Enhancing Competitiveness:The INDIA Card

June 7, 2006

Rajiv Gulati, Director, India-China StrategyCorporate Strategic Planning

ASIAN POWERS SYMPOSIUM

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• Modern India - A vibrant and the world's largest democracy

• Home alike to the tribal with his anachronistic lifestyle and to the sophisticated urban jetsetter.

• A land where temple elephants exist amicably with the microchip.

• Its ancient monuments are the backdrop for most modern facilities where atomic energy is generated

• Modern industrial development has brought the country within the world's top ten nations.

• 2nd/ 3rd largest producer of Engineers & scientists as a result of initial investment in building institutes of higher education like IITs.

• Industrialization process started post independence (1950s), however remained in the range of 2-3% (Hindu Rate of Growth) till mid 80s.

• One of the world's fastest growing economies @ 6-7% pa* from 1993 onwards.

*Source : Projection for 2004-05 (with Q-1 & Q-2 growth being >6%)

India Fact File

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…Steady & Sustainable Growth

5.9

7.3 7.37.8

4.8

6.8

6.1

4.4

5.8

4.5

8.5

77.5

0

1

2

3

4

5

6

7

8

9

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05 (E)

2005-06 (P)

GD

P G

row

th -

% P

A

Source: Economic Survey 2002-03, Press note by CSO for financial year 2002-03, * Economic Survey 2003-04.

CAGR** = 6.5%

** from 1997 – 98 to 2004-05

*

India Fact File

Current GDP = $ 616 Bn (2003-04)*

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….Increasing percentage of Productive Population

Popn.

( % )

1961 1971 1981 1991 2001 2006 ( Projected )

2010 ( Projected )

Below 15 yrs

41.0 42.0 38.5 36.9 35.3 30.6 28.8

15-60 yrs

53.3 52.0 55.2 55.9 56.9 61.9 63.2

Above 60 yrs

5.7 6.0 6.3 7.2 7.7 7.5 8.0

Source : Census India 2001 ; Central Statistical Organization ;

Statistical Outline of India 1999-00

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INDIA – CAPABILITIES

Talent

Cost**

* Satellite** Assumes skills, physical infrastructure are similar to those required for BPO activities, without vendor margin

Source:Statistical Abstract of India, 2005 ; Bureau of Labour and Statistical Standards, joint McKinsey/NASSCOM study; EIU; Jampro; www.stats.gov.cn/english/index.html , Times of India, Company website

• Yearly graduates

– 2,460,000 college

– 250,000 post-graduates

– 72,000 business majors

– 80%-90% speak English

• Employee cost for college graduates ~ US$10,400/ year

• ~ 70% cost savings possible relative to Europe / US

Environ-ment

• Infrastructure**

– Telcom reliability*: 99.5%

– Outbound international bandwidth: 780 Mbps

– Available Grade A/B building space (sq ft): 9.2 M; vacancy rate 35%-40%

• Business Environment

– EIU overall business environment: 6.15/10

– EIU global rank: 40/60

1

2

3

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Risk (A=least risky, E=most risky)

Source: EIU Viewswire - data as of July 2004

• Overall country risk rating: C

– Political risk: D

– Economic policy risk: C

– Economic structure risk: B

• Significant vendor base• Sophisticated BPO environment• Growth of Indian Multinationals for

Global delivery

Vendors

4

5

INDIA – CAPABILITIES

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INDIA – the objections of pastLack of Infrastructure- Examples of turnaround.

– National Highway Development Project- 14.1 M Km of roads by end 2007, cost US $12 Bn

– Privatisation of ports– Electricity Privatization

Cost of Capital high– No more– Banking sector liberalisation leading to nominal lending rates falling to about

11.5%.– Private banks participation adding to health

Labour laws- Not a barrier– - Enough examples of smooth restructuring and down sizing in labour intensive

industries.

Indian Manufacturing efficiency has improved significantly due to opening of markets..

– Ford , Hyundai manufacture and export more cars from here than they sell locally. Automotive, IT , pharmaceuticals exports testimony to this.

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Leading global corporations have been sourcing services

across the value chain from India since 1994…

Finance and Accounts

Technology Services

Product Development

Inb

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L

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Man

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ctu

rin

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Op

erat

ion

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Ou

tbo

un

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Lo

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Mar

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ng

an

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Sal

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Cu

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S

ervi

ce

Human Resource Management

Technology Services

• Software development

• Customization

• Hosting & maintenance

• Customer technology support

R&D/Product Design

• Clinical Research

• VLSI design

• DSP chip design

• Avionics research

• R&D and finished goods

• R&D and engineering services

Finance and Accounting

• Back-office

• Accounts payable

• Accounts payable/receivable, financial reporting

• Finance accounting

• Revenue accounting

Operations

• Order tracking services

• Order tracking and logistic services

• Claims processing

• Credit card processing

• Ticket reservations

Marketing/Sales/Customer Service

• Outbound tele-sales support for their consumers

• Computer help desk

• Web-based interaction for answering customer inquiries

• Technical support to retail and business consumers.

• Inbound voice to consumers

• Inbound and outbound customer interaction

• Customer service

HR services

• Payroll processing

• HR services including payroll, recruitment, HRIS etc.

• Payroll services

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Offshore Movement Driven

By … Sustainable Cost Advantage in LCCs

Opportunities to Consolidate / Re-engineer

Higher Productivity Pressures

High

LowHigh

UK

China

Philippines

Mexico

India

USA

Co

st

Workforce Attractiveness/Skills

South AfricaHungary

Canada

Large Talent PoolLarge Talent Pool

Sm

all T

a len

t P

oo

l

Mauritius

Tunisia

English Other Languages

Low

India landscape – the BPO Environment

3rd Party Outsourcing,

Value in Bln.USD

Captive Outsourcing

Value in Bln.USD

2001 2008

17

164

38%

2001 2008

35

18226%

CAGR

CAGR

Source:Gartner Dataquest; Aberdeen group; McKinsey BPO&O Initiative

Macro Trends in Growth

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Key Trends in India Offshoring is now mainstream…

Business Process Outsourcing grows faster than call centers – likely to dominate future growth

Greater risk, compliance and information security focus

New industries like Healthcare actively involved

Offshoring is now well accepted worldwide and some large players in the field

• Value adding business process overtakes call centres in 2004 ie R&D, F&A, HR

• Telecom, Healthcare, Industrial, R&D collaborations• Sourcing API’s in India ( 75 FDA certified plants )

• Risk management, the dominant theme, with dedicated governance models

• Significant long term commitment. At least 10 firms with over 10,000 people each

Sourcing Models• Hybrids - a growing model and captives continue to be

preferred

Dem

and

Sid

e

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… and an effective supply side management is the key differentiator

Cost Competitiveness

Talent

Location Decisions

Tax and Regulatory Issues

• Arbitrage is still the primary proposition • India’s cost competitiveness in IT reducing sector will be under

threat in a few years

• Quest for qualified middle management because of rapid industry expansion

• Tier II city movement – Pune, Hyderabad• Infrastructure constraints

• Concerns on actual handling of transfer pricing and tax holiday cases

• 2009 Sunset for tax holidays

Market structure: Consolidations, IPOs and other transactions

• Global and regional offshorers catch up swiftly• Growth of Indian Multinational Service Providers• Call centre business consolidates and becomes scale drivenS

up

ply

sid

e

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Increasing Middle Class

155 million 300 million

There are now estimated to be some 300 million middle-income earners making $2000 to $4000 a year* equivalent to $15K to $20K on PPP basis!!!!

•Source : Report by CIA’s National Intelligence Council 2004. www.atimes.com/atimes/South_Asia.

20042002

445 million

2006 Projected

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Impact on Healthcare

Improving Hygiene

- Lesser Pollution: 4 stroke engine, lead free gas, polluting industries relocated, new modes of transport

- Lesser Infections: In last ten years share of anti-bacterials has reduced from 27% to 17%

- More Awareness: Better diagnosis. Lifestyle diseases now becoming important. Cardiovascular second largest and diabetes fourth largest therapeutic area.

- Therapeutic areas now mimic the developed world

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Healthcare Spending

Evolution of healthcare spendEvolution of healthcare spendUS $ Billion

1990-91 1995-96 2000-01

6.212

22CAGR = 16%

5.2% of GDP

3.7 % of GDP3.7 % of GDP

2012 (Estimate)

67 ~7-8% of GDP

• 9-10%: W Europe

• 8-9%: S. America

• 7.1%: S. Africa

• 6.7%: Korea

• 5.7%: Thailand

“Last two years have finally seen a Sectoremerge…”

Source: National Accounts Statistics Back Series, 2001; CMIE 2001; Organisation of Pharmaceutical Producers, 2002; McKinsey analysis

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Changing Healthcare Scenario

Key Facts:

• Until the early 1980s, Govt.-run hospitals and those operated by charitable organizations were the main providers of subsidized healthcare.

• Last two decades have seen the mushrooming of corporate and privately run hospitals.

• They have invested on modern equipment and focus on super-specialties.

• The private sector accounts for 70% of primary medical care and 40% of all hospital care in India. They also employee 80% of the country’s medical personnel.

• Corporate organization structure for hospitals:

• The Apollo Hospitals Group has pioneered this.

• Wockhardt, Escorts, Fortis Healthcare and Max India are the major corporates following suit.

• With the strengthening of Healthcare Insurance in India there will be an increase in number of people opting for private hospitals as affordability is no longer a barrier.

Source: CII

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Corporate Organization Structure For Hospitals:

CHENNAI DELHI HYDERABAD

CHENNAI-TONDIARPET CHENNAI-SPECIALITY VIZAG

MADURAI ARAGONDA HYDERABAD-SPECIALITY

RANCHI ERODE SRILANKA

MYSORE BILASPUR CHENGANNUR

Apollo Hospitals Network

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Emerging Trends - Medical Tourism

• Medical Tourism - Patients going to a different country for either urgent or elective medical procedures – is fast becoming a worldwide, multibillion industry.

• India is considered the leading country promoting medical tourism.

Source: CNBC News

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• If medical tourism were to reach 25% of revenues of organized private market, $1-$2 Billion US will be added to the industry

• Medical tourism market would then represent 3 to 5% of the total delivery market in 2012

Size of up market (private)

Without medical tourism

With medical tourism

3.2-6.4

4.3-8.5

2012, Billion USDs• Indian medical tourism market is

growing (+15% in past 5 years, +30% in 2000), albeit still limited limited

– Escorts treated only 675 foreign patients in 2000 (~5% of all its patients) – now treating several thousand

– Apollo raising proportion of international patients to over 10%

• Important to look at Apollo’s perspective of “end-to-end”health and well-being – not just surgery

• Important to look at Ayurveda

“We have quadrupled in 2

years”

Medical Tourism – Destination India

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Medical Tourism – Destination India

• The large difference between the medical/hospital charges in Western countries and here is one of the main reasons why people are targeting India as a health tourism destination*.

• The focus of medical tourism in the country is mainly on *:• Cardiac surgery, • Knee / hip replacement, &• Dentistry

Category US India

Heart Surgery** 30,000 8,000

Bone Marrow Transplant** 250,000 69,000

Liver Transplant** 300,000 69,000

Orthopaedic Surgery** 20,000 6,000

Hip Replacement** 17,000 2,500

Dentistry-Filling* 300 - 400 20-40

Root Canal* 3,000 100-200

Dentures* 1,000 200

Consider the differences in charges: Treatment Costs in US $

Source: *The Financial Express 01 Jan. ’05

**http://www.ximb.ac.in/~u103121/CPProject/Trend_of_medical_tourism_DD.htm

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Indians love the US …•16-Nation Pew Global Attitudes Survey

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Joke: Outsource NASA to India

WASHINGTON (IWR Satire) - - President Bush on Monday told a joint session of Congress that in order to balance the budget we will need to start outsourcing government programs and agencies like NASA to third world countries.

http://www.internetweekly.org/photo_cartoons/cartoon_bush_nasa.html

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•G Madhavan Nair, Chairman ISRO and Michael Griffin, Administrator NASA; signed MOU on May 9, 2006 to fly two US experiments on Chandrayaan in 2008

• Miniature Synthetic Aperture Radar• Moon Mineralogy Mapper

•Mission cost to India, under $100 million

•Price to the United States: free.

Reality: India’s Lunar Mission

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India / U.S. – “A Win-Win Partnership” •India invests heavily in R&D

•India makes progress in software development

•Penetration of PC’s in Indian households grows

•Significant increase in domestic air travel in India

•India’s Pharmaceutical companies focusing on new molecules

•Outsourcing goes up

•US exports of equipment to India up (e.g. mass spectrometer)

•India uses computers made by US companies

•Intel – Microsoft all over India

•Boeing receives largest ever order to supply aircrafts

•All want to collaborate with US Pharma’s for global development and commercialization

•US unemployment goes down

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Conclusion

India: An attractive outsourcing destination AND an attractive market for products

For Pharmaceuticals …..• Therapeutic areas now aligned with research initiatives of major

Pharma MNCs• Growth of Specialized private hospitals• Introduction of Product Patents

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IndiaIndiana

Outsourcing

In-sourcing

ProductsMarketing Services

Out-licensing

Talent

Manufacturing

Research & Development

From Indiana to India – the Emerging Economy

Offshoring