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The draw
of cheap Chinese and Indian labor is so strong, and the
media hype surrounding it so relentless, that some
starry-eyed, developed-country executives are losing
sight of the bottom line.
So acute
is the “Chindia” fever in some businesses, notably the
auto industry, even the basic common sense of adapting
manufacturing practices to make the best use of the
region’s labor endowment is being discarded.
A
factory worker cost $37 an hour in Germany last year and
only $1.40 in China (and $1 in India).
Therefore, it should be cheaper to make a car part in
China (or India) than in Germany, even after accounting
for the higher productivity of the German worker.
This
logic, straightforward as it appears, seems to be
getting regularly flouted in the thriving automotive
clusters that have emerged near Beijing and Bangalore,
Guangzhou and New Delhi, and Shanghai and Pune.
There
are now more than 100 foreign-funded, auto-related
production units in China and 60 in India.
Tapping
Chinese and Indian demand is the key motivation for the
presence of global auto majors and component companies
in these clusters. Together, the two Asian auto markets
are expected by analysts to be bigger than Western
Europe’s by 2015.
Still,
it’s reasonable to inquire what, if anything, cheap and
bountiful Asian labor has done for these companies.
Disappointing savings
That’s
the question that Boston Consulting Group asked of
senior executives at more than 40 European, Japanese and
North American original equipment makers and suppliers.
The
answer they got was staggeringly counterintuitive.
“Cost
savings have been disappointing,” Nikolaus Lang, a
partner at the consulting firm’s
Munich office, said last month in “Winning the Localization Game,”
a study he has co-written with two colleagues. “Nearly
two-thirds of the companies we analyzed reported that
their unit costs in
China or
India were equal to or higher than the unit costs in
their home countries.”
Sounds
improbable? Lang and his colleagues provide a breakdown
of what’s causing the benefits of inexpensive labor to
dissipate. The main culprit, according to their
analysis, is that factories in China and India are
smaller than in developed countries, thus not allowing
economies of scale. Besides, it also costs companies
more to ensure product quality in Asia. The in-house
rejection rates are higher than they are in the West.
Robots
replace workers
From
this, it may seem that the path to improved quality must
pass through greater automation; fewer workers will,
after all, make fewer mistakes.
Many
companies in Asia, even several homegrown ones, are now
going down that route. Bajaj Auto Ltd., India’s
second-biggest motorcycle maker, had more than 21,000
workers in 1997.
Over the
next eight years, the company tripled revenue by cutting
the number of employees to 11,000 and by increasing
assets per worker almost sevenfold. Part of this capital
infusion went into robots that weld chassis frames.
Not just
automakers. With a drop in import duties, even component
manufacturers in India are now buying robotic production
lines from overseas.
But this
strategy defeats the whole purpose of producing in a
location where factory wages are a fraction of what they
are in a developed country.
The
Boston Consulting analysts say automakers in China and
India ought to use more manual labor in noncritical
processes such as window-fixing and wheel-mounting.
‘Over-engineered’ processes
The
production processes in the auto industries in China and
India, often an exact replica of Western standards, may
be “over-engineered,” the analysts say. These are simply
not suitable for taking advantage of the region’s
abundant labor.
“Companies need to conduct a stringent analysis of the
whole production process, identifying those steps where
quality is less critical and where manual labor is a
viable alternative to automation,” Lang and his
colleagues say.
China
and India offer global carmakers and their suppliers a
unique opportunity to produce vehicles that are
affordable to a large number of emerging-market buyers.
The buzz
created by the $2,500 car, a prototype of which was
recently unveiled by India’s Tata Motors Ltd., has
demonstrated the potential merit of such a strategy.
So far,
global carmakers have taken a “wait-and-see” approach to
the Nano, as Tata’s proposed car is called.
Even as
they wait to see how consumers respond to a no- frills
product, perhaps they should begin evaluating the
efficiencies of their manufacturing in China and India.
They may find prospects for cost savings that they have
so far overlooked.
Cheap
labor
According to the Society of Indian Automobile
Manufacturers, the typical cost structure of a company
in this industry in India is dominated by raw materials
such as steel and rubber; wages and salaries account for
only 3 percent of total expenses.
This
doesn’t necessarily mean worker costs are irrelevant; it
may also imply that the technology selected is overly
capital-intensive, and the labor input is artificially
low.
To run a
Chindia business that doesn’t even attempt to benefit
from cheap labor seems rather nonsensical, though that
may be the norm in the auto industry right now. |
