in selecting the modality and the extension in this material research process. After that, the solutions

Stonefly 249

proposed by the suppliers have to be approved by Stonefly and consequently an industrialization phase begins. In this phase previously developed product concepts are rationalized and standardized in order to obtain a product suitable for large-scale production. Then for each model – on the basis of the features of the selected materials – they create a 3D prototype (4a) and a technical record (4b), useful for describing the process and materials to be utilized in the production. Before developing the final bills of materials, a market survey is performed in order to evaluate the customers’ agreement (5), in order to change prototypes considering unsatisfied needs. For this purpose prototypes are committed to agents which propose the product to some shops, and collect opinions from customers. When the company thinks that the product has a positive feed-back, a detailed bill of materials is created and sent with prototypes and technical cards to the supplier.

6.

The supply control

Today Stonefly has suppliers located in four geographic areas: Eastern Europe, North Africa, China, and India. The attribution of orders to the producers is made on the base of the product characteristics considering the supplier’s process competences, the availability of materials, closeness to the sources of raw materials, production costs and flexibility (Stonefly 3). In the order attribution the company considers mainly the product lines. This choice is taken because of the need to group models characterized by common constituent particulars. Having selected the supplier, Stonefly will provide technical support and control, delegating the supplier all production activities regarding the assigned product lines. The producer first of all develops moulds; this project has several finishing steps with a continuous activity of conformity control carried out directly by the Italian Stonefly’s headquarters. Then the producer buys raw materials. This activity is outsourced to him because he has more chance of interactions with local suppliers and greater possibility of obtaining good prices and better buying conditions. Purchased materials undergo a process of conformity control by Stonefly, through the sending of samples to Italy. The declaration of conformity starts off the real production process, with the production of all the components and accessories of the shoes. Production activities

250 Sourcing in India

1

Factors affecting the choice of the supply basin: • Closeness to raw materials • Production process flexibility • Technical specialization • Production costs

China

2

India

North Africa

Eastern Europe

2 Conformity control

3

Creation of new stamps 3

Conformity control

Primary goods supplying 4 Components production a

Sole

4 Production control

b c

Assembly control

Vamp Other components

Final assembly

Stonefly Supplier

Stonefly 3:

The process of quality control

are monitored by Stonefly technical staff at the producer. This activity of control is carried out during all the phases of the production process: 1. 2.

Leather cutting: a hand-crafted process which requires a skilled professional able to minimize scraps and re-workings; Hemming: cut parts are sewn one to the other. This process is made with shoe sewing machines. In some cases it is necessary to sew by hand. The result of this step is the vamp (i.e. the upper part of the shoe);

Stonefly 251

3.

Assembling: vamps are put on a shoe tree. There are numerous techniques to stick the sole to the vamp, so that the shoes take the expected shape.

When Stonefly decided to localize its production in India, local factories were creating products which did not meet Italian standards. Stonefly’s quality controllers have, besides a control function, the target of transferring production techniques, sharing process knowledge and finishing methods which can enhance the quality of the shoe (for instance they can give suggestions regarding threads, waxes, brushes, etc.). This knowhow transfer is often carried out at the first level of the supply chain: Stonefly technicians go to the tanner, follow all the stages of tanning and provide technical solutions to improve the quality of their productions (for instance they can give suggestions on the tanning duration, on the chemicals to be used to give the right colour and consistency to the hide, etc.). As far as mentioned the previously control activities are concerned, it is clear that they are mutually interrelated and require on the one hand a constant presence at the supplier’s plant (controllers, in the first phase of the relationship, work exclusively at the supplier), on the other hand a deep technical knowledge of product and process characteristics. The controller, for example, checks leathers (and explains why they can be not compliant with Stonefly standards) and verifies the operations of cutting and neckline. This activity is not limited to the finished product, but concerns the entire production process, especially in the first period of the buyer–supplier relationship. Indian suppliers usually accept the presence of Stonefly controllers at their plants as they know that only through this control and support can they establish a long term business relationship with western customers. Also thanks to this bent to accept suggestions, Indian suppliers learn all production techniques very fast and, two or three years after the beginning of the relation, quality controllers typically go there no more than twice a week, controlling prevalently end-products. If there is any flaw, they investigate only the phase in which the problem occurred. As a consequence, the control activities at the suppliers become less pressing and more routine as the relationship strengthens.

7.

The negotiation in India

We can conclude with a dissertation on the negotiation of the purchase contract.

252 Sourcing in India

Assuming that the most important aspect of the negotiation is the price of the purchased product, according to the Stonefly’s experience the most difficult aspect in India is identifying the costs of the counterpart. For the company, in fact, knowing the costs of materials involved in the production – which are most of the costs – is very important in order to identify the Indian suppliers’ margins. It is interesting to underline the fact that the lower rate of development of the shoe sector in India compared to the Chinese one means an advantage for the negotiation: in China, in fact, where the major players of the sector are located there is no space for negotiation for medium companies (like Stonefly) as Chinese suppliers consider these orders irrelevant compared to those provided by big multinationals. In India it’s different. Regarding Stonefly’s experience, there aren’t peculiar problems in the definition of purchase contracts. The contract normally regulates the obligations of the Indian suppliers to provide only Stonefly with Stonefly shoes and not sell to other companies. In India, in contrast with what happens in China, no intellectual property attacks have been registered. As far as the management of delays is concerned, Stonefly does not include penalties in the contract but prefers to receive compensation in terms of solutions to the problem: in the case of delays superior to two weeks, the supplier must use product shipment by air. However, incidents of this type are nearly absent in India.

Notes

1

Service Offshoring: the Literature

1. Local networks, usually named LAN (Local Area Network), are private networks used for connecting personal computers and workstations inside a single building /campus (Tanenbaum, 2003).

2

India: a Geo-economic Overview

1. India is a multi-language society, there are 18 main languages acknowledged by the Constitution; the official languages are Hindi (spoken by 38% of people) and English. 2. The term Raj, which means ‘‘power’’, ‘‘government’’, ‘‘administration’’, generally refers to the colonial domination. 3. The Indian Union is a Federal Republic, the State is led by the President of the Republic, who holds a representative function. The legislative power is committed to a bicameral Parliament, while the executive power is committed to the government, led by a Prime Minister, which is responsible to Parliament. Finally, the judiciary power is identified independent by the Constitution, and controls the executive and legislative powers. 4. During the 1950s the linguistics problem erupted and solicited the restructuring of the Indian region: the number of States increased from 9 to 25. These States were designed on a linguistic basis, with the exception of Punjab (identified on a religious base), while the North-East of India was organized respecting tribal differences. 5. The most widespread religion is Hinduism (81.3%), however there are relevant percentages of Muslims (12%), Christians (2.3%), Sikhs (1.9%), Buddhists, etc. 6. The BJP (Bharatya Janata Party – The Indian People Party) was born on in 1980 and represents the instances of Hindu nationalism. 7. The ‘‘untouchables’’ according to the Hindu religion are those that for ritual contamination reasons are considered to be outside the cast hierarchy and therefore are victims of numerous discriminations. 8. The ‘‘disadvantaged’’ groups are the ex-untouchables and the tribal inhabitants (the original inhabitants of the subcontinent that were pushed out of their region by conquest and by successive invasions, forced into the forests and the poor lands). These make up for 15% and 7.5% of the population. The constitution however allows this measure to be extended for other disadvantaged classes – in this category being included rural groups belonging to the fourth ‘‘vama’’ –almost half the Indian population. 9. Jawaharlal Nehru (1889–1964). Member of Congress and follower of Gandhi, designated by him to be his successor, and who once Independence was obtained filled this position until his death in 1964. 253

254 Notes 10. The IITs were created in Kharagpur, Bombay (1958), Kanpur, Madras (1959) and Delhi (1961). To these were added the IITs near Guwahati (1994) and Roorkey University that in 2001 was upgraded to become an IIT (Department of Education, Annual Report 2002–2003). 11. In India all the economic indicators are calculated based on the fiscal year that begins on 1st April and finishes on the 31st of March; with regards to the fiscal year 2006 that refers to the period between 1st April 2006 and 31st March 2007. 12. ASEAN (Association of South-East Asian Nations) is an alliance founded in 1967 by the nations of the Asian South-East. This includes: Brunei, Cambodia, Philippines, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand/ Siam and Vietnam. 13. The South-Asian Association for Regional Cooperation (SAARC) is an association of 8 countries of South-Asia: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. It has an extension of over 5 million km2 and includes a fifth of the worldwide population. The association encourages the cooperation in various sectors: from agriculture to health, from rural development to anti-terrorism. 14. The first two EPZs were created in Kandla (Gujarat) in 1965, and in Santacruz (Maharashtra) in 1974. These areas were equipped with adequate infrastructures, in which foreign participation consented 100 per cent, a duty-free environment and special fiscal terms. The productive units that rise in these areas must be export-oriented, yet they can sell in loco a percentage of their production behind customs payment. Since 1st April 2000 the Export & Import Policy made possible the creation of Special Economic Zones (SEZs), which have also been converted with the EPZs. The SEZ’s objective, which recalls the Chinese counterparts, is to attract foreign investments and to provide incentives to exports. 15. With the exception of activities included in the list of forbidden sectors.

3

India: the Land of Service Offshoring

1. IDC is a company leader in IT market researches and consultancy. 2. Deloitte is a finance consulting company. 3. The lack regards in particular transport infrastructures. Telecommunication infrastructures are considered adequate (Kobayashi and Hillary, 2004, McCormack et al., 2005). 4. CMM (Capability Maturity Model) is a method developed (1984) for the development of software by SEI (Software Engineering Institute) at the Carnegie Mellon University (Pittsburgh, USA). It has five levels of ‘‘maturity’’; each of them represents an improvement in the processes and in the organization of a software development. 5. NASSCOM (National Association of Software and Service Companies) is a chamber of commerce that acts as intermediary for the companies operating in software and service sectors. It is the main Indian institution in this field. 6. According with data reported in Chapter 2, total export refers to goods exchange. 7. The expression embedded software refers to those programmes which allow the functioning of electronic products and equipment (ICE, 2004).

Notes 255 8. ITES means IT enabled services (i.e. services managed through IT). BPO means business process outsourcing.

4

Planning and Starting an Offshore Project in India

1. Embleton and Wright (1998), Sourcing Interests Group (2003), Gupta and Nidhin (2003), Ganesh (2004). 2. Willcocks et al. (1995); Udo (2000); de Lucas and Rodriguez (2003); Kumar and David (2003); Bertolini et al. (2004); Deloitte (2004a). 3. Embleton and Wright (2003); de Lucas and Rodriguez (2003); Gupta and Nidhin (2003); UNCTAD (2005a). 4. Embleton and Wright (1998); Franceschini et al. (2003); Ganesh (2004); UNCTAD (2005a). 5. Willcocks et al. (1999); Gupta (2003); Adler, (2003); Grittner (2003). Barthe´lemy and Geyer (2001); Monczka et al. (2005). 6. Kern et al. (2002); Adler (2003); Gupta (2003); Monczka et al. (2005). 7. Aubert et al. (2003); Kotabe and Murray (2004); Trefler, (2005); Beulen et al. (2005) 8. Willcocks et al. (1995). 9. Bertolini et al. (2004); Keane (2003); Trefler (2005); Diamond Cluster (2005). 10. Barthe´lemy and Geyer (2001); De Lucas and Rodriguez (2003); Aubert et al. (2004), Carmel and Nicholson (2005). 11. Udo (2000); Gupta (2003); Barthe´lemy and Geyer (2003). 12. Ganesh (2004) 13. Carmel and Agarwal (2001); Gupta (2003); UNCTAD (2005a); Graf and Mudambi (2005). 14. Gupta (2003); Skelton et al. (2004); Graf and Mudambi (2005). 15. Embleton and Wright; (1998); Baldwin (2003). 16. Cf. Lowes et al. (2004); Irving et al. (2004); Bajpai et al. (2004); Gupta (2003); Edgell and Lewis (2003); Vashistha and Vashistha (2004). 17. Gupta (2003); Bertolini et al. (2004); Diamond Cluster (2005); Trefler (2005). 18. Keane (2003); Bertolini et al. (2004); Diamond cluster (2005); Trefler (2005). 19. Bertolini et al. (2004); Utilipoint, (2005). 20. Keane (2003); A.T. Kearney (2004a); Bertolini et al. (2004); Ganesh (2004); Trefler (2005); Utilipoint (2005). 21. The research was carried out on a sample of 565 companies; 39% of these had a consolidated experience in outsourcing, whereas the remaining 61% had adopted this solution over a period ranging from two to seven years. The sectors included in the research are: the car and transport industries, retail sales, consumer’s goods and services, industrial machines, pharmaceutical industry. The companies were mostly based in North America, Europe and Asia.

5

Foreign Investments in India: Modes and Legislative Constraints

1. SIA: Secretariat for Industrial Assistance, Department of Industrial Policy Promotion, Ministry of Commerce and Industry. Information are obtainable by email, chat or Bulletin Board in the Ministery web-site. (www.dipp.nic.in).

256 Notes 2. For this reason the costs the office faces must be financed through foreign currency remittances. 3. About 1.8 million Euros. 4. About 180,000 Euros. 5. There are some exceptions (e.g. ‘‘Export Oriented Units’’ (EOUs) can produce goods reserved for small companies, but they must respect the obligation of exporting at least 66% of their production). 6. Items reserved to SSI the 28th of March 2005 were 506 http://www.smallin dustryindia.com/publications/reserveditems/resvex.htm). Products belonging to this category are re-defined continuously when incentives plans of government change. 7. The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement – negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994 – administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation. 8. It’s available only if the extension is presented within 12 months since the date in which primary request is presented.

6

Transport and Communication Infrastructures in India

1. This chapter is written (except paragraph 6.6.) in collaboration with DHL. 2. The Central Road Fund, created by the Indian Government with the Central Road Fund Act (2000), is a financing fund aimed at supporting the development of the Indian road network. The fund originated from taxation of fuels and nowadays collects approximately 1 billion dollars a year (Worldbank, 2006). 3. Examples of incentives are the possibility of establishing wholly owned foreign enterprises for the building of transport infrastructures, tax reliefs in the import of equipments to be used for the building of infrastructures, etc. 4. Landed Cost represents the real cost for an imported good, calculated considering the price paid to the supplier, transport costs, taxes, rights of the intermediary and any other expenses. It is one of the most considered factors in the evaluation of international sourcing choices. 5. Other formula are: BOLT (build-operate-lease-transfer), which, unlike BOT, includes a leasing concession before the transfer of the property to the government; BOO (build-own-operate), in which the structure is only owned by the private company, BTO (build-transfer-operate), in which the property of the structure is transferred before its start. 6. The strategy of Air Deccan is based on the supply of new connections among middle sized cities at prices competitive compared to railway transfers. In this way the company increased the sector’s customers (35%–40% of Air Deccan’s customers had not flown before the establishment of the company) (Chetana’s Institute of Management & Research, 2006). 7. TEU means Twenty Equivalent Units. TEU corresponds to the standard dimension of a container of 20 feet (20 feet = about 6.1 m); a container of 20 feet is 1 TEU.

Notes 257 8. Vishakhapatnam, Kandia, Chennai, Kolkata, Jawaharlal Nehru Port (J.N.P.T., also known as Nava Sheva), Mumbai, Mormugao, New Mangalore, Paradip, Tuticorin, Cochin, Ennore. 9. ‘‘National Highways’’, owning only 2% of the total Indian road network, manage 40% of the traffic. 10. As far as container traffic is concerned, the route New Delhi–Mumbai is completely exploited; the distance of 1,340 km separating the two cities is made at an average speed of 28.5 km/h. The average crossing time is 47 hours (DHL, 2006) 11. Traditional connections via analogical modem. 12. The New Telecom Policy includes three kinds of typologies (ISPA–Internet Service Providers Association of India): . ‘‘A’’: licences for supplying Internet services to the entire Indian country; . ‘‘B’’: licences for supplying Internet services to one of the 20 districts the country is divided into or to a big metropolis; . ‘‘C’’: licences for a single city.

Accenture 1. Customers of Accenture’s clients. 2. Activities of ‘‘functional planning’’ and ‘‘application to organization’’ are realized onsite, also recurring to support offered by Accenture offshore staff, that is transferred near the customer.

Finmeccanica 1. ‘‘Offset’’ is the name of the policy applied by countries’ Governments requiring that the winner of a government contract for the supply of valuable goods purchases directly in the country a percentage, normally established by law, of the goods and services required for the contract execution. The offset policies may require that the purchases are directly related to the contract or allow to purchase unrelated goods and services as a way of compensation.

IDS 1. Ingegneria Dei Sistemi. 2. Mr Franco Bardelli is one of the founding members (1960) of SELENIA (known today as SELEX SISTEMI INTEGRATI), in which he held the appointment of managing director for ten years. 3. These instruments ease excavationand micro-tunnelling operations

Stonefly 1. The first Italian companies (Antonini, Primigi, Lotto, Diadora) entered this market 10 years later.

258 Notes 2. Stonefly sources both in the north of India (New Delhi), and in the south-east (Chennai), where the production is more relevant. 3. The product line is at the highest level of aggregation regarding shoe typologies and is made by 4–5 models, linked by the same detail which, in Stonefly, is the sole.

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264 References Udo G., ‘‘Using analytic hierarchy process to analyze the information technology outsourcing decision’’, Industrial Management & Data System, vol. 100, No. 9, pp. 421–29, 2000 Willcocks L., Choi C.J., ‘‘Co-operative Partnership and ‘Total’ IT Outsourcing: From Contractual Obligation to Strategic Alliance?’’, European Management Journal vol. 13, No. 1, pp. 67–78, 1995 Willcocks L., Fitzgerald G., Feeny D., ‘‘Outsourcing IT: the strategic implications’’, Long Range Planning, vol. 28, No. 5, pp. 59–70, 1995 Willcocks L., Lacity M., ‘‘Fitzgerald G., Information Technology Outsourcing in Europe and the USA: Assessment Issues’’, International Journal of Information Management, vol. 15, No. 5, pp. 333–51, 1995 Willcocks L.P., Lacity M.C., Kern T., ‘‘Risk mitigation in IT outsourcing strategy revisited: longitudinal case research at LISA’’, Journal of Strategic Information Systems vol. 8, No. 3, pp. 285–314, 1999 Willcocks L., Smith G., ‘‘IT-enabled business process reengineering: organizational and human resource dimensions’’, Journal of Strategic Information Systems, vol. 4 No. 3, pp. 279–301, 1995 Yilmaz M.R., Chatterjee S., ‘‘Deming and the quality of software development’’, Business Horizons, vol. 40, No. 6, pp. 51–8, 1997

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268 References Ministry of Shipping (http://shipping.nic.in) NASSCOM – National Association of Software and Service Companies (www.nasscom.org) National Highway Authority of India (http://www.nhai.org) NCAER – National Council of Applied Economic Research (www.nacaer.org) National Portal of India (www.india.gov.in) Planning Commission of India (http://planningcommission.nic.in) RBI – Reserve Bank of India (www.rbi.org.in) SIA – Secretariat for Industrial Assistance (http://siadipp.nic.in) STPI – Software Technology Parks of India (www.stpi.soft.net) WBIDC – West Bengal Industrial Development Corporation (www.wbidc.org)

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References 269 Deutsche Bank Research, ‘‘Key economic indicators: India’’, 2006 Diamond Cluster, ‘‘2005 Global IT Outsourcing Study’’, 2005 DLA Piper Rudnick Gray Cary, ‘‘Guida informativa legale, Hong Kong’’, 2005 Economic Survey, Ministry of Finance (http://finmin.nic.in), 2006 EIU – Economist Intelligence Unit . ‘‘Economic Data’’, 2004 . ‘‘Better, faster, cheaper? Business process transformation in financial services’’, 2005 Federalimentare, ‘‘Missione in India’’ 2005 GAO – United States Government Accountability Office, ‘‘International Trade: Current Government Data Provide Limited Insight into Offshoring of Services’’, September 2004 Gartner, ‘‘Choosing an offshore outsourcing location’’, 2003 GeniSys, ‘‘The Clarion Call of Business Process Outsourcing’’, 2004 Goldman Sachs, ‘‘DreamingWith BRICs: The Path to 2050’’, Global Economics Paper, No. 99, 2003 IATA, ‘‘Aviation in India: Great Opportunities and Great Challenges’’, 2005 IBM, ‘‘Back-office and customer care centers in emerging economies’’, 2004 ICE – Istituto nazionale per il Commercio Estero (www.ice.gov.it) . ‘‘India: Congiuntura Economica’’, 2004a . ‘‘India’’, 2004b . ‘‘Societa` italiane che operano in India’’, 2005 . ‘‘India: Congiuntura Economica’’, 2007 IDC – International Data Corporation . ‘‘Worldwide IT services forecast update, 2002–2007’’, 2003 . ‘‘Worldwide BPO market steadily expands, with buyer demand molding vendor strategies’’, 2005 Innodata Isogen, ‘‘Don’t get caught offshore with the wrong partner seven tips for selecting the best outsourcing partner’’, 2005 Keane, ‘‘Offshore IT outsourcing: An integral component of high-performance IT organizations’’, 2003 KPMG, ‘‘Consumer Markets in India – the next big thing?’’, 2005

270 References neoIT . ‘‘Mapping Offshore Markets Update 2005’’, vol. 3, No. 8, 2005a . ‘‘Offshore & nearshore: ITO salary report 2004’’, vol. 3, No. 5, 2005b OECD – Organization for Economic Co-operation and Development, ‘‘OECD Information Technology Outlook 2004’’, 2005 Sourcing Interests Group, ‘‘Offshore Outsourcing Part 2: Implementation’’, 2003 UNCTAD – United Nations Conference on Trade and Development . ‘‘Changing Dynamics of Global Computer Software and Services Industry: Implications for Developing Countries’’, 2002a . ‘‘Handbooks of Statistics’’, 2002b . ‘‘Foreign Direct Investment and Performance Requirements: New Evidence from selected Countries’’, 2003 . ‘‘World Investment Report 2004: The Shift Towards Services’’, 2004 . ‘‘Business Process Offshore Outsourcing – Untapped Opportunities for SMEs’’, 2005a . ‘‘World Investment Report 2005: Transnational Corporations and the Internationalization of R&D’’, 2005b . ‘‘World Investment Report 2007: transnational corporations, extractive industries and development’’ UNDP – United Nations Development Programme, ‘‘Human Development Report 2003 – Indicators – India’’, 2005 Utilipoint, ‘‘First Data Corporation Utility Business Process Outsourcing’’, 2005 UTISec – UTI Securities, ‘‘Banking Sector Report’’, 2005 Worldbank (www.worldbank.org) . ‘‘India’s Transport Sector: The Challenges Ahead’’, 2002 . ‘‘The World Bank in India: Country Brief’’, 2005a . ‘‘Railroad data for India’’, 2005b . ‘‘Road Funds’’, 2005c WTO – World Trade Organization (www.wto.org) . ‘‘WTO: International Trade Statistics 2005’’, 2005a . ‘‘World Trade Report 2005’’, 2005b

Index A.T. Kearney, 11, 18–20, 70, 72, 76, 78, 87, 90, 92 Accenture, 70, 77, 101, 107, 110, 112, 128, 175–92 act, 28, 33, 51, 67, 136, 140, 143, 146, 147, 148, 151, 211 Adobe, 97 agreement, 47, 48, 82, 85, 97, 104, 115, 127, 139, 146, 148, 170, 208, 211, 217, 220, 234, 237, 240, 241, 243, 244, 248, 249 agriculture, 30–2, 36, 37, 68, 73, 76 airport, 151–4, 236, 242 Andra Pradesh, 144 Application Service Provider (ASP), 16, 185, 231 assistance, 3, 15, 103 Entrepreneurial Assistance Unit (EAU), 142 Secretary for Industrial Assistance (SIA), 136, 144 Association of South-East Asian Nations (ASEAN), 40, 47, 56, 82, 104 Aram, 132–3 Artha, 132–3 auditing, 129, 140 authority, 26, 76, 151, 152, 153, 158, 167 authorization, 30, 136, 138, 139, 142, 167 Bangalore, 60, 61, 78, 87, 97, 169, 179, 191, 206 bank, 29, 30, 36, 59, 64, 101–3, 124, 175, 191 Sella, 108, 109 Swiss, 14 World, 150, 151 barrier, 59, 96, 210 Beijing, 153 Belgium, 40, 41, 44, 45, 103 Bharatiya Janata Party (BJP), 27, 30, 31, 80, 168

Bihar, 32, 35, 80 biotechnology, 10, 65, 67, 68, 77, 78, 82 Brazil, 52, 54, 86, 88, 89, 90, 91, 215, 236, 237 Build Operate Transfer (BOT), 122, 151 Bush, G. W., 48 business process, 19, 84, 85, 87, 101, 109, 110, 166, 204, 206, 217 outsourcing (BPO), 3, 10, 84–91, 94, 101, 102, 104, 178, 184, 185, 190, 209 Canada, 3, 47, 85, 86, 88–91, 93, 103, 147 capital, 6, 7, 17, 20, 50, 78, 122, 136, 138, 142, 146, 167, 175, 218 certification, 94–5, 127, 129, 205, 206 channel, 139, 192, 222, 232 sourcing, 13, 105, 109, 110 check, 43, 95, 226, 227, 251 Chennai, 61, 65, 68, 144, 148, 152, 154–7, 160, 162, 168–70, 179, 191, 247 China, 31, 32, 34, 36, 39, 40, 41, 44, 45, 47–9, 52, 54, 59, 74, 80–2, 85–93, 104, 155, 158, 171, 172, 180, 181, 197, 223, 238, 244, 246, 249, 250, 252 CIA, 32, 158 Cisco Systems, 35, 36 co-design, 109 Coca Cola, 51 Comau, 106, 107, 121 common law, 85 communication, 7, 14, 15, 18, 26, 30, 56, 73, 76, 96, 113, 131, 135, 166–72, 175, 186, 199, 200, 201, 203, 204, 239, 240, 246 competitiveness, 44, 116, 210, 218, 234 complexity, 7, 12, 15, 16, 17, 22, 32, 57, 115, 125, 130, 162, 185, 205, 208, 209, 238, 239

271

272 Index congress, 24 party, 30, 31, 81 constraint, 80, 204, 233 legislative, 136–49 container, 155–6, 165 contract, 5, 8, 10, 85, 112, 114–17, 122, 124, 126–9, 135, 137, 138, 182, 187, 190, 198, 199, 200, 205, 206, 217, 219, 228, 229, 232, 233, 240, 245, 251, 252 control, 14, 16, 18, 112–15, 122–4, 129–32, 136–8, 140, 168, 187, 198, 201, 208, 209, 225, 229, 230, 238–43, 249–51 cooperation, 122, 125, 142, 190, 217, 219, 224, 237, 239 technical, 138 technological, 137, 139 copyright, 147, 148–9, 210 core, 196, 201, 203, 216, 217, 218, 219, 229, 235, 242 activities, 4, 109, 112, 113, 117–23, 125, 201, 223, 238, 239 business, 7, 12, 192, 213 corridor, 151, 161, 163 cost, 4, 5, 8, 12–15, 17, 19, 21, 36, 57, 91, 93–4, 106, 109, 116, 123–28, 131, 132, 150–2, 162, 166, 168, 169, 176, 178, 181, 182, 187, 188, 192, 196, 197, 198, 201, 204, 210, 216, 218, 219, 225, 226, 232, 238, 239, 240, 242, 245, 249, 250, 252 advantage, 13, 16, 20, 88, 90, 104, 115, 127, 128, 209 labour, 20, 32, 80, 85, 105, 106, 110, 127, 238, 239, 243, 244, 245, 246 credit, 29, 139, 145 culture, 23, 82, 123, 124, 130, 132, 133, 134 debt, 29, 49, 50, 60, 81, 133 delay, 80, 131, 150, 206, 212, 229, 242, 252 delivery, 106, 110, 156, 178–82, 185, 186, 191, 192, 193, 213, 220, 229, 245 Deloitte, 2–3, 5, 6, 17, 18, 85 Deng Xiao Ping, 81

design, 9–11, 120, 182, 183, 188, 200, 220, 221, 223–8, 232, 235, 243, 244, 247, 248 determinant, 1, 11–15, 106 distribution, 7, 11, 59, 84, 116, 138, 139, 141, 152, 175, 176, 182, 198, 207, 215, 237, 243, 244 district, 34, 36, 162, 245 DuPont, 14 economy of scale, 141 e-learning, 10 Electronic Hardware Technology Park (EHTP), 60, 64–8 employment, 31–4, 60, 76, 104, 140, 194–6, 226 England, 237 entry mode, 106, 137–40 environment, 19–21, 31, 51, 56, 60, 81, 87, 89, 96, 111, 135, 143, 144, 162, 187, 217, 218, 225, 226, 228, 229, 231, 232, 236, 247 Europe, 3, 24–6, 44, 102–4, 176, 192–6, 198, 199, 211, 213, 215, 239, 243, 249, 250 European Union (EU), 47, 48, 82, 155 Export Oriented Unit (EOU), 51, 60, 64–8, 146 Export Processing Zone (EPZ), 29, 51, 59, 64–8, 124, 144–5 Far East, 213, 244 Finmeccanica, 213–34 flexibility, 12, 33, 51, 109, 124, 126–8, 132, 181, 190, 192, 201, 204, 223, 233, 238, 241, 245, 249, 250 Foreign Direct Investment (FDI) 15, 29, 30, 50–60, 61, 70, 77, 81, 82, 97, 136, 141–4, 151 France, 55–7, 104, 108, 213, 215, 236, 244 freight, 155, 156 Gandhi, 24 Indira, 29 Rajiv, 29 Sanjay, 32 Sonia, 31

Index 273 General Motors, 52, 106 Germany, 40–2, 44, 45, 55, 56, 57, 88, 103, 104 GlaxoSmithKline (GSK), 107, 109, 113–15, 120–2, 127, 132, 193–212 globalization, 20, 233 Golden Quadrilateral (GQ), 151, 160–5 Great Britain, 56, 88, 104 Gross Domestic Product (GDP), 30, 31, 36, 37, 49, 69, 72, 73, 76, 81, 97, 98 Gujarat, 61, 62, 144 Gupta, 23 hardware, 65, 92, 98, 99, 101, 110, 185, 240 help desk, 8, 9, 95, 117, 121, 122, 192, 208 Hewlett-Packard (HP), 35, 36, 96, 97 Hindu, 24–7 Hinduism, 25, 132, 133 Hinduist, 23 Hong Kong, 40, 41, 45, 52, 54, 73, 104, 155 Human Resource (HR), 70, 82, 83, 92–3, 96, 104, 176, 181, 185–7, 198, 204, 205, 206, 207 development (HRD), 148 Hyderabad, 35, 61, 68, 169, 179, 191 IBM, 17, 18, 35, 36, 51, 70, 74, 77, 101 Information and Communication Technology (ICT), 8, 20, 84, 96, 217–19, 231 IDS, 107, 109, 113, 115, 116, 120–2, 126, 131, 132, 235–42 Indian Institute of Technology (IIT), 35, 73 infrastructure, 7, 14, 19–21, 31, 33, 59, 60, 61, 64, 67, 70, 76, 78, 81, 82, 88–92, 101, 109, 128, 151–3, 155, 156, 158, 160, 164, 178, 181, 185, 188, 196, 197, 205, 210, 231, 234 communication, 96, 150, 151, 166–72 IT, 178, 207 transport, 104, 246 insourcing, 1, 2, 5, 14, 105, 109, 117–19, 120, 122, 123, 128, 201

inspection, 59 institution, 26, 35, 69, 70, 77, 85, 95–6, 102, 158, 232 Intel, 35, 36, 87, 93 Intellectual Property (IP), 89, 90, 91, 136, 139, 146–9, 198, 206, 210–12, 240, 241, 252 intermediary, 110, 126, 175, 228 investor, 20, 105, 110, 124, 133, 142, 213 foreign, 136, 139, 141, 142, 143, 150, 152, 170 IT, 4–6, 10, 17, 19–20, 35, 65, 70, 73, 76–8, 82, 87, 89, 92, 97, 105, 108, 109, 110, 122, 132, 168, 175, 178, 179, 182, 183, 185, 191, 192, 195, 196, 199, 200, 205–8, 216, 229, 231, 232, 235, 238 enabled services (ITES), 101, 102, 166 market, 84, 97–104 offshoring, 209 outsourcing (ITO), 3–5, 13, 21, 84–7, 88–90, 94, 127, 185, 192 sector, 93, 94–6, 101, 104 Italy, 44, 45, 108, 122, 193–5, 197, 213, 216, 226, 234, 239, 243, 244, 249 Japan, 40, 41, 45, 52, 55–7, 103, 194, 195, 196, 211, 243 Joint Venture ( JV), 109, 122, 123, 124, 137, 138, 139, 155, 178, 244 Karnataka, 60, 61, 62, 68, 76–8, 206, 207 knowhow, 14, 97, 113, 114, 115, 123, 138, 213, 226, 228, 237, 239, 242 Korea, 39, 54, 55, 56, 57, 104 KPMG, 50, 101, 209 labour, 6, 7, 13, 16–21, 32, 33–5, 60, 61, 80, 82, 90, 91, 94, 95, 104, 105, 106, 110, 127, 143, 196, 238, 239 land, 76, 144, 151, 156 law, 20, 85, 117, 119, 132, 136, 140, 144, 146, 148 legislation, 34, 59, 60, 81, 82, 83, 85, 89, 117, 123, 210 license, 52, 136, 139, 146, 167, 169

274 Index location, 60, 68, 74, 76, 82, 84, 85, 87, 89–95, 105, 111, 114, 116–18, 127, 128, 141, 143, 144, 153, 182, 186, 191, 192, 201, 202, 204, 205, 210, 212, 242 localization, 1, 3, 4, 5, 10, 13, 15–21, 61, 66, 67, 109, 110, 112, 114, 129, 144, 146, 156, 159, 183 logistics, 106, 109, 151, 162, 198, 217, 218 Lufthansa, 14 Maharashtra, 60, 61, 62, 68, 69–71, 76, 106, 144, 206, 207 marketing, 9–11, 138, 139, 194, 196, 197, 211 Microsoft, 35, 36, 85, 93, 97, 178 Mogul, 23, 24 Motorola, 93, 97 Mumbai, 61, 65, 67–71, 148, 152, 153, 154, 156, 157, 160, 162, 164, 168, 169, 179, 191 Muslim, 23, 24, 25, 27 NASSCOM, 35 NCR, 108, 109, 110, 113, 121, 122, 126 negotiation, 10, 15, 47, 132–5, 190, 217, 241 Nehru, 28, 29 Port, 156 neoIT, 13–14, 18–21, 85, 88, 89, 90, 92, 93 New Delhi, 48, 148, 152, 160, 164, 168, 237 Nissan, 52 office, 61, 63, 87, 109, 137, 138, 142, 148, 191, 192, 195, 207, 213, 216, 236, 237 back, 5, 6, 104, 109, 114, 130, 195, 201, 203, 204, 208 branch, 101, 102, 137 front, 116 international purchasing, 188, 203 liaison, 137 project, 137, 138 Oracle, 35, 36, 96, 97, 176

organization, 12, 34, 59, 70, 81, 175, 187, 188, 193, 198–200, 203–6, 216–19, 223, 228, 229, 231, 233 Orissa, 80 Pakistan, 23, 24, 25, 27, 31, 39, 48, 52, 92 patent, 10, 146–7, 148, 197, 198, 210–12 payment, 5, 16, 49, 51, 106, 143, 146, 149, 185, 208 payroll, 10, 196 penalty, 138 pilot, 34, 129, 130, 190, 222, 223, 228, 231 Pradesh, 34, 160 Andhra, 68, 76, 62, 144, 206 Madhya, 32, 63 Uttar, 32, 61, 63, 67 procedure, 112, 129, 136, 139, 141, 142, 146, 196, 226, 229, 236 protection, 6, 10, 20, 21, 89, 92, 106, 123, 139, 146–8, 162, 210, 211, 212, 240 Pune, 68, 70, 71, 106, 191 Reserve Bank of India (RBI), 50, 137, 138, 139, 142 registration, 34, 141, 147, 148 regulation, 33, 34, 51, 136, 137, 143, 144, 145, 158, 192 relationship, 2, 5, 15, 16, 17, 25, 31, 47, 48, 92, 97, 111, 124, 125, 126, 128, 129, 130, 131, 132–5, 138, 143, 171, 198, 209, 210, 219, 220, 228, 241, 251 report, 33, 35, 150, 183, 187, 195, 199, 240 retail, 59, 82, 102, 108, 109, 244 R&D, 10, 77, 78, 87, 92, 97, 100, 101, 121, 194, 196, 197, 198, 199, 206, 207, 210, 211, 213, 214, 224, 246 rights, 15, 24, 25, 26, 67, 146–8, 208, 210–12, 240, 241 risk, 5, 15–17, 21, 89, 106, 114–16, 123–6, 134, 135, 201, 203, 205, 208, 210, 211, 229, 233, 242 river, 22, 23, 81, 158

Index 275 route, 150, 155, 158, 162, 164 rule, 23, 24, 25, 81, 132, 143, 210 safety, 8, 10, 132, 153, 155, 156, 158, 217, 218 sales, 5, 10–12, 50, 109, 137–9, 148, 195, 196–8, 207, 208, 230 security, 10, 20, 34, 60, 90, 91, 123, 213, 215, 229, 231, 232 Sella, 108, 109, 124 Singapore, 39, 40, 41, 44, 45, 52, 54, 55, 56, 57, 87, 88, 103, 104 Singh, 31, 81 Small Medium Enterprise (SME), 140, 234 software, 3, 4, 8, 9, 20, 35, 36, 58, 60, 65, 66, 70, 72, 73, 76–8, 84, 85, 92–6, 98–104, 109, 113, 116, 117, 121, 122, 132, 148, 176, 178, 185, 210, 223, 225, 228, 231, 232, 236–42 technology park (STP), 60, 66, 96 sourcing, 1–10, 12–16, 18, 22, 92, 97, 105, 106, 110–13, 115, 117–21, 127, 131, 132, 187–90, 198, 200, 203, 204, 206, 209, 210, 217, 219, 220, 237–40, 241, 244, 245–6 channel, 105, 109, 110 global, 110, 196, 219, 220, 221, 222, 223, 228, 230–4 intermediated, 110 international, 2, 4, 8, 111 local, 3, 13, 18 South Asian Association for regional cooperation (SAARC), 47, 104 Special Economic Zone (SEZ), 59, 60, 64–7, 70, 73, 74, 124, 145–6 Sri Lanka, 34, 147 stock, 46, 70, 136, 138 Stonefly, 108, 110, 243–52 supply, 11, 13, 18, 48, 85, 104, 109, 115, 116, 127, 190, 193, 195, 204, 206, 217, 220, 221, 225 basin, 17, 110, 189, 194, 209, 237, 239, 240 chain, 176, 192, 195, 198 market, 7, 8, 10 network, 187, 188 relationship, 17, 189

Taiwan, 54, 104 TATA, 70, 87 tax, 10, 19, 21, 29, 30, 31, 34, 70, 78, 121, 122, 140, 141, 144–6 exemption, 145, 146 technology, 10–13, 35, 51, 59, 60, 66, 67, 70, 73, 107, 113, 139, 175–8, 184, 185, 190, 191, 198, 200, 205, 209, 213, 235, 244 Texas Instruments, 93, 96, 97 tool, 44, 78, 106, 115, 132, 180, 200, 202, 206, 217, 221, 225, 231 trade, 24, 30, 36, 39, 40, 41, 44, 49, 67, 81, 82, 100, 192, 210, 211 trademark, 147–8, 210 training, 15, 18, 19, 35, 36, 99, 129, 130, 131, 187, 188, 190, 192, 230, 231, 237, 238 transaction, 7, 13, 36, 49, 55, 116, 121, 122, 192 transition, 105, 112, 126, 128, 129, 130–1, 186–7, 188 transport, 7, 26, 56, 60, 62, 76, 103, 104, 106, 116, 143, 188, 213, 214, 225 Toyota, 52 UNCTAD, 29, 30, 47, 51–3, 92, 93, 101 unemployment, 19, 31, 34 United Kingdom (UK), 55, 57, 103, 107, 147, 179, 207, 213, 215, 216, 236 United Nations (UN), 33 United States (USA), 36, 39, 40–2, 44, 45, 47, 48, 52, 55–7, 73, 81, 82, 85, 95, 102, 103, 193, 194, 196, 198, 199, 213, 215, 243 violation, 15 warehouse, 108, 109 Wholly Owned Subsidiaries (WOS), 106, 122, 123, 124, 137, 138–9, 203 World Trade Organization (WTO), 2, 3, 39, 49, 147, 211