The draw of cheap Chinese and Indian labour is so strong, that some starry-eyed, developed-country executives are losing sight of the bottom line. So acute is the “Chindia” fever in some businesses, notably the auto industry, even the basic common sense of adapting manufacturing practices to make the best use of the region’s labour endowment is being discarded.

A factory worker costs $37 an hour in Germany last year and only $1.40 in China and $1 in India. Therefore, it should be cheaper to make a car part in China (or India) than though German  productivity is much higher.

Key motivation

This logic, straightforward as it appears, seems to be getting regularly flouted in the thriving automotive clusters that have emerged near Beijing and Bangalore, Guangzhou and New Delhi, and Shanghai and Pune.

There are now more than 100 foreign-funded, auto-related production units in China and 60 in India.

Tapping Chinese and Indian demand is the key motivation for the presence of global auto majors and component companies in these clusters. Together, the two Asian auto markets are expected by analysts to be bigger than Western Europe’s by 2015.

Still, it’s reasonable to inquire what, if anything, cheap and bountiful Asian labour has done for these companies.

Disappointing savings

That’s the question that Boston Consulting Group asked of senior executives at more than 40 European, Japanese and North American original equipment makers and suppliers.

The answer they got was staggeringly counter-intuitive.

“Cost savings have been disappointing,”' Nikolaus Lang, a partner at the consulting firm’s Munich office, said last month in “Winning the Localisation Game,” a study he has co-written with two colleagues. “Nearly two-thirds of the companies we analysed reported that their unit costs in China or India were equal to or higher than the unit costs in their home countries.”

Sounds improbable? Lang and his colleagues provide a breakdown of what’s causing the benefits of inexpensive labour to dissipate. The main culprit, according to their analysis, is that factories in China and India are smaller than in developed countries, thus not allowing economies of scale. Besides, it also costs companies more to ensure product quality in Asia. The in-house rejection rates are higher than they are in the West.

Robots replace workers

From this it may seem that the path to improved quality must pass through greater automation; fewer workers will, after all, make fewer mistakes.

Many companies in Asia, even several homegrown ones, are now going down that route. Bajaj Auto Ltd, India’s second-biggest motorcycle maker, had more than 21,000 workers in 1997.

Over the next eight years, the company tripled revenue by cutting the number of employees to 11,000. Part of this capital infusion went into robots that weld chassis frames. Not just automakers. With a drop in import duties, even component manufacturers in India are now buying robotic production lines from overseas. But this strategy defeats the whole purpose of producing in a location where factory wages are a fraction of what they are in a developed country. The BCG analysts say automakers in China and India ought to use more manual labour in non-critical processes.

‘Over-engineered’ processes

The production processes in the auto industries in China and India, often an exact replica of Western standards, may be “over-engineered,” the analysts say. These are simply not suitable for taking advantage of the region’s abundant labour.

“Companies need to conduct a stringent analysis of the whole production process, identifying those steps where quality is less critical and where manual labour is a viable alternative to automation,”' Lang and his colleagues say. China and India offer global carmakers and their suppliers a unique opportunity to produce vehicles that are affordable to a large number of emerging-market buyers.

The buzz created by the $2,500 car, a prototype of which was recently unveiled by India’s Tata Motors Ltd, has demonstrated the potential merit of such a strategy. So far, global carmakers have taken a “wait-and-see” approach to the Nano, as Tata’s proposed car is called. Even for no-frills products, they should begin evaluating the efficiencies of their manufacturing in China and India. They may find prospects for cost-savings that they have so far overlooked.

Cheap labour

Typically the cost structure of a company in auto industry in India is dominated by raw materials such as steel and rubber; wages and salaries account for ony three  per cent of total expenses.This doesn’t necessarily mean worker costs are irrelevant; it may also imply that the technology selected is overly capital-intensive, and the labour input is artificially low.To run a Chindia business that doesn’t even attempt to benefit from cheap labour seems rather nonsensical, though that may be the norm in the auto industry right now.

Source: Bloomberg News