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Can Australia compete with China and India?

Scott Summerville, Information Age

18/08/2006 12:17:21

The media has had a field day with China and now India. About a year ago the switch was flicked and India all of a sudden became a huge topic. If you pick up the Herald Tribune or the Asian Wall Street Journal you see a lot of articles about India, whereas two years ago it was all about China.

It's interesting the way the media picks these things up and runs with them. A lot of myths have been created in the process. Let's take a shot at some of the images that they've created in everyone's minds.

China isn't the manufacturing centre of the world . . . yet You've undoubtedly heard that Chinese exports are driving not only US companies, but other Western companies, out of business. Chinese and Indian manufacturing is labour-intensive, utilising low-cost labour, and that's why companies go to those countries to manufacture. Companies from mature economies, such as Australia and the United States, are finding it difficult to compete against cheap Asian imports.

China competes solely on its low-cost labour; India's economy is all services, IT, back-office, and little to no manufacturing. China is taking manufacturing jobs away from developed countries.

The reality is that China's entire economy is the size of Italy's today, and smaller than the US manufacturing economy which is less then 20 per cent of the overall US economy. While China is growing dramatically, we should keep it in context. The size of the Chinese economy is not at the level of the US economy, the Japanese economy and so on.

Over 50 per cent of the export volume from China is from multinational corporations, not local Chinese companies. A lot of the growth in exports is a result of shifting manufacturing to China.

Exports that were going from Japan and Korea directly to the US and Australia have shifted to China, and are counted in the Chinese export total. Over 80 per cent of Rockwell's business is with China's local companies and 20 per cent or less with the multinational companies that we all know. We automate factories making them more efficient and productive.

If China's competitive advantage was strictly low-cost labour we wouldn't have much of a market there, yet it is our biggest market in Asia.

The rise of automation China is also the second fastest adopter of Rockwell Automation's advanced automation technology. Actually, they're number one in terms of growth and two in terms of installed base, only behind the US. India has the largest number of US food and drug administration approvals behind the US. To get FDA approvals you need tracking and traceability of the pharmaceuticals, and that requires automation. Chinese companies are performing better than US companies when it comes to on-time delivery and meeting spec.

India is not all about services; the manufacturing economy is 30 per cent of total GDP and is outpacing services and agriculture in terms of growth. China is losing manufacturing jobs much faster than any other country in the world. Millions and millions of people in China have lost their jobs in the manufacturing sector. China still has a big problem with efficiency and productivity. A lot of state-owned enterprises are moving to become more productive because they want to compete on the global stage.

Having said all that, and after debunking the myths, Chinese and Indian manufacturing companies do create significant competitive pressure on other manufacturers due to shear scale, rising quality and value-add, greater supply chain efficiency, and to some extent, lower-cost labour.

The solution for Australian and US companies So what's the solution not only for Australian manufacturers, but US manufacturers? Well, raise the perception of value while lowering indirect cost. Become more efficient through the use of Lean Six Sigma programs and other tools. But don't lower direct costs which typically also lower the perception of value.

For example, a major global automotive manufacturer recently reduced the cost of direct material on some cars. It was very visible to the consumer in the interior of the car. That's exactly what you don't want to do. You lower the perception of value by the customer, so they're going to demand a lower price for that car.

Moving manufacturing to a low-cost country such as China or India is another way to lower direct costs. However, it also lowers the perception of value in most cases and, particularly in the industrial world, most customers will say: "what's in it for me?"

Typically what's in it for them is a price reduction. If you can raise the perception of value and lower cost on the indirect side you are going to have a winning combination. In metals and mining, two of the key vertical sectors in Australia, BHP Billiton, BlueScope Steel and Alcoa are all leaders in their field. They're producing high value-add products relative to China and other parts of the world. They have operating excellence. They have lowered their indirect costs significantly and they've created supply chain efficiency, not only within Australia, but within the region.

In automotive, GM Holden and Toyota are two examples. Again, high value-add products and supply chain efficiency. Both companies are exporting products in contrast to China. Then there are the food and beverage manufacturers which benefit from the clean and green image that Australia has. The success of the Australian wine industry is largely based on creating brand equity in the entire industry along with supply chain efficiency.

Whether it's branding, high value add, operating excellence or supply chain efficiency, Australian manufacturers can compete with emerging and low-cost markets selectively on products where there is an opportunity to create differentiation in terms of value perceived.

Follow your customers So, you don't necessarily need to move manufacturing to China or India, but if you do you have to do it for the right reasons: First, follow your customers. If your customers are moving to China or India, you may have an opportunity to create supply chain efficiency and greater customer satisfaction by being next door. The first mover in this scenario has a significant advantage over copy-cats.

Second, if you have significant brand equity in a consumer product where the move of manufacturing to a low-cost market will be transparent to the consumer then by all means go to China or India to reduce cost and increase margins. Young girls are not going to demand a price decrease on their Barbie dolls because manufacturing is now in Guangdong province, China and neither are their parents.

However, transparency is difficult in non--commodity industrial goods where the manufacturing moves are typically visible to customers. Interestingly enough, the Chinese are trying to create global brands and globalise their manufacturing operations. Haier, the Chinese white goods manufacturer, has a factory in South Carolina in the US, one of the first Chinese companies to locate offshore. Baosteel is creating a steel plant in Brazil with a Brazilian partner and Chery, the Chinese automotive manufacturer, is trying to set up a distribution and service network in the US.

But the Chinese have had difficulty creating brand equity for their products. It's a hot subject in China these days. When the domestic economy cools off China will need to rely more heavily on its global brands.

Why low-cost labour is not the problem Manufacturing competitiveness is not just about low-cost labour and in many cases it's not about low-cost labour at all. China and India cannot be competitive in manufacturing based on low-cost labour alone and they clearly are not. They're buying a lot of advanced manufacturing technology and they're using it to produce world-class products.

Australian manufacturers that are capable of identifying and investing in opportunities, particularly around products that deliver higher value add for customers will be very successful. Competitiveness is about capturing a sustainable, long-term advantage through higher value add and/or very stable and predictable manufacturing operations.

Scott Summerville is president, Rockwell Automation, Asia Pacific

This article appeared in Australian Chief Executive magazine and is reprinted with permission.