The New Imperatives Of Strategic Outsourcing

Updated: Aug 28 2004, 05:30am hrs
India has recently scripted its success story by cleverly harnessing its prowess in software, IT services and business process outsourcing (BPO). Indeed, a combination of highly skilled labour, policy initiatives and low costs has helped India transform itself into the outsourcing hub for the global IT and services industry.

Increasingly, its also becoming an attractive destination for manufacturing outsourcing. Although manufacturing has so far lagged behind services, India has the potential to replicate its success in software services outsourcing and BPO by leveraging its design capabilities in manufacturing outsourcing. For India, this might just be the opportunity to achieve its targeted annual growth rate of 8 per cent, by revving up the twin engines of growth - manufacturing and services.

Heart of Contract Manufacturing
The spectacular outward transformation of the global manufacturing landscape follows a simple economic logic. With geographical barriers tumbling, a company can pare production costs drastically by outsourcing a part (or all) of its manufacturing requirements to the most cost-effective locations, while maintaining quality standards and being as close to the end-market as possible.

The best product can thus be made at the lowest possible cost, without making additional green-field investments. Today, most major global brands of electronic goods - Sony-Ericsson, Nokia, HP, Dell, and so on - are in partnership with at least a couple of contract manufacturers, or in current parlance, electronics manufacturing services (EMS) providers. Today, the production of everything from cell phones and PDAs to flatscreen TVs and game consoles are entrusted into the capable hands of EMS companies.

Strategic outsourcing of electronics manufacturing is a complex process in which EMS providers must offer services across the entire product cycle, including product design, system building, customer fulfilment and outbound logistics. A turnkey approach to manufacturing allows EMS providers to carry projects through from the initial concept and design phase to the final phases of industrialization, manufacturing and deployment.

EMS providers thus bring into play their expertise to enable OEMs (original equipment manufacturers) to manage their product life cycles better and reduce the time-to-market. Overall, the goal is to make manufacturing more cost-effective, in order to improve bottom lines and market share. Many of the top EMS companies have global networks, superlative technologies, bulk component purchases and considerable experience. All these advantages enable them to provide low cost, high quality and high volume manufacturing facilities across diverse industries, such as computing, automotive, telecommunication, networking, medical and communication. Flextronics is a prime example, leading the industry as the number one global EMS provider with manufacturing, design and logistics operations in 30 countries. Globally, the contract manufacturing industry is estimated at over $100 billion.

According to the latest IDC figures (IDC March 31, 2004), the industry is slated to grow at a compounded annual growth rate of 11.1% per cent in the next three years.

What Makes India a Hot Manufacturing Spot Since it initiated its reforms process in the early 1990s, India has enjoyed services-led, analysts believe that this has had a spillover effect on the manufacturing sector.

New Options
According to a report by Goldman Sachs (Global Economics Paper No: 109), reform in key sectors for services and manufacturing, such as power and telecom policies, is helping India to overcome its bottlenecks in physical infrastructure. India has also launched an ambitious roads project to connect its major cities, and this will strengthen transportation infrastructure. These initiatives have created favourable conditions for a strong manufacturing base.

Indias initiatives on privatization and divestment too have fuelled growth. Today, the countrys top manufacturing companies are global players, seeking markets and M&As abroad. India has also steadily built competence in diverse manufacturing industries. The worlds largest automobile makers source auto components from Indian firms because of price and quality. Hot-rolled steel is manufactured in India using one of the worlds most cost-efficient processes. Indian pharmaceutical firms are among the worlds top five manufacturers of bulk drugs. Finally, India has a burgeoning middle class of more than 250 million, which in turn means that there is a large domestic market for consumer goods, including electronics. Many EMS companies are therefore looking at setting up manufacturing bases in India to cater to the local market. Riding the India Bubble As supply chain enablers, a critical piece of the business no longer lies on manufacturing solely but value additions such as product design and logistics.

In fact, the vertical operating structures assembled over the years by some top-tier EMS providers are now hailed as a competitive advantage as the electronics industry enters recovery. The best opportunities lie with well-managed, vertically integrated EMS providers with emerging ODM models, said David MacGregor, an analyst with Cleveland-based Longbow Research LLC, in a report. Flextronics for example, has put a heavy emphasis on its design and, more specifically, Original Design Manufacturing (ODM) business over the past 12 months. From a margin perspective, the company believes that an increase in its ODM business will result in a permanent increase in gross margins. Flextronics has in excess of 3,500 design engineers world wide, and has been designing rather than just manufacturing products like digital imaging, printers and cell phones. The prospects for mobile-phone makers would appear to be bright.

Analysts are expecting global demand for handsets to reach about 600 million units this year, up from 520 million in 2003, as consumers replace their older handsets with color-screen and camera-imbedded phones.

What does this mean for India With its highly skilled and low-cost workforce, strong design and high precision engineering capabilities, the future does indeed bode well for India as a global design hub. Flextr-onics recent acquisition of a 55 per cent equity stake in Hughes Software System is a strong testimony to the encouraging trend and markets confidence of the countrys brainpower in the technology space. In fact, India is key to our growth strategy in the design services realm, particularly in the application software development arena, just as India operation has become vital to the future of many Americas biggest, most profitable companies.

The writer is vice-president, Business Development, (South Asia)