The Age Of Commoditization
Traditional British GCSE O-level exam papers for history, French, German and Italian will no longer be marked in Britain. In an arrangement reached earlier this year, half a million of these exam papers will be emailed to India to be marked at one-fifth the costs. Elsewhere in Britain, surgery patients who are fed up with the long waiting time can now travel to India to get their surgical operations done within days. Like the US$ 14 billion a year IT business that India has won from 230 global Fortune 500 companies, the medical industry in India offers what the customers want: first-class expertise at near third world prices.
Sitting in Bangalore, an Indian tax accountant busily fills up American IRS tax returns while an Indian lawyer diligently prepares the case for a British solicitor. Indian radiologists analyse CAT scans sent by doctors in the west and feedback their professional opinions overnight. These practitioners have never stepped foot outside their country but have become adept experts in the professional industry requirements of their customers’ countries. On the back of a strong IT and precision service industry, economists predict that India will replace Germany as the third largest economy in the world by 2035.
Where India offers specialised professional expertise, China meets the world with prices that are 50% to 90% lower than American manufacturing costs. For America, the worst hit is the small and medium manufacturing sector that makes up 37% of its manufacturing segment – already 2.7 million Americans have lost their jobs since the year 2000. In the year 2001, Britain’s exports to China exceeded the imports from that country. By 2004, China overturned this position – Britain now imports more from China than it exports and this situation is not reversible in the short-term. One of China’s reasons for success is that it has adopted a different model – mass manufacturing based on the simple premise that quality is dependent on the end price. Unlike the conventional manufacturing philosophy of “take it at this price or leave it”, China’s manufacturing sector is willing to produce products where quality depends on the price the customer is willing to pay -one size does not fit all.
In December last year, Business Week magazine reported the three scariest words in the US industry today are “The China Price”. For a country that nearly self-destructed during the Cultural Revolution of the 1960s, China’s GDP per Capita has tripled in one generation, saving 300 million people from poverty. By 2050, China is expected to be the largest economy in the world surpassing the United States. Although the threat posed by China and India appears clear-cut, are America and other developed nations worrying unduly about these giants at our doorstep?
It would be easy to dismiss both India and China as just aberrations in global economics, driven by the need to reduce costs. Eventually when the costs in these two countries rise, they too will be forced to transfer manufacturing to other lower-cost countries. After all, hasn’t the west witnessed similar evacuation when it weathered decades of competition from Japan, Korea and Taiwan -only to see even these countries losing out to China eventually? Ironically, in the 1970s, the Japanese themselves began the exodus of their manufacturing bases to lower cost South-East Asian countries, including Malaysia.
This time however, there is a difference. The domestic markets of both these China and India are large enough to give America and other developed nations a run for their money. India boasts a middle-class population of 200 million people while China puts its figure at 60 million. Compare this with America’s 40 million middle-class citizens, UK’s 10 million middle residents and the contrast becomes frighteningly clear.
The middle income group dictates many consumer markets. Take the automobile and mobile phone markets, for example. China’s demand for passenger cars in 2005 is 3 million units, already making it the third largest automobile market in the world. Today, China is already the largest mobile phone market in the world with 350 million subscribers. This number is set to surge to 600 million subscribers by 2009. When a country’s middle-class population provides a sufficiently large platform for consumer goods, rapid industrial expansion and the re-skilling of its people takes place at an unprecedented pace. By 2050, China and Indiatogether will account for 50% of total global output. The implication of these astounding figures is that a power shift is inevitable.
It is important to note that the first shift of low-cost mass manufacturing to China and the shift of professional services outsourcing to India are not the core issues – they are the warning signs of 2 other silent movements taking place. True to the proverbial iceberg phenomenon, we have to be aware that other fundamental shifts have silently begun beneath the surface. Just like movements of tectonic plates that alter our geography, we must view these shifts as irreversible movements that have significant implications on our strategies for the future. China and India reflect the symptoms of these shifts, not the causes.
If Malaysia is to compete in this altered future, we must distinctly identify the causes of these silent shifts and quickly re-strategise before the rug is pulled from under our feet. Conventional thinking and current strategies will not work in this distorted landscape – it is no longer just about being a low cost producer or differentiating our products along accepted lines. Malaysia has to become an innovator nation and rise above the crowd. Innovation is driven by a thinking society , we must therefore reevaluate our core thinking processes and learn new techniques that will enable us to become innovative. To create a different future, we have to start thinking differently.
In the next article, we shall examine the first shift that is underway – the commoditization of knowledge and information.
Source: Dr. Kamal Jit Singh is the CEO of British Telecom’s Asian Research Centre and specialises in using Innovation as a strategy for increasing competitiveness. He is passionate about changing the way Malaysians think and hopes his articles provoke and challenge conventional thinking. Brickbats are welcomed at: firstname.lastname@example.org.