Treading A New Path In Sourcing

Updated: Aug 31 2002, 05:30am hrs
The strategy of sourcing and outsourcing traditionally in corporate India have taken three paths: one, where Indian companies have looked at overseas markets to procure cheaper alternative products. Second, where multinational companies operating in India have been the base to supply products to their international counterparts.

Third, cases where Indian companies have been the supply organisation to global companies, particularly in sectors like automobiles, garments and shoes. RPG Groups Ceat Ltds recent move to import tyres from Pirelli of Italy, adds yet another dimension to the sourcing pattern and turns the current trends upside down. It could even be a pointer of product strategies for Indian companies in the days ahead.

For one, Ceat is sourcing radial tyres from Pirelli, one of the largest tyre manufacturers in the world clearly, which are in the top end of the market segment and would not be a cheaper alternative.

This goes against the fundamental grain of Indian outsourcing strategy to look for cheaper alternatives from international markets. In recent times, Indian companies which have looked for cheaper alternatives have typically eyed the Chinese market. This could either be by setting up a manufacturing base there or importing products which are not in the high end category. Ceat, on the other hand will not be following either of these.

On the one hand, while Ceats current move is aimed primarily to augment its own capacities of radial tyres, it has also resisted the other alternative to set up another manufacturing facility in India. Further, it has also not looked eastward to set up a manufacturing base like what some of the other companies in India have done.

It may be a pointer for Indian companies to look at the west for imports as an alternative to Indian manufacturing. In fact, this also strengthens the current trend of Indian companies not investing domestically in manufacturing at the same rate and pace at which they used to do earlier.

Traditionally, imports as an alternative to manufacturing in India are largely there in the consumer goods segments and in a few other sectors. But this is clearly a new trend where this is happening in the industrial goods and manufacturing segment.

Finally, in a move that could have far reaching impact, Ceat has taken a gamble to see how a premium brand from one of the best global companies in the industry would sell in India. Further, the domestic tyre industry in India has over the years built strong local brands without large scale international infusion of investment. If Ceats strategy works, it could also be an indication of the maturing of the Indian tyre market. On its part, Ceat too believes that it makes eminent sense for it as it could add to the bottomline of the company more as the the margins from this product category would be much more. Clearly, it also would help bolster the financial turnaround that it has achieved recently.

Typically, the model of MNCs using India as a base for their global sourcing have gathered momentum over the years. For example, Ford India exports a large part of its production abroad within the Ford network.

Similarly, Maruti exports a large part of its production to the various markets of Suzuki abroad. At another very different level, Hindustan Lever Ltd (HLL) recently announced its ambitious gameplan of a $ 1 billion sourcing and export game plan from India. Further, Indian companies like Sundaram Fasteners are major suppliers to global auto manufacturers like General Motors. But the current move by Ceat adds a new dimension.

International tyre majors over the years have not been able to gain a strong and sustainable foothold in India over the years. Companies like Michelin and Continental have faced one hurdle or the other in a sustainable India game plan.

It is still early days yet to see whether the Ceat model will work out in the long term or not. If over a period of time, it is demonstrated that this will work out, then it may even change the very dynamics of the Indian tyre industry totally.