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Click to edit Master subtitle style. 2002-10-22-MB-IIH002(BV)(LL) 1 KEY MESSAGES Manufacturing has been a key driver of Chinas accelerated growth Contrary.

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Presentation on theme: "Click to edit Master subtitle style. 2002-10-22-MB-IIH002(BV)(LL) 1 KEY MESSAGES Manufacturing has been a key driver of Chinas accelerated growth Contrary."— Presentation transcript:

1 Click to edit Master subtitle style

2 2002-10-22-MB-IIH002(BV)(LL) 1 KEY MESSAGES Manufacturing has been a key driver of Chinas accelerated growth Contrary to myths that exist in India, Chinas manufacturing growth is based on strong fundamentals These fundamentals were created by a well-planned economic reforms programme India must and can revive its manufacturing sector. This will require – –A seven-point reform agenda from the government – –Lower price points from Indian companies to stimulate domestic demand – –Targeted strategies from Indian companies to drive exports Manufacturing has been a key driver of Chinas accelerated growth Contrary to myths that exist in India, Chinas manufacturing growth is based on strong fundamentals These fundamentals were created by a well-planned economic reforms programme India must and can revive its manufacturing sector. This will require – –A seven-point reform agenda from the government – –Lower price points from Indian companies to stimulate domestic demand – –Targeted strategies from Indian companies to drive exports

3 2002-10-22-MB-IIH002(BV)(LL) 2 *Adjusted for 2000 PPP Source:World Development Indicators CHINA HAS GROWN MUCH FASTER THAN INDIA IN THE LAST DECADE GDP per capita growth PPP adjusted*, $ per person China CAGR = 9.0% (1990-2000) India CAGR = 3.6% (1990-2000) 60% (2,407) (3,829)

4 2002-10-22-MB-IIH002(BV)(LL) 3 Per cent employment in agriculture IndiaChina 19811999 CHINA HAS SUCCEEDED IN SHIFTING PEOPLE OUT OF AGRICULTURE Source:World Development Indicators 19811999

5 2002-10-22-MB-IIH002(BV)(LL) 4 MANUFACTURING WAS A MAJOR GROWTH DRIVER Source:World Development Indicators; McKinsey analysis India China GDP growth Per cent, 1990-2000 Agriculture Industry/ manufac- turing Services Total Manufacturing contribution to GDP, 2000 Per cent IndiaChina 16 35

6 2002-10-22-MB-IIH002(BV)(LL) 5 CHINAS CURRENT MANUFACTURING SECTOR IS SIMILAR TO THAT OF OTHER HIGH-GROWTH ECONOMIES Manufacturing sector size Per cent of GDP EraCountry 70s 90s Source:World Development Indicators Japan S. Korea Indonesia 2000India 2000China 90sMalaysia 70sSingapore 80sThailand

7 2002-10-22-MB-IIH002(BV)(LL) 6 KEY MESSAGES Manufacturing has been a key driver of Chinas accelerated growth Contrary to myths that exist in India, Chinas manufacturing growth is based on strong fundamentals These fundamentals were created by a well-planned economic reforms programme India must and can revive its manufacturing sector. This will require – –A seven-point reform agenda from the government – –Lower price points from Indian companies to stimulate domestic demand – –Targeted strategies from Indian companies to drive exports Manufacturing has been a key driver of Chinas accelerated growth Contrary to myths that exist in India, Chinas manufacturing growth is based on strong fundamentals These fundamentals were created by a well-planned economic reforms programme India must and can revive its manufacturing sector. This will require – –A seven-point reform agenda from the government – –Lower price points from Indian companies to stimulate domestic demand – –Targeted strategies from Indian companies to drive exports

8 2002-10-22-MB-IIH002(BV)(LL) 7 THERE ARE SEVERAL MYTHS ABOUT CHINAS MANUFACTURING SUCCESS Chinas growth was driven by investments, not productivity Myth 1 Higher growth in China was also driven by rapid growth in productivity

9 2002-10-22-MB-IIH002(BV)(LL) 8 REALITY 1: HIGHER GROWTH IN CHINA WAS DRIVEN BY HIGHER LABOUR PRODUCTIVITY GROWTH Source:World Development Indicators, McKinsey analysis GDP/capita growth Per cent, CAGR, 1990-2000 Productivity growth Employment per capita growth 0.4 0.05 Industry/ manufacturing 5.5 x Others 1.8 x 2.8 x

10 2002-10-22-MB-IIH002(BV)(LL) 9 CHINAS PRODUCTIVITY IS MUCH HIGHER THAN INDIAS ACROSS MOST OF THE TOP MANUFACTURING SECTORS *Includes toys and sports goods Source:NSO, CSSO, China Statistical Yearbook, 2000 data Top eight manufacturing sectors in India by employment Ratio of Chinese to Indian productivity Textiles Beverages and tobacco Wood and wood products Food Non-metallic minerals Metal products Machinery and Equipment Other manufacturing

11 2002-10-22-MB-IIH002(BV)(LL) 10 THERE ARE SEVERAL MYTHS ABOUT CHINAS MANUFACTURING SUCCESS The domestic sector accounts for most of the difference in manufacturing GDP per capita Chinas manufacturing success is driven only by exports Myth 2 Chinas growth was driven by investments, not productivity Myth 1 Higher growth in China was also driven by rapid growth in productivity

12 2002-10-22-MB-IIH002(BV)(LL) 11 TWO-THIRDS OF THE DIFFERENCE IN MANUFACTURING GDP PER CAPITA IS DUE TO THE DOMESTIC SECTOR Manufacturing GDP per capita $, PPP, 2000 Domestic difference Exports* difference China *Exports GDP calculated assuming that half of total exports are from re-exports of imported products, where value-added is 20% Source:World Development Indicators Product Steel Aluminium PVC Beer CTVs Air-conditioners Cement Cigarettes Ratio of Chinese to Indian domestic consumption India

13 2002-10-22-MB-IIH002(BV)(LL) 12 CHINESE RETAIL PRICES ARE MUCH LOWER THAN THOSE OF COMPARABLE PRODUCTS IN INDIA Rupees 000 per unit MNC 21 Colour TV 3 blade, 48 Ceiling Fans 100 cc, 4- stroke Motorcycles MNC Desktop Computer 33% India China 30% 14% 26% MNC Washing Machine 23% Note:8.28 RMB = 1 USD, Rs. 49 = 1 USD Source:Retail surveys,2002 MNC DVD players 53%

14 2002-10-22-MB-IIH002(BV)(LL) 13 THERE ARE SEVERAL MYTHS ABOUT CHINAS MANUFACTURING SUCCESS Chinas domestic prices are driven by marginal pricing and by subsidies Myth 3 Lower prices are driven by strong fundamentals The domestic sector accounts for most of the difference in manufacturing GDP per capita Chinas manufacturing success is driven only by exports Myth 2 Chinas growth was driven by investments, not productivity Myth 1 Higher growth in China was also driven by rapid growth in productivity

15 2002-10-22-MB-IIH002(BV)(LL) 14 REALITY 3: THE DRIVERS OF CHINAS LOW PRICES ARE TAXES, DUTIES, PRODUCTIVITY AND INTEREST RATES Price structure comparison across products Indian prices indexed to 100 IndiaIndirect taxes Interest costs Labour Produc- tivity Others**China *Import duties drive lower margins and lower material costs **Includes capital productivity and lower specifications for products in China Source:Interviews; plants and store visits; data analysis; McKinsey synthesis Import duties* 100 14-16 4-7 3-4 2-5 67-72

16 2002-10-22-MB-IIH002(BV)(LL) 15 INDIAN MANUFACTURERS FACE A HIGHER LEVEL OF TOTAL TAXATION *Includes excise, sales tax on the final product and sales tax on components Source:McKinsey analysis Product Per cent of retail price, 2002 Average taxes* Motorcycles CTVs Fans Most products India China

17 2002-10-22-MB-IIH002(BV)(LL) 16 IMPORT DUTIES ARE MUCH HIGHER IN INDIA RESULTING IN HIGHER INPUT PRICES Key raw materialsImport duty on raw material India China Per cent, 2001 Plastic (PVC) Source: CMIE, China Statistical Yearbook Aluminium Copper Zinc Phenol Toluene Diesel Price Difference Per cent 17 11 25 30 6 15 21

18 2002-10-22-MB-IIH002(BV)(LL) 17 *Adjusted by 20% for greater extent of assembly of components in India Source:Interviews, McKinsey analysis ORGANISED SECTOR LABOUR PRODUCTIVITY IN CHINA IS HIGHER BY 10-50 PERCENT ACROSS MOST SECTORS TV assembly China India TV sets/operator per day 10% ApparelFootwear China India Shoes/worker per dayShirts/worker (8 hr-shift) China India 35 20 75% 3.6X Comparison of labour productivity across products Fan assembly Fans/operator per day* 50% China India

19 2002-10-22-MB-IIH002(BV)(LL) 18 INTEREST RATES IN CHINA ARE LOWER THAN THOSE IN INDIA *For five-year loans Source:World Development Indicators Lending rates* comparison China India Per cent

20 2002-10-22-MB-IIH002(BV)(LL) 19 THERE ARE SEVERAL MYTHS ABOUT CHINAS MANUFACTURING SUCCESS Chinas exports are driven by marginal pricing Myth 4 Apart from price competitiveness, Chinas exports are driven by FDI Chinas domestic prices are driven by marginal pricing and by subsidies Myth 3 Lower prices are driven by strong fundamentals The domestic sector accounts for most of the difference in manufacturing GDP per capita Chinas manufacturing success is driven only by exports Myth 2 Chinas growth was driven by investments, not productivity Myth 1 Higher growth in China was also driven by rapid growth in productivity

21 2002-10-22-MB-IIH002(BV)(LL) 20 Source:World Development Indicators Manufactured exports growth $ billion REALITY 4: IN ADDITION TO LOWER PRICES, FDI DROVE RAPID EXPORTS GROWTH IN CHINA China 1990-99 CAGR = 16.3 % India 1990-99 CAGR = 8.7 % China FDI backed exports Per cent of total exports India

22 2002-10-22-MB-IIH002(BV)(LL) 21 THERE ARE SEVERAL MYTHS ABOUT CHINAS MANUFACTURING SUCCESS Chinese products are always of poor quality Myth 5 There are several Chinese manufacturers who make products of world-class standards Chinas exports are driven by marginal pricing Myth 4 Apart from price competitiveness, Chinas exports are driven by FDI Chinas domestic prices are driven by marginal pricing and by subsidies Myth 3 Lower prices are driven by strong fundamentals The domestic sector accounts for most of the difference in manufacturing GDP per capita Chinas manufacturing success is driven only by exports Myth 2 Chinas growth was driven by investments, not productivity Myth 1 Higher growth in China was also driven by rapid growth in productivity

23 2002-10-22-MB-IIH002(BV)(LL) 22 REALITY 5: HIGH QUALITY MANUFACTURING CAPABILITY EXISTS IN SEVERAL SECTORS Buicks made in China are of higher quality than those made in US, probably due to college-educated workers in the China plant - GM quality survey team Guangzhou Honda-produced Accord is regarded as the best quality vehicle produced by overseas Honda manufacturing plants, as rated by Japanese experts - Honda With its good quality products and low prices, Haier could break into America the way Sony did in the 1950s - Fortune cover story on Haier

24 2002-10-22-MB-IIH002(BV)(LL) 23 KEY MESSAGES Manufacturing has been a key driver of Chinas accelerated growth Contrary to myths that exist in India, Chinas manufacturing growth is based on strong fundamentals These fundamentals were created by a well-planned economic reforms programme India must and can revive its manufacturing sector. This will require – –A seven-point reform agenda from the government – –Lower price points from Indian companies to stimulate domestic demand – –Targeted strategies from Indian companies to drive exports Manufacturing has been a key driver of Chinas accelerated growth Contrary to myths that exist in India, Chinas manufacturing growth is based on strong fundamentals These fundamentals were created by a well-planned economic reforms programme India must and can revive its manufacturing sector. This will require – –A seven-point reform agenda from the government – –Lower price points from Indian companies to stimulate domestic demand – –Targeted strategies from Indian companies to drive exports

25 2002-10-22-MB-IIH002(BV)(LL) 24 CHINA HAS UNDERTAKEN A SERIES OF ECONOMIC REFORMS OVER THE LAST TWO DECADES 1970s 1980s 1990s 1979 Creation of SEZs to attract foreign investment 1984 Labour reforms 1992 Lowered interest rates 1994 Reduced indirect taxes 1 2 3 5 Reduced import duties 4 Aspiration to pull people out of agriculture

26 2002-10-22-MB-IIH002(BV)(LL) 25 SEZs OFFER WORLD-CLASS FACILITIES TO INVESTORS Fiscal benefits Hassle free process Access to domestic and export markets Income tax exemptions Plug-and-play infrastructure Fifteen days for start-up and closure Separate books for domestic and exports sales Land provided with power, water, sewage, telecom, heating, etc.

27 2002-10-22-MB-IIH002(BV)(LL) 26 Number of rates dramatically reduced WTO driving further reductions Uniform VAT across products/states Earlier system had over 250 different tax rates TAXES AND DUTIES WERE REDUCED AND SIMPLIFIED Average import duties 19922000 Average VAT/domestic taxes 19902000 Source:ADB-China Country Economic Review; EIU; CMIE; World Bank discussion papers on China Per cent, trade-weightedPer cent of retail price China 45 13 24 32 14 25-30 IndiaChinaIndia 9 2005P

28 2002-10-22-MB-IIH002(BV)(LL) 27 KEY MESSAGES Manufacturing has been a key driver of Chinas accelerated growth Contrary to myths that exist in India, Chinas manufacturing growth is based on strong fundamentals These fundamentals were created by a well-planned economic reforms programme India must and can revive its manufacturing sector. This will require – –A seven-point reform agenda from the government – –Lower price points from Indian companies to stimulate domestic demand – –Targeted strategies from Indian companies to drive exports Manufacturing has been a key driver of Chinas accelerated growth Contrary to myths that exist in India, Chinas manufacturing growth is based on strong fundamentals These fundamentals were created by a well-planned economic reforms programme India must and can revive its manufacturing sector. This will require – –A seven-point reform agenda from the government – –Lower price points from Indian companies to stimulate domestic demand – –Targeted strategies from Indian companies to drive exports

29 2002-10-22-MB-IIH002(BV)(LL) 28 SEVEN KEY GOVERNMENT INITIATIVES REQUIRED 1. 1.Replace all indirect taxes with a VAT, and reduce the rate to 15% of retail price 3. 3.Reform labour laws 7. 7.Enable lower interest rates through fiscal reforms and by modifying the bankruptcy act 4. Kick-start SEZ growth – –Allow sales to DTA by paying domestic duties – –Ease labour laws 2. 2.Reduce import duties to 10% by 2006 6. Eliminate SSI reservations and fiscal concessions to small scale players 5. Power Reforms – –Privatise distribution – –Allow direct sales to consumers of over 0.1 MW

30 2002-10-22-MB-IIH002(BV)(LL) 29 INDIAN COMPANIES SHOULD STIMULATE DOMESTIC DEMAND THROUGH LOWER PRICES Source:World Development Indicators, ACMA; ICRA; Francis Kanoi Volumes of room ACs 000 units 199395969798002001 CAGR 93-97 = 9.2% CAGR 98-01= 16.5% 99 Excise duty cut from 40% to 30%

31 2002-10-22-MB-IIH002(BV)(LL) 30 INDIAN COMPANIES CAN USE SEVERAL IMPROVEMENT LEVERS – AUTOMOTIVE EXAMPLE Source:MGI, India: The Growth Imperative Shop floor improvement Purchasing improvement India Poten- tial Average Post- liberation plants Marketing Equivalent cars per equivalent employee, Indexed to US average in 1998 = 100 Product design changes

32 2002-10-22-MB-IIH002(BV)(LL) 31 INDIA HAS A LARGE EXPORT OPPORTUNITY Source:CMIE (India Trades); industry reports; McKinsey analysis Labour-intensive Skill-intensive Raw-material based Capital-intensive Agricultural input- based Sector Breakup of World Trade, 2000 Per cent of total Indian and Chinese shares Per cent of world trade India China

33 2002-10-22-MB-IIH002(BV)(LL) 32 INDIAN MANUFACTURERS CAN BE VERY COMPETITIVE ON EXPORTS IN SEVERAL SECTORS % Indian Output Sum- mary of asses- ment 6 Play catch- up with China Labour intensive Readymade garments Footwear Toys & Sports goods Example sectors

34 2002-10-22-MB-IIH002(BV)(LL) 33 ACTIONS FOR INDIAN GARMENTS MANUFACTURERS Key bottlenecks faced Low productivity Shirts per worker per day India China Long lead time Weeks 2-3 6-12 India China Top three actions required Raise productivity – –Improve work flow – –Link wages to productivity in new plants Leverage upcoming private port terminals to improve delivery performance Focus on segments such as jerseys *Suits and jerseys are the largest traded segments in apparel Source:CMIE (India Trades), interviews, plant visits Low share in highly-traded segments Per cent Share in top 3 segments* Overall share India China

35 2002-10-22-MB-IIH002(BV)(LL) 34 INDIAN MANUFACTURERS CAN BE VERY COMPETITIVE ON EXPORTS IN SEVERAL SECTORS % Indian Output Sum- mary of asses- ment 6 Play catch-up with China Labour intensive Readymade garments Footwear Toys & Sports goods Build IT-like dominance Skill intensive 40 Passenger cars/MUVs & CVs Drugs and pharma- ceuticals Example sectors

36 2002-10-22-MB-IIH002(BV)(LL) 35 INDIA HAS A LARGE OPPORTUNITY IN SKILL- INTENSIVE SECTORS – AUTO COMPONENTS EXAMPLE Source:IMD World Competitiveness Yearbook, 2001; Auto Business UK; Automotive News Three key actions for Indian companies Strengthen OEM relationships Offer technical support/product development services Focus on China as a market through JVs Availability of qualified engineers IMD survey scores, 2000; 1=low, 10 = high IndiaUSAChinaGermany Growth in auto components outsourcing Indexed to trade in 00=100 20002005P2010P CAGR 10%

37 2002-10-22-MB-IIH002(BV)(LL) 36 THERE ARE COMPANIES THAT ARE BUILDING INDIA AS THEIR EXPORTS HUB – CUMMINS CASE EXAMPLE Heavy diesel engines Compo- nents Mid-range engines Cummins India is the only manufacturer of four engine models for the world market Significant sourcing of large-volume stable components from India India is the lowest cost production base for Cummins engines in the world Source:Interviews

38 2002-10-22-MB-IIH002(BV)(LL) 37 INDIAN MANUFACTURERS CAN BE VERY COMPETITIVE ON EXPORTS IN SEVERAL SECTORS % Indian Output Sum- mary of asses- ment 6 Play catch-up with China Labour intensive Readymade garments Footwear Toys & Sports goods Build IT-like dominance Skill intensive 40 Passenger cars/MUVs & CVs Drugs and pharma- ceuticals Grow exports in sectors where India has abundant raw materials Raw material based 24 Aluminium & products Steel & products Example sectors

39 2002-10-22-MB-IIH002(BV)(LL) 38 INDIAN COMPANIES CAN WIN IN RAW –MATERIAL BASED SECTORS – TATA STEEL CASE EXAMPLE *POSCO – Pohang Iron and steel company (South Korea) Source:Analyst reports; McKinsey analysis Operating costs (Hot metal stage) $/tonne POSCO*TISCO Operating costs (HR stage) $/tonne POSCO*TISCO 150-155 Key initiatives / policies Aspiration and mindset to become the worlds lowest cost producer of steel Substantial cost- reduction and productivity improvement in the last ten years

40 2002-10-22-MB-IIH002(BV)(LL) 39 INDIAN MANUFACTURERS CAN BE VERY COMPETITIVE ON EXPORTS IN SEVERAL SECTORS % Indian Output Sum- mary of asses- ment 6 Play catch-up with China Labour intensive Readymade garments Footwear Toys & Sports goods Build IT-like dominance Skill intensive 40 Passenger cars/MUVs & CVs Drugs and pharma- ceuticals Grow exports in sectors where India has abundant raw materials Raw material based 24 Aluminium & products Steel & products Evaluate sourcing from China Capital intensive 23 Petroleum products Organic chemicals Example sectors

41 2002-10-22-MB-IIH002(BV)(LL) 40 INDIAN COMPANIES CAN BE SUCCESSFUL IN CAPITAL- INTENSIVE SECTORS – RELIANCE CASE EXAMPLE Source: Analyst reports; McKinsey analysis Refined petroleum cost, $/barrel Indian average RPL Jamnagar Reliances current cost position Completed Jamnagar project in record 30 months Capital outlay 30% lower than other refineries in Asia Raised debt at international rates Skills at managing capital costs

42 2002-10-22-MB-IIH002(BV)(LL) 41 INDIAN MANUFACTURERS CAN BE VERY COMPETITIVE ON EXPORTS IN SEVERAL SECTORS % Indian Output Sum- mary of asses- ment 6 Play catch-up with China Labour intensive Readymade garments Footwear Toys & Sports goods Build IT-like dominance Skill intensive 40 Passenger cars/MUVs & CVs Drugs and pharma- ceuticals Grow exports in sectors where India has abundant raw materials Raw material based 24 Aluminium & products Steel & products Evaluate sourcing from China Capital intensive 23 Petroleum products Organic chemicals Grow exports significantly Agriculture based 7 Dairy products Poultry & meat products Example sectors

43 2002-10-22-MB-IIH002(BV)(LL) 42 THE SIZE OF THE PRIZE IS TOO LARGE FOR INDIA TO IGNORE Sector size 1990-2000 2000-2010 (Status Quo) Per cent of GDP Additional employment generation Million 2000-2010 (Reforms) Exports 1990-2000 2000-2010 (Status Quo) $ billion 2000-2010 (Reforms)


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