capturing global advantage - management consulting€¦ · capturing global advantage 5 industrial...

Capturing Global Advantage

How Lead ing Indus t r ia l Compan ies Are Trans fo rmingThe i r Indus t r i es by Sourc ing and Se l l ing in Ch ina ,Ind ia , and Other Low-Cos t Count r i es

BCG REPORT

The Boston Consulting Group is a general management consulting firmthat is a global leader in business strategy. BCG has helped companiesin every major industry and market achieve a competitive advantage bydeveloping and implementing winning strategies. Founded in 1963, thefirm now operates 60 offices in 37 countries. For further information,please visit our Web site at www.bcg.com.

Capturing Global Advantage

ARINDAM BHATTACHARYA

THOMAS BRADTKE

JIM HEMERLING

JEAN LEBRETON

XAVIER MOSQUET

IMMO RUPF

HAROLD L. SIRKIN

DAVE YOUNG

A P R I L 2 0 0 4

www.bcg.com

How Lead ing Indus t r ia l Compan ies Are Trans fo rming The i r Indus t r i es by Sourc ing and Se l l ing in Ch ina , Ind ia , and Other Low-Cos t Count r i es

© The Boston Consulting Group, Inc. 2004. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 973 1339, attention IMC/PermissionsMail: IMC/Permissions

The Boston Consulting Group, Inc.Exchange PlaceBoston, MA 02109USA

2 BCG REPORT

3Capturing Global Advantage

Table of Contents

A Word from the Authors 5

Introduction 6

The Changing Pattern of Global Competition 10Deeper Competition: The End of Protected Sectors 10

Truly Global Competition: The Rise of China and India 12

Mapping the Sources of Global Advantage 16The Cost Advantage 16

The Market Access Advantage 21

The Capabilities Advantage 23

The Strategic Challenge: What to Relocate Where? 26What Should Go? 26

What Should Not Go? 29

How to Decide Where to Go? 30

Setting the Scope and Speed of Low-Cost-Country Strategy Rollout 33

Getting the Economics Right 34

Identifying and Mitigating the Risks 36

The Operational Challenge: Making It Work 38Overcoming Organizational Barriers 38

Getting Your Low-Cost-Country Operations Right 41

An Agenda for Industrial Companies—and for Governments 45Implications for Management 45

Implications for Governments 46

4 BCG REPORT

A Word from the Authors


Industrial companies are facing an unprecedented challenge: how to capture and maintain advantage dur-ing this period of rapid globalization. It is a daunting task. Executives urgently need to understand how glob-alization is affecting their companies and their industries. Specifically, they need to be able to answer toughquestions about the likely impact of globalization on each of their products, their customers, and theirassets—both today and in the very near future. And then they need to craft strategies and build capabilitiesthat will help them seize the opportunities offered by globalization, moderate its risks, and contain its costs.The reward, for companies that meet the challenge, will be solid competitive advantage. But getting therefrom here will be far from simple. This report is intended to offer both insight and practical guidance.

We would like to thank everyone who contributed to the realization of this report, especially

• The senior executives we spoke with at industrial companies around the globe, who generously sharedtheir experience with us

• Our BCG colleagues and advisers: James Abraham, Zafar Momin, Josef Rick, François Rouzaud, andGeorge Stalk

• The project team of consultants and researchers: Terence Chan, Forrest Chen, Ashish Garg, Chris Hogbin,David Jin, Hei Wai Kwan, Shilpa Punatar, and Vivian Zheng

• The editorial team: Barry Adler, Kathleen Lancaster, Chris Mark, and Sharon Slodki

While the process of globalization is inexorable, there is still much that executives can do to affect its impacton their companies, their industries, and their national economies. We hope you will find this report help-ful, and we would welcome an opportunity to discuss these issues with you.

Arindam BhattacharyaVice President and DirectorNew [email protected]

Thomas Bradtke [email protected]

Jim HemerlingVice President and [email protected]

Jean LebretonVice President and [email protected]

Xavier MosquetSenior Vice President and [email protected]

Immo RupfVice President and [email protected]

Harold L. SirkinSenior Vice President and [email protected]

Dave YoungSenior Vice Presidentand [email protected]

Introduction

6 BCG REPORT

Globalization is no longer merely an option but animperative. The migration of sourcing, manufactur-ing, R&D, and service operations from high-costcountries (HCCs) to low-cost countries (LCCs) iswell under way and accelerating fast. Fully loadedwage rates, including benefits, of $1 to $2 per hourin LCCs—compared with rates typically between$15 and $25 in the United States and as high as $30or more in Europe—are the primary driver. Butother factors, such as advances in telecommunica-tions technology and in techniques for supply chainmanagement, are contributing to the opportunityto radically restructure costs.

Moreover, low cost no longer means low quality.Companies in HCCs can now source virtually any-thing on the other side of the globe at much lowercost than at home and get equivalent quality.Increasingly, LCCs’ pools of highly motivated andhighly skilled workers are supported by first-rateinfrastructure, education, and training. Most LCCs,mindful of the benefits their economies stand togain from development, have been adopting favor-able economic policies and making sustainedinvestments in these areas. In addition, LCCs haveabsorbed extensive knowledge transfer from multi-national companies that are already operatingthere. And although LCCs have far less automationthan industrialized countries, modern managementtechniques, rigorously applied, are ensuring equiv-alent levels of quality.

Driven by these developments, the globalization ofcost structures will have a direct impact on a signif-icant portion of global manufacturing GDP overthe next decade. No major industrial category willbe immune: imports from LCCs are growing fastacross all of them. In industry after industry, glob-alization is redrawing the playing field and creatingnew winners and losers. So companies are underenormous pressure to make the move to globaloperations. But executives are struggling to over-come the seemingly daunting tactical and organiza-tional barriers to realizing this opportunity.

Certainly, deciding what products and processes toglobalize is a big task. But dealing with tactical andorganizational barriers can be even more challeng-ing. Issues of mindset, structural complexity, cul-ture, resource constraints, real and perceived risks,incentives and disincentives—as well as costly legacyobligations—all combine to make progress diffi-cult, both at home and in LCCs. Nonetheless, theforces driving globalization are inexorable.Companies that are not yet actively pursuing thisopportunity need to begin now; those that arealready moving may need to pick up the pace.

The imperative is not just global sourcing but glob-alization. Capturing global advantage requires tak-ing a very broad view. It entails deciding not merelywhat to source from where but also how best toglobalize a company’s entire operations—to decon-struct them and then reconstruct them in a radi-cally new form, so that every activity takes placewhere and how it is most advantaged, consideringthe strategic and operating advantages and risksinvolved.

Creating advantaged operations will likely mean movingin many directions at once. Increasingly, companieswill do business not so much in regions that happento be geographically contiguous but in clusters ofcountries—perhaps widely dispersed—that offercomplementary advantages. For example, a com-pany might conduct R&D in the United States andPoland, manufacturing in China and Mexico, andcustomer service in India and Ireland. The bestlocation for each activity will not necessarily be theleast costly option. In some cases, other advantagesmay outweigh cost considerations. For example, inthe case of highly specialized products or those withshort lives, proximity to customers may offer anoverriding advantage, regardless of cost.

Going global also means staying local. In creatingadvantaged global operations, companies cannotneglect local focus. Global production will stillneed local customization, local distribution systems,

and local branding. In addition, significant por-tions of manufacturing are expected to remainadvantaged in their current locations. Reasons forstaying in higher-cost locations might include theneed to safeguard intellectual property content, theimportance of collocation with customers, or therequirement to use local content. In other cases,aggressive programs to drive innovation inprocesses, work methods, and technology in exist-ing facilities could boost real productivity enoughto offset the advantages of offshore operations.Each company must balance such considerationsfor each product line andmarket worldwide.

Assets may become liabilities.Companies will need toreposition some facilitiesin HCCs and eventuallyshut down others. They may also need to take write-offs and lay off employees. These issues can beextremely complex and painful. But they must befaced squarely and managed with care and skill aspart of a necessary restructuring for long-term com-petitive advantage. Companies must understand thescope of these emerging liabilities now, so that theycan plan and act to minimize the costs and painover time.

Low-cost labor will change the tradeoff between capitaland labor, transforming products and processes. In thedeveloped world, most industries have investedheavily in automation and have also simplifiedproduct design in order to reduce labor content. InLCCs, where high labor content is less costly thanhigh automation, the tradeoff between capital andlabor is radically altered, as is the basic economicequation between fixed and variable investments.Product design and manufacturing processes willneed to be adjusted accordingly; screws may onceagain be cheaper than welds, and built-up assem-blies may become cheaper than more complex inte-gral designs.

There will be no more “business as usual.” Going globalmeans doing business in radically new ways.Companies that master the art of globalization willlook and feel very different from traditional com-

panies. They will make decisions globally, in a waythat is more inclusive, more flexible, and fasterthan anything they have known before. They will doit by breaking down old silos, establishing newstructures and processes, writing new policies, andnurturing new kinds of employees. Along the way,they will create whole new ways of competing intheir industries. And they may potentially createphenomenal value.

The advantages to be gained are huge—and strategic.Companies that move quickly and intelligently

stand to benefit fromthree compelling formsof competitive advantage:significantly lower costs,direct access to burgeon-ing markets, and capabili-ties that create far more

operational flexibility, customization, and variety.

The cost advantage is striking. Companies that pursuewell-crafted LCC strategies are likely to see thelanded costs of their products reduced by 20 to 40percent, and service costs reduced by as much as 60percent. The primary source of this advantage islower wages and benefits, which translate intohigher margins. Importantly, this cost advantage islikely to increase, not decrease, with time. Otherbenefits to the bottom line include significantlylower capital requirements. And, of course, lowercosts make it possible to sell products at more com-petitive prices, boosting volume and acceleratingrevenue growth.

The market access advantage is critical. Establishingoperations in LCCs opens opportunities in fast-growing markets. Access to local markets shouldplay a central role in global strategic thinking.Many LCCs have attractive local markets. Mostnotable among them is China, which is already oneof the five largest markets in the world for nearly allproduct categories—and it is growing fast. Butother LCCs also offer significant opportunities forcompanies interested in selling products locally, aswell as manufacturing them. Companies that estab-lish platforms in those countries will be best posi-tioned to serve those markets.


Low-cost labor will change thetradeoff between capital andlabor, transforming products

and processes.

The capabilities advantage opens up new possibilities.This source of advantage is rooted in the reintro-duction of skillful human hands into highly sophis-ticated assembly processes, replacing costly mono-lithic machines. This shift creates excitingpossibilities for flexible manufacturing, cost-effec-tive customization, richer segmentation, and vastlyincreased variety—at little extra cost. Added tothese advantages are access to rich talent pools forskilled work and research and development.

Radical changes in competitive positions are likely.By capitalizing on all the kinds of advantage avail-able through globalization, companies can breaknew ground. Companies that currently lead theirindustries, but with seemingly little room to createnew value, can reemerge as growth companies andexpand their leads. Companies that are trailing orstuck can use this chance to reinvent themselvesand strike out in new directions.

Capturing long-term advantage will require sus-tained effort. Globalization will create real advan-tage in the short to medium term as cost structuresshift. However, over time, the initial advantage islikely to shrink as competitors move to create thesame value. So companies that are now focusing onglobalization should also be identifying the basis oflong-term advantage and preparing for the nextstage of competition. Developing partnerships,building advantaged local positions, and otherwiselaying the groundwork for capturing trade share inthe future must begin now so that the advantagethus created can endure for decades to come.

Getting there from here will be challenging.Companies are discovering that seizing the advan-tage offered by LCCs can be complex and arduous.While rules of thumb are emerging, there is no sim-ple formula for determining which products andservices should move to which LCC and whichshould stay at home. The bottom-line economicadvantages to be gained in various regions are notalways easy to assess or compare. Many kinds of riskneed to be taken into account, from operational,monetary, and intellectual property risk to geopo-litical risk. Investment decisions must be made notjust once but repeatedly, as the sources of advan-tage shift. And, of course, once these decisions have

been made, companies must meet the huge organi-zational and implementation challenges entailed indeveloping their operations in LCCs.

Speed is critical. Despite the challenges, the realquestion now is not whether to go global but howmuch and how fast you can move. The largest com-petitive advantage will lie with those companies thatmove soonest and make the strongest commit-ments. They will secure structural advantages interms of access to the most desirable suppliers, part-ners, facilities, and workers. They will also move upthe learning curve ahead of competitors and beginto build scale in local markets. In doing so, they willbe building advantaged positions that will form thefoundations for long-term advantage. Companiesthat win this race will enter a virtuous cycle, usingtheir globally advantaged operations to create valuethat will allow them to invest in innovation andgrowth, thus building more advantage. In contrast,companies that wait will be caught in a vicious cycleof uncompetitive costs, lost business, underutilizedcapacity, and the irreversible destruction of value.

* * *

In this report we address the opportunities—andthe issues. This report is based on a global studyconducted by The Boston Consulting Group in late2003, as well as a broad range of work with leadingcompanies around the globe. In the course of ourresearch, we have performed detailed analyses ofthe competitive economics of industrial companies.We have also engaged in selective interviews withexecutives in the United States, Europe, and Asia.We have looked primarily at a wide range of cate-gories in discrete manufacturing industries, fromhighly complex engineered products such as carsand trains, to assemblies such as pumps and gener-ators, to simple components such as aluminumextrusions. In addition, we have drawn lessons fromthe experience of consumer-oriented manufactur-ing industries where relevant.

In these pages we identify the specific opportunitiesto be captured by incorporating LCCs into a com-pany’s cost structure. We look at the full spectrumof ways that companies can leverage LCCs as asource of advantage, including purchasing parts

8 BCG REPORT

and components, manufacturing and assembling,conducting R&D, performing key service functions,and taking advantage of these countries’ domesticmarkets. We focus particular attention on Chinaand India because of their sheer size and strikingadvantages.

While we do not attempt to address all the politicaland social issues raised by the increasing globaliza-tion of manufacturing and service operations, wedo tackle the thorniest strategic and operational

issues involved, including how to manage the bal-

ance between home-country and LCC operations,

how to choose among LCCs, how to redeploy high-

cost assets, and how to manage risk. We offer coun-

sel on how to set up and manage a global sourcing

or manufacturing operation for maximum flexibil-

ity and minimal risk. We also address the challenges

of implementation and how to keep the new struc-

ture working dynamically to capture the constantly

shifting advantage.


Consider this scenario: A global player in industrialequipment has its products designed in variousR&D centers in the United States and India, thenhas the components manufactured in China andshipped to assembly locations in Mexico andEastern Europe, from which the finished productsare sold all over the world. Meanwhile, the com-pany’s global warranty-management process is car-ried out in India, where a team accesses incomingfield data from around the world, analyzes it in realtime to determine the root causes of performanceproblems, interacts with field or design engineersaround the world if necessary, and sanctions pay-ments to customers as appropriate. The product’s“owners,” based at the company’s R&D centers, fol-low up on the root causes, initiate any neededdesign adjustments, and communicate the reviseddesigns to the manufacturing unit in China—oftenin a matter of days.

Welcome to the brave new world of low-cost-countryoperations. While companies have been sourcingboth manufacturing and services from LCCs formany years, the pace of displacement has recentlyaccelerated and its scale has expanded. Importsfrom LCCs are now making substantial inroads intosectors historically considered protected fromLCCs—even within core industrial categories.Moreover, these imports are no longer coming onlyfrom LCC neighbors such as Mexico for the UnitedStates or Eastern Europe for Western Europe—orfrom traditional Asian players. The acceleratedpace and broadened scope of global outsourcingraise the stakes considerably for all Western com-panies.

Deeper Competition: The End of Protected Sectors

The prevailing view is that many industrial goodsare somehow “protected” from LCC sourcing. Thismay have been the case in the past, but it is not any-more. While the current penetration of LCC-sourced industrial goods into U.S. and Europeanmarkets is still relatively small, it is far from negligi-

ble. The migration of industrial sourcing, manufac-turing, and service operations from high-cost tolow-cost countries is well under way and accelerat-ing fast. In some sectors, LCC imports are growingat rates as high as 30 percent per year. To help com-panies visualize precisely where these changes arehappening and at what speed, we have created theLCC Matrix, which provides a way of viewing theinroads that globalization is making into today’sdomestic industrial markets. The LCC Matrix is aflexible tool that can be used to compare selectedindustries, companies, or products in terms of thespeed and magnitude of their migration to LCCs.(See Exhibit 1.)

In this application of the LCC Matrix, we compareselected industry segments. As an indicator of speed(shown on the horizontal axis), we use the netgrowth of imports from LCCs to the United States—that is, the growth rate of imports minus the rate ofgrowth in U.S. domestic consumption. As indicatorsof magnitude, we calculate both the value of importsfrom LCCs as a proportion of the value of totaldomestic consumption (indicated by the positionon the vertical axis) and the absolute amount ofLCC imports (reflected in the size of the bubbles).For example, in 2002 the United States importedfrom LCCs approximately $6 billion of various fab-ricated metal products, or 11 percent of total U.S.consumption, and these imports have been growing12 percent per year faster than the market. In ourwork with leading companies, we have found it use-ful to create individualized versions of the matrix,comparing companies or product categories of par-ticular interest to the company in question.

As this version of the LCC Matrix illustrates, majorindustrial-product categories in the United Statesfall into four clusters.

Moving early. Approximately 10 to 15 percent ofsampled industrial demand belongs to this cluster.It comprises product areas in which penetration byLCC imports is already established and growing

The Changing Pattern of Global Competition

10 BCG REPORT

moderately. These products were part of the earlymigration wave, and their growth has subsequentlybeen facilitated by improved logistics chains andstandardized product interfaces. Increasingly, theseproducts arrive in the United States not as compo-nents that are “ready for assembly” by a U.S.-basedmanufacturer but as finished end products. Inother words, these are the products for which a sig-nificant portion of manufacturing has left theUnited States and will not return. Automotive elec-trical equipment contained in a car assembled inthe United States is representative of this category.Highly labor-intensive wiring harnesses are a goodexample of a segment in which Mexico and low-costAsia already account for major volumes.

Growing fast. Approximately 15 to 20 percent ofsampled industrial demand falls into this cluster.Products in this cluster will be the big movers in theshort term. LCC imports have already achievedhigh penetration and are continuing to grow athigh rates. Household appliances are examples ofitems in this cluster. Fast-developing productionfacilities in Asia, particularly in China, are produc-ing unprecedented quantities of vacuum cleaners,kitchen appliances, and germ-killing humidifiersfor their own domestic markets and for export mar-kets in which consumers are increasingly searchingfor bargains. In the core industrial business,motors, generators, relays, and industrial controlsare expected to be on a similar path. These indus-


E X H I B I T 1

THE LCC MATRIX SHOWS THE PENETRATION AND GROWTH OF LCC IMPORTSCase Study: The United States

SOURCES: U.S. Census Bureau; BCG analysis.

NOTE: Consumption is defined as U.S. production plus imports minus exports; LCC sample consists of 11 countries (Brazil, China, Czech Republic, Hungary, India,

Indonesia, Malaysia, Mexico, Poland, Russia, and Thailand). Industrial imports from LCCs consist of the major product lines within North American Industry Classification

System codes 332 to 336.

aThe average annual growth rate of LCC imports minus the average annual growth rate of U.S. domestic consumption.

0

5

10

15

20

25

30

Net growth of LCC imports, 1997–2002 (percentage points)a

Globalizing slowly Up and coming

Growing fastMoving early

Computers andperipheralequipment

Semiconductorsand other electrical

components

Motorvehicles

Other transportequipment Agricultural, construction,

and mining machinery

Householdappliances

Motors andgenerators

Motor vehicleelectricalequipment

Commercial andservice industrymachinery

Engine, turbine,and power transmission equipment

Other general-purposemachinery

HVAC

Power distributionand transformers

Motor vehicle seating and interior trim

Motor vehicleengine parts

Machine shopproducts

Other motor-vehicle parts

Otherfabricatedmetalproducts

Relays and industrialcontrols

Hardware

Cutlery andhand tools

Electricalequipment

Magnetic and optical media

Motor vehiclebodies and trailers

Metalworkingmachinery Motor vehicle transmission

and power train partsIndustrial machinery

Railroad rolling stock

Boilers, tanks,and shippingcontainers

Architecturaland structural

metals

Aerospace productsand parts

Vehicle steering and suspension components

Motor vehicle brakesystems

Value of 2002 LCC imports into the United States ($1 billion)

Average = 10.5%

–5 0 5 10 15 20 25 30

Average = 9.8%

LCC penetration,2002: LCC imports as a percentage of U.S. consumption

Navigational, measuring, medical, and control instruments

Other electrical equipmentand components

trial electrical and electronic products could followthe pattern observed a decade ago, when the man-ufacture of consumer electronics migrated quicklyto LCCs, which now supply more than 70 percent ofU.S. consumption. Companies that have not yet putstrategies in place to ward off foreign competitionor establish LCC sourcing may be running out of time.

Up and coming. This cluster, the largest of the four,contains product categories that account forapproximately 30 to 40 percent of sampled indus-trial demand. LCCs’ penetration of these categoriesis still relatively low but changing quickly as importsfrom LCCs accelerate—in some cases increasing bymore than 15 percent per year. This rapid accelera-tion of growth is particularly noteworthy. In manyinstances, current annual growth rates are three tofive times what they were just a few years ago. Thiscluster contains major sectors such as aerospace,architectural and structural metal products, andmachine shops. As fundamental changes occur inindustries that were once considered immune fromLCC sourcing, many companies will be caught off-guard. Companies in this cluster face the greatestopportunities but also the greatest threats, becausemuch of their business will face new cost competi-tion. Establishing comprehensive LCC strategies,both offensive and defensive, will be absolutely crit-ical if these companies are to maintain their com-petitive positions.

Globalizing slowly. Representing approximately 25to 30 percent of sampled industrial demand, prod-ucts in this cluster could either remain wellshielded from LCC imports or be up for grabs. Forexample, truck trailers, because they are extremelybulky and relatively low in value, don’t appear to bethe kind of product that could be sourced econom-ically from low-cost Asia. That could change, how-ever, if the industry were to switch to prefabricatedkits made in China that could be shipped economi-cally, and would require only minimal assembly inthe United States. Metalworking machinery repre-sents another category in this cluster. Machineryimports from LCCs are currently negligible becauseeither the LCCs do not have the technical capabili-ties to manufacture sophisticated equipment or

domestic demand in those nations is absorbingmost of the production. But this situation could cer-tainly change. The bottom line is that some of thesectors in this cluster that now appear safe will even-tually become vulnerable.

The trends evident in the LCC Matrix reveal thatindustrial goods are now following the path blazedover the past 20 years by consumer goods manufac-turing. More than 70 percent of footwear, 60 per-cent of audio and video equipment, and 45 percentof apparel have their origin in low-cost Asia, LatinAmerica, or Eastern Europe, and those areas arestill gaining share. (See Exhibit 2.)

While LCC penetration of Western markets forindustrial goods is still in its early days, it is clearlygaining momentum. The real shift lies ahead, asLCC-sourced goods attain critical mass in more andmore categories in core industrial sectors in theUnited States and Europe. On average, they alreadyaccount for more than 10 percent of industrial con-sumption in the United States, where they are grow-ing at rates of 10, 20, or even 30 percent per year—in a market that is essentially flat. And the trends inEurope are very much the same. For instance,imports from LCCs already account for 6 percent oftotal manufacturing consumption in Germany,where they are growing at more than 10 percent peryear. (See Exhibit 3, page 14.)

Services, too, are moving to LCCs in large numbers.Approximately 300,000 U.S. service jobs havealready moved offshore. This figure is projected togrow to 2.5 million to 3 million in the next tenyears. Transactional processes (for example, payrolland accounts receivable) and customer-facing ser-vices (for example, call centers and telemarketing)together constitute more than 65 percent of theservices now being provided by LCCs. For example,India’s business-process-outsourcing (BPO) indus-try is estimated at $1.5 billion and growing at about50 percent per year.

Truly Global Competition: The Rise of China and India

The range of LCCs involved in large-scale outsourc-ing has changed dramatically in recent years. To the

12 BCG REPORT

“traditional” Asian LCCs, such as Korea and Taiwan,have been added proximate LCCs, such as EasternEurope and Mexico, as well as developing Asiancountries, such as Thailand and Malaysia. (See Ex-hibit 4, page 14.) Most important, China and Indiahave recently burst upon the outsourcing scene,changing the nature and dynamics of the game.

China. China is clearly emerging as the industrialpower base of the future. For both Europe and theUnited States, China already represents a major andvery fast-growing source of industrial products. Forinstance, imports from China now represent nearly

one-fifth of all imports from LCCs into the UnitedStates and Germany; and these imports are growingat 15 to 20 percent per year—far faster than theaverage of LCC imports. China is also becoming asignificant source of services, particularly for Japanand Korea. This role is in part language related butis also driven by China’s advanced capabilities inproducts such as mobile phones—a segment inwhich Chinese consumers are often global trend-setters.

India. In contrast to China, India is becoming apowerhouse in outsourced services, taking over


E X H I B I T 2

CONSUMER GOODS MANUFACTURING SHOWS THE SHAPE OF THINGS TO COMECase Study: The United States

SOURCES: U.S. Census Bureau; BCG analysis.

NOTE: Consumption is defined as U.S. production plus imports minus exports; industrial imports from LCCs consist of North American Industry Classification System codes

332 to 336 with import value greater than $2 billion.

aThe average annual growth rate of LCC imports minus the average annual growth rate of U.S. domestic consumption.

Growing fastMoving early

Footwear

Audio and video equipment

Apparel

Semiconductors and other electronic

components

Engine, turbine, and power transmission equipment

Motor vehicles

Fabricated metal products

Pumps, compressors, and material-handling equipment

Computer equipment

Household appliances

Globalizing slowly Up and coming

5 10 15 20

LCC penetration, 2002: LCC imports as a percentage of U.S. consumption

Net growth of LCC imports, 1997–2002 (percentage points)a

10

15

80

70

50

60

0

5

Motor vehicle parts

Value of 2002 LCC imports into the United States ($5 billion)

Communication equipment

Heating and ventilationMeasuring and

controlling devices

Industrial goodsaverage = 10.5%

Industrial goods average = 9.8%

Consumer goods

14 BCG REPORT

6% 10%

20%20%

74% 70%

1997 2002

LCCs

Domesticsources

~$1.7trillion

~$1.9trillion

Others

+84

+49

+47

+13%

+1%

+3%

+180 +2%Sources of industrial consumption

Growth1997–2002 ($billions)

CAGR1997–2002

4% 6%

25%29%

71% 65%

1997 2002

LCCs

Domesticsources

~€1.4 trillion

~€1.5 trillion

Others

+40

–48

+88

+12%

–1%

+5%

+80 +1%Sources of manufacturing consumption

United States Germany Growth1997–2002 (€billions)

CAGR1997–2002

E X H I B I T 3

INDUSTRIAL GOODS IMPORTED FROM LCCS ARE PLAYING AN INCREASINGLY IMPORTANT ROLE IN THE UNITED STATES AND WESTERN EUROPE

SOURCES: U.S. Census Bureau; Federal Statistical Office of Germany.

NOTE: We define the U.S. industrial sector as discrete industrial goods (NAICS 332–336); we define the German manufacturing sector as all manufactured goods except

agriculture and services.

–3 –2 –1 0 1 2 3Czech RepublicChinaHungaryPoland

RussiaMexicoKorea

ThailandMalaysiaIndiaTaiwanIndonesiaBrazilCanadaSpain

FranceJapanItaly

China displacing Japan

Eastern Europe displacing Western Europe

United States

United Kingdom

–8 –6 –4 –2 0 2 4 6 8ChinaMexicoKoreaGermany

BrazilMalaysiaFranceHungaryCzech RepublicIndiaPolandRussiaSpainIndonesiaItalyThailandUnited KingdomTaiwanCanadaJapan

Mexico displacing Canada

China displacing Japan and Taiwan

U.S. imports of industrial goods German imports of industrial goods

E X H I B I T 4

LCCS ARE DISPLACING HIGHER-COST COUNTRIES AS SOURCES OF IMPORTS INTO THE UNITED STATES AND EUROPEPercentage Change in Share of Imports, 1997–2002

SOURCES: U.S. Census Bureau; Federal Statistical Office of Germany.

NOTE: Percentage share includes only the key LCCs and HCCs selected for this study.

share from countries such as Ireland and Canada.India now supplies some 60 to 65 percent of thevoracious global market for offshore BPO services.This market includes not only transactional proc-esses but also core industrial processes such as sup-ply chain management, design and engineering,purchasing, and dealer support. One of India’smajor advantages is the availability of large num-bers of highly educated English-speaking workersand managers, together with a strong telecom-munications infrastructure. From 1999 to 2002,India’s service-outsourcing revenue grew more than70 percent annually. Manyglobal companies, includ-ing Alcatel, GE, Motorola,and Siemens, have set upR&D centers in both Indiaand China to leverage thesubstantial pools of engi-neering talent that are based in the two countries.

Eastern Europe. Until recently, LCCs close to thelarge markets of Western Europe and the UnitedStates have provided those markets with the lion’sshare of their LCC imports. For example, Poland,Hungary, and the Czech Republic represent morethan half of LCC imports into Germany. However,these countries’ share in this trade is increasinglybeing challenged, especially by China. In response,some Eastern European countries have been devel-oping service centers that cater particularly to theneed for European languages. In addition, someEastern European countries possess pockets of spe-cialty expertise. For example, Russia’s capabilitiesin the aerospace industry led Boeing and Airbus toestablish research and design centers in Moscow.For several Eastern European countries, imminentmembership in the European Union will have bothpositive and negative effects on competitiveness.Their labor costs may rise, thus eroding some oftheir current labor advantage, but at the same timethey should gain simplified access to Western mar-kets and improved logistics, which would take costout of the sales and supply chain. Moreover, thelabor rate increases may be limited, if the experi-ence of Eastern Europe follows that of Greece andPortugal, which joined the European Union in1981 and 1986, respectively. In both cases, although

labor rates increased, overall cost advantage relativeto other E.U. members remained intact. Mean-while, even lower-cost countries such as Romaniaand Bulgaria, which will not join the EuropeanUnion in the near future, are becoming viable alter-natives to Hungary, Poland, and the CzechRepublic.

Mexico. Mexico still represents some 40 percent ofLCC imports into the United States. As is happen-ing in Eastern Europe, Mexico’s share of trade withits wealthier neighbor is coming under tough com-

petitive pressure. U.S.imports of industrialgoods from China arenow growing twice asfast as those fromMexico. If this trendholds, China’s exports

will overtake Mexico’s within the next five years.Nonetheless, we envision continuing roles forMexico and the Eastern European countries as“backyard” suppliers to markets in the large devel-oped countries. We discuss this relationship indetail in the next section.

Southeast Asia. Countries in this region—princi-pally Indonesia, Malaysia, the Philippines,Singapore, and Thailand—have assumed an impor-tant role in the globalization of cost structures. Therecent economic crisis in Asia and the emergenceof China and India are putting these countriesunder pressure. Like countries elsewhere, theSoutheast Asian countries will need to adjust to thenew global environment, but the fundamental fac-tors that led to their earlier success are still present:well-educated, low-cost labor forces and fast-devel-oping internal markets. Moreover, in some sectorsthere has been a critical mass of investment, whichnow serves as a magnet for further activity. Ex-amples include car parts in Thailand and electron-ics in Malaysia.

Across all these regions, the globalization of coststructures is gaining pace. Underlying this move-ment is the simple fact that companies that aresmart about incorporating LCCs into their valuechains can gain huge competitive advantage.


Mexico and Eastern Europewill play continuing roles as “backyard” suppliers to developed countries.

Global advantage is composed of three basic ele-ments: a cost advantage, a market access advantage,and a capabilities advantage. Although the costadvantage remains the key driver of globalization,in recent years it has been reinforced—and in somecases overshadowed—by two other major factors.First, LCC internal markets have matured intoattractive, fast-growing markets, providing a power-ful incentive for companies to invest locally.Second, capabilities in LCCs have greatly improved,fueled by sound government policies there and bythe swiftly accelerating transfer of knowledge frommultinational companies.

The Cost Advantage

The primary driver of the move to LCC sourcingremains the very large—and sustainable—costadvantage that companies can achieve. In our expe-rience, companies that globalize their cost struc-tures to include LCCs can realize savings of 20 to 40percent in the landed costs of their products. (SeeExhibit 5.)

Where the cost advantage comes from. The costadvantage derives from several sources: lower laborcosts, lower capital-investment costs, lower domesticsourcing costs, larger economies of scale, and gov-ernment incentives. (See Exhibit 6.)

Lower labor costs. As one would expect, the over-whelming driver of the advantage is the differencein labor cost. A factory worker in the United Statesor Europe costs $15 to $30 or more per hour,depending on whether the factory is unionized,where it is located, and the extent of benefits pro-vided. In contrast, a Chinese factory worker earnswell below $1 per hour—a twentyfold cost advan-tage. Wages in Mexico and Eastern Europe are twoto eight times the level in China, though still anorder of magnitude below U.S. and WesternEuropean wages. Actual costs vary widely aroundthese averages, but the magnitude of the differencebetween the West and China—a ratio of 20 to 1—

cannot be ignored. It is worth noting that somelabor savings are hidden—for example, in over-head, repair, and maintenance costs.

For services, the sustainable cost advantage to begained by outsourcing to India, for example, is 50to 60 percent. Outsourcing the same services to anEastern European vendor would mean achievingsavings in the 30-to-40-percent range. In absoluteterms, typical fully loaded costs for an overheadprocess employee—for example, in accounting—are $26 to $30 per hour in the United States, $10 to$12 per hour in India, and $15 to $18 per hour inEastern Europe.

Lower capital-investment costs. Another important—and often overlooked—source of advantage is lowercapital-investment requirements. Whereas thelower labor costs benefit the P&L, lower capitalinvestments can mean saving significant amounts ofcash on the balance sheet. In an analysis of totalreturn on capital, we observed that the combina-

Mapping the Sources of Global Advantage

16 BCG REPORT

0 25 50 75

Range of net savings after transportation, logistics, and

import duties (%)Category Example

• Aluminum extrusions

• Compressors

• Call centers

• Transformers

• Electric motors

Components

Finishedproducts

Services

E X H I B I T 5

LCCS CAN BRING DOWN THE COST OF PRODUCTS BY AS MUCH AS 40 PERCENT AND THE COST OF SERVICES BY AS MUCH AS 60 PERCENTU.S. Example

SOURCE: BCG analysis.

tion of lower product cost and lower capital invest-ment can have a dramatic impact on profitability.Capital investment requirements are lower for twomain reasons: lower factor costs and a higher pro-portion of manual labor.

Some factor costs can be lower in LCCs. Machinesand tooling—when they are produced locally—ben-efit from the lower cost environment. Often theycost at least 50 percent less than in the West. Wehave observed significant discounts for stampingpresses, CNC machines, and power tools. While theequipment often has a different design from equip-ment used in HCCs, it provides essentially the samefunctionality across the range of products on whichit is used. Government incentives also lower the costof investment—for instance, in land.

LCCs also offer the opportunity to use a higher pro-portion of manual labor. Experienced companiesredesign the way their products are manufacturedto reduce automation and increase labor. This low-ers capital investment significantly. For example, aleading consumer-durables company has elimi-

nated all conveyor belts in its Chinese factories.This reduction in automation does not entail anyloss of quality. The company achieves world-classquality in its Chinese operations, equivalent to thequality it achieves in its Western plants.

Companies that have been operating in China reportthat, in the aggregate, they can drive their invest-ment requirements to as low as 30 to 40 percent ofwhat would be required in their home countries.

Lower domestic sourcing costs. Also fueling cost advan-tage is the fact that many LCC suppliers are willingto accept relatively low profits in the short tomedium term in return for strong growth. This is arational strategy on their part because they can cre-ate more wealth by focusing on explosive growththan by seeking short-term profits. In addition,some industries benefit from lower materials costsin LCCs, though this advantage varies widely interms of both industries and countries. For exam-ple, some companies save up to 30 percent on fab-ric and 20 percent on plastics by buying raw materi-als locally.


E X H I B I T 6

SAVINGS ACHIEVED IN LCC MANUFACTURING DERIVE FROM SEVERAL SOURCESTypical Composition of Savings


Labor savings of up to 95%

“Super-scale” facilities

Savings on raw materials such as• Fabrics (up to 30%)• Plastics (up to 20%)

• Lower equipment cost• Less equipment

Special incentives Government incentives such as subsidized energy and reduced tax ratesScale

Labor Assets Materials, supplies,

and tooling

4

1 2 3

5

Larger economies of scale. LCCs are building produc-tion facilities of unprecedented dimensions. Newlybuilt capacity will benefit from substantial volumeadvantages. In sectors as diverse as TV sets and alu-minum extrusions, Chinese plants, for example, arebecoming huge production hubs in order to serveboth as global “super-scale” export bases and assources for a rapidly growing—and potentially mas-sive—domestic market. By combining the volumesfor domestic and global export sales, these facilitiesare destined to set world standards in their respec-tive categories.

Government incentives. Beneficial government poli-cies deeply influence the cost advantage. China inparticular has become very adept at stimulatinggrowth. Besides providing tax incentives and lower-ing import duties, the central Chinese governmenthas set up more than 500 special economic zones toattract foreign investment. Local governments havefollowed suit and created several thousand zones oftheir own. One BCG client claims that it received somany incentives for one of its factories that its con-struction was virtually free of charge.

India, for its part, does not tax the export revenues ofBPO firms. In addition, state governments in Indiaprovide land at subsidized rates in “IT parks,” whereBPO firms can set up shop at relatively low cost.China and India represent a general trend amongLCCs toward increasing sophistication in offering arange of incentives to attract foreign capital.

Why the cost advantage will persist. Many observershave suggested that the LCC cost advantage willevaporate in the foreseeable future (variouslydefined as the next 5, 10, or 20 years). They arguethat while LCC factor costs are currently low, theywill increase much faster than costs in developedcountries, thereby narrowing the cost gap. We main-tain, in contrast, that the cost gap not only is unlikelyto close within the next 20 years but in some casesmay actually increase, for several reasons.

First, and perhaps most important, leading compa-nies operating in some LCC markets have consis-tently been able to lower their purchase costs overtime, achieving annual cost reductions that signifi-

cantly exceed what can normally be achieved in theWest. For instance, 10 percent improvements incost per year are not uncommon for products newlyrelocated to China. Notably, this annual perfor-mance improvement comes on top of the initial 20-to-40-percent savings that companies typicallyachieve by moving operations to China. The subse-quent annual improvements stem from expandedscale, deepening relationships with suppliers, and avery competitive environment. Obviously, such con-tinuous improvements in cost positions constitute agrowing advantage for companies that make themove early.

Second, the growth of wages in China and India willbe limited because of the enormous reservoir ofunderemployed people in these countries. Chinastill has more than 800 million people—some 12percent of the world’s population—living in thecountryside. They are expected to exert very strongdownward pressure on wages for low-skilled posi-tions over the next few decades. Although there willbe more pressure on higher-skilled positions, thesupply of candidates for such positions is also verylarge. For example, several million engineers grad-uate from Chinese universities each year. On theother hand, China currently has a severe shortageof experienced managers, which is driving salariesup and creating a war for talent—especially formanagers with at least ten years of experience. Thisis an important challenge that companies mustactively address. India, for its part, has a pool of 25million highly educated English-speaking workers,expanding by a million every year. So the rapidgrowth of IT and BPO services has had a negligibleimpact on wage rates. Moreover, India is one of thefew countries in which the working-age populationis projected to grow for the next 40 years or so,keeping wages low.

Third, the current differential in labor rates is sobig that the gap between them will remain substan-tial for the foreseeable future, even if there are dou-ble-digit differences in the rates at which they grow.(See Exhibit 7.) In fact, the gap in real wages willactually increase in absolute value, at least for thenext several years, because the bases are so widelydifferent. Typically, a U.S. or Western European fac-

18 BCG REPORT


E X H I B I T 7

THE LCC LABOR COST ADVANTAGE WILL NOT SHRINK BUT EXPAND IN THE NEXT SEVERAL YEARS

SOURCES: The Economist Intelligence Unit; Euromonitor; S&P DRI; U.S. Department of Labor; BCG analysis.

Indonesia

China

India

Russia

Thailand

Malaysia

Mexico

Poland

Brazil

Hungary

Czech Republic

Taiwan

Korea

Spain

Italy

France

United Kingdom

Canada

Japan

United States

Germany

10CAGR (%)

Expected change, 2003–2009

8

7

8

6

5

5

6

6

7

7

4.5

4.5

2.5

2.5

2

2

2.5

1.5

2.5

2

0.30

0.47

0.56

0.88

0.82

0.71

0.83

1.13

1.15

1.77

1.82

1.73

3.02

1.97

2.64

2.24

2.27

2.94

1.93

3.48

3.86

$/hour4035302520151050

0.390.70

0.801.27

1.121.68

1.502.38

1.962.78

2.092.80

2.453.28

2.703.83

2.753.90

3.535.30

3.645.47

5.677.40

9.9913.01

12.3214.29

16.5619.20

17.7720.01

17.8720.14

18.4421.38

20.6822.61

21.8625.34

30.6034.46

Average hourly compensation of production workers, including benefits, 2003 versus 2009 ($)

Average of the 11LCC countries studied:2003: about $2.10 per hour2009: about $3 per hourIncreasing 6.5% per year

2003 2009

tory worker costs an employer $15 to $30 per hour.A Chinese factory worker earns less than $1 perhour—a gap of $14 to $29. If wages increase at anannual rate of 8 percent in China, while in theUnited States and Germany they increase at annualrates of 2.5 percent and 2 percent, respectively, in2009 the average hourly wages will be approxi-mately $1.30 in China, $25.30 in the United States,and $34.50 in Germany. So, despite the disparity ingrowth rates, the gap will have expanded by up to$4 (assuming that there is no significant change inthe relative values of the countries’ currencies).Government-mandatedlabor costs, such as work-ers’ compensation, willfurther widen this gap.

In contrast, labor costs inthe smaller Eastern Euro-pean countries and Mexico might come undergreater pressure. These countries will remain com-petitive vis-à-vis the United States and WesternEurope, but they will likely slip further behindChina and India because they start from a relativelyhigh cost base and generally experience substantialannual increases.

The hidden costs of LCC operations. The costadvantage gained through LCC operations, whilesubstantial, can nonetheless be significantly erodedby additional costs if companies don’t control themaggressively. Establishing and operating an LCCsupply chain entails making a number of initial andongoing investments that can reduce a company’shoped-for savings. Identifying and quantifyingthese additional costs are an essential part of assess-ing the overall economics of alternative options forsourcing. Companies that neglect to explicitly con-sider these “hidden” costs in their assessments canend up with unrealistic or unsustainable economicexpectations—and unpleasant surprises halfwayinto the effort. The additional costs specific to operating in LCCs typically fall into four cate-gories.

One-time LCC setup costs. These expenses include thetypical costs for establishing new businesses: identi-fying and qualifying suppliers, establishing a reli-

able logistics chain, tooling, and training, amongothers. Depending on the industry and the com-plexity of the business, these costs typically add 10to 40 percent to the cost of goods sold (COGS) inthe first year. For companies that have an estab-lished LCC business model and supply stream, one-time setup costs in a new LCC location are typicallyhalf or less than half of the above range.

On the services side, one-time costs include vendor-identification, internal-process-redesign, infrastruc-ture-redesign (including IT systems, software, and

network), vendor-train-ing, process-transition,and pilot costs. Typically,these costs could be 25 to75 percent of the firstyear’s cost of operations.If redundancy costs are

included, the typical payback period from BPOcould rise to between two and two and a half years.

Ongoing LCC risk-management and opportunity costs.Companies tend to underestimate the amount andquality of infrastructure required to run a high-vol-ume LCC supply chain on a day-to-day basis. Closelymonitoring the quality of domestic suppliers, pro-viding buffer inventories through a longer-than-usual logistics chain, and hedging exchange ratefluctuations in often highly volatile financial mar-kets are just a few examples of risks that can and need to be managed—at a cost. Depending onthe degree of economic development of the hostcountry, the geographic distance to the target mar-kets, and the scale of a company’s LCC program,these costs typically add another 2 to 5 percent tothe COGS.

Exit costs for legacy assets and resources in high-cost coun-tries. In cases where LCCs are being used to replaceexisting high-cost production or services, compa-nies must take into account the full range of exitcosts for those facilities and resources. Removingthem from the company’s ledgers can present amajor execution challenge and financial burden.While, in some cases, economically attractive alter-native uses may be available, in most instances exit-ing marginal capacity means incurring layoffs, asset

20 BCG REPORT

Companies that neglect to explicitly consider

“hidden” costs can end upwith unpleasant surprises.

write-downs, and site cleanup programs, causingripple effects that can affect customers and relatedbusiness units. The amount of restructuringrequired often serves as a major reason not to moveproduction facilities, especially for companiesbased in Europe. Nonetheless, for many companiesit will be necessary—and worthwhile—to pay legacycosts, however painful, in order to take advantageof lower production costs that will allow them toremain competitive. The key here is to arrive at arealistic assessment of legacy costs and to develop aplan to minimize them over time.

Most companies can make fairly reliable estimatesof people- and asset-related costs. However, theyoften underestimate costs in four major areas: sen-ior management time, environmental liabilities,business lost in the migration process, and highercosts relating to the remaining business units,which are burdened with paying for formerlyshared services and infrastructure. Exit costs varywidely, driven by the nature of the operation, theaverage tenure of the work force, and the value,location, and fungibility of assets. Our researchindicates that the total legacy-related costs for mostmoves to LCCs fall in the range of $25,000 to$100,000 per transferred full-time employee (FTE).For an industrial operation with 200 FTEs, forexample, this would mean a one-time cost of $5 mil-lion to $20 million. Such costs—together with thedifficulty of the shutdown process itself—act as apowerful impediment to the movement of existingproduct lines to LCCs, as we discuss in the next section.

Long-term “bad will” costs in the home countr y.Companies planning to move operations to LCCsneed to anticipate a range of possible negative reac-tions in their home countries. These effects couldinclude losses of productivity on the part of dis-gruntled employees, reduced labor flexibility aris-ing from deterioration of relations with unions, anddamaged relationships with home-country govern-mental agencies. In many cases, of course, compa-nies do not shut down their home-country opera-tions entirely, preferring to operate both globallyand locally. Often there are opportunities to main-tain the most efficient of the home-country opera-

tions while closing only the least efficient, thusboosting home-country productivity.

All these “hidden” costs must enter into each com-pany’s assessment of the magnitude of the potentialcost advantage it stands to gain by including LCCsin its value chain. At the same time, it is importantto factor in several other kinds of advantage to begained. Primary among these, as noted above, aremarket access and first-rate capabilities.

The Market Access Advantage

While companies have traditionally relocated theirmanufacturing operations to LCCs primarily to takeadvantage of lower costs, once they are establishedin those countries, they are naturally positioned toserve local markets. And as LCC economies mature,their internal markets can develop very fast, allow-ing the established companies to compound thecompetitive advantage they originally createdthrough lower costs. In China, for example, themarket for machine tools is almost twice the size ofthe U.S. market—and growing 20 percentage pointsfaster. (See Exhibit 8, page 22.)

GE Medical Systems provides a striking example ofthe market access advantage. As wealth increased inChina, GE Medical Systems decided that it was timeto enter the market. It did so by transferring tech-nology to local Chinese R&D centers, which thendesigned “Chinese” versions of GE’s products, offer-ing roughly 80 percent of the functionality ofWestern systems at just 50 percent of the price.These systems met local needs so well that GEquickly became the market leader in China. Further-more, the Chinese product has also proved a hit insome Western countries, where its unique tradeoffbetween price and functionality appeals to certainmarket segments. In short, by focusing on the localChinese market, GE has both built a profitable localmarket and created a new worldwide segment.

China’s growing role. China is emerging as a veryspecial entity in this respect. For many industrialgoods, as well as consumer goods, China is alreadythe world’s largest market—as well as the world’slargest producer. For instance, China is already the


largest market for machine tools, the second-largestmarket for transmission and distribution equip-ment, and the fourth-largest market for automo-biles (including passenger cars and trucks). Andthese markets are growing fast. From 2001 to 2002,China’s machine-tool market grew by 20 percentwhile the U.S. market shrank by 36 percent. Inmany instances, domestic LCC suppliers cannotmeet the requirements of LCC customers, openingup significant opportunities for Western companieseither to establish themselves as suppliers of choiceor to reinforce their existing positions. Metal-cut-ting tools are a good illustration of this opportunity.While domestic LCC suppliers can meet the lower-

end specs, international brands such as Sandvik andKennametal are the preferred vendors for the rap-idly growing high-end market.

Little wonder, then, that leading companies arestarting to generate a large portion of their globalsales in China. A specialty metals producer told usthat he expects half of his company’s global growthto come from China. Similarly, an electrical compo-nents manufacturer anticipates that more than 50percent of new demand in the next 20 years will bein China. ABB, Emerson, Schneider, and Siemenshave seen their China sales grow substantially overthe years; we estimate that as early as 2005, China

22 BCG REPORT

E X H I B I T 8

CHINA OFFERS LARGE, RAPIDLY GROWING DOMESTIC MARKETSRelative Size and Growth of Chinese Markets Versus U.S. Markets, 2001

SOURCES: U.S. Census Bureau; Gardner Publications; S&P DRI; ABS Energy Research; Dresdner Kleinwort Wasserstein (DrKW) research; China Statistical Yearbook;

press search; BCG analysis.

1Including switching gear, high-voltage insulated cables, power and distribution transformers, overhead lines, insulators, bushings, and fittings.

2Including gas and steam turbines, boilers, and hydroelectric equipment; market growth estimates are based on projected electricity consumption.

3Cars and light trucks.

4Machinery for woodworking, plastics and rubber, paper, textiles, and food products.

5Annual growth rate in China minus annual growth rate in the United States.

Transmission and distribution1

Primary metals

Machine tools

Power generation2

Computer equipmentIndustrial machinery4

Agricultural, mining, and construction equipment

Plastics and rubber

productsCutlery and hand tools

Fabricatedmetal

products Measuring and controlling devices and office machinery

Motor vehicles3

Pumps, compressors, and material-handling equipment

10

20

30

40

50

60

100

170

0 5 10 15 20 60

Growth differential (percentage points)5

Consumption index, China versusUnited States (%)

Telecommunication equipment

will account for more than 5 percent of their totalsales. The global competitive positions these com-panies are building today will be difficult to over-come for players who choose to sit it out.

The challenge in India. In India, the challenge ismarketing to the “bottom of the wealth pyramid”—a reference to the spending power of the huge low-income population in both the urban and the ruralsectors. Reaching this market requires new productdesigns, new pricing strategies, new channel rela-tionships, and new distribution logistics. Therewards for meeting thischallenge can be huge. Forexample, Unilever’s Indiansubsidiary, Hindustan Lever,contributes close to 10 per-cent of its global parent’sbottom line—far more thanits organizational equivalents in other regions.

It is worth noting that the market access advantageis not limited to massive countries such as Chinaand India. Thailand, for instance, has been thelargest regional market for pickup trucks over thepast decade. As a result, several car companies haveinvested in assembly plants there. Initially, thesewere small plants, sized to meet local demand.However, as the local industry matured, it attractedadditional investment—to the point whereThailand is now a worldwide hub for a whole cate-gory of complete platforms for several leadingautomakers.

The Capabilities Advantage

As one BCG client explained to a BPO vendor inIndia, “I am not simply looking for labor cost advan-tage; I am looking for labor skill advantage.” Thisstatement reflects this executive’s understanding ofthe multiple ways that LCCs can contribute to com-petitive advantage. The global companies that areleading the LCC charge know that while the LCC-based cost advantage will persist relative to labor intheir countries of origin, that advantage will erodeas soon as their competitors follow them to theLCCs. So these companies are seeking to build sec-ond-order benefits to reinforce the cost advantage.

The noncost advantages that companies are reap-ing by operating in LCCs include skill, flexibility,quality, productivity, and R&D speed.

Skill. In a recent BCG project in the United States,we repeatedly came across deficiencies in workers’skills and qualifications as a major challenge to thefuture competitiveness of manufacturing enter-prises. More than 40 percent of the companies wetalked with expressed significant concerns aboutthe erosion of skills in the work force. They citedmachine operators who are unable to handle

specialized equipmentproperly or to make thetransition to new workmaterials. In contrast,LCCs provide largepools of skilled workerswho are eager to apply

their “craftsman” talents. In addition, companiescan tap into a large pool of talented, trainable, andloyal workers who are eager to move up the skill lad-der. Moreover, skill is available not only in manu-facturing but across the board in most service areas,such as engineering and BPO. An excellent exam-ple, discussed above, is GE Medical Systems, whichhas designated India as its center of excellence fora range of products, leveraging not just lower man-ufacturing costs but also highly sophisticated designand manufacturing skills.

Flexibility. LCCs provide multiple layers of addedflexibility and agility for Western companies. Liketraditional, home-country outsourcing, outsourcingto LCCs allows companies to make major portionsof their cost structures variable. As explainedabove, companies that invest in LCC productioncapacity will likely spend less on equipment thanthey would in a Western country because machin-ery is generally less expensive and manufacturersuse less of it, substituting lower-cost manual labor.The different balance between equipment andlabor provides two significant benefits. First, thevariable portion of the cost structure increases,making the operation more immune to volumechanges, whether seasonal or cyclical. Second,because less dedicated machinery is used, compa-nies can respond more rapidly to sudden changes


The noncost advantages ofLCC operations include skill,

flexibility, quality, productivity,and R&D speed.

in demand across product lines and can launch newproducts faster—valuable capabilities in the compe-tition to win customers and boost revenues. In addi-tion, the greater use of skilled flexible labor allowscompanies to manufacture a greater number of cus-tomized products, which is not feasible in a highlyautomated Western setting. Thus customizationdone in an LCC can open up higher price niches,provide better competitive differentiation, andboost overall profitability.

Companies looking to move production to LCCsoften start with a view that they will achieve thelargest savings on their highest-volume products.Our experience shows, however, that frequently theopposite is true. Because of much lower toolingcosts and the ability to substitute labor for equip-ment, smaller-volume products—for which fixedtooling and equipment costs per unit are highest—often realize the greatest advantage.

To fully leverage lower-cost labor, some companiesare further reducing their reliance on capital—or,as one executive put it, practicing “decapitation.”As discussed above, they are doing this by redesign-ing their products to permit more manual assemblywithout sacrificing quality. The cost advantage cre-ated by this reduction in capital investment is thenfurther reinforced by reductions in the timeneeded to build the tooling—which in turn sup-ports more experimentation with small-volumeproducts. All of these flexibility advantages con-tribute to overall competitive advantage in terms ofcost, product variety, and time to market.

Quality. Another way that LCC capabilities con-tribute to competitive advantage is in quality. Oncethe initial supply bugs are worked out, the quality ofend products produced in LCCs is equivalent to thequality achieved in HCCs. Companies that sourcefrom LCCs, as well as those that establish their ownmanufacturing or processes there, confirm this ob-servation. Once an LCC plant has moved along itslearning curve, it can achieve quality that is equiva-lent to or even higher than that achieved by the com-pany’s best plants in the West. Obviously, there areoccasional exceptions, mainly in sectors in which theLCC supply base is not yet fully developed.

In terms of service quality, we have commonly seenimprovements ranging from 30 to 50 percent abovethe levels specified in the service level agreements(SLAs) signed with vendors. In services, in particu-lar, the quality of labor is an added advantage.Activities that are “back office” for industrial com-panies are of course very much “front office” forBPO companies, which therefore pay extra atten-tion to the quality of their employees. For example,a call center employee in Western Europe or theUnited States is typically a high school graduate,whereas in Poland or India he or she would typi-cally be a college graduate. In addition, LCC serviceproviders generally use higher levels of computeri-zation, combined with rules-based process simplifi-cation, to eliminate errors.

Productivity. The issue of productivity often cloudsthe debate about the value of using LCCs. Peoplewho are not experienced with LCCs commonlyassert that while labor costs in the United States andEurope are much higher than labor costs in LCCs,the higher costs are justified by much higher pro-ductivity. In our experience, this claim is ofteninvalid. Part of the problem lies in the definition ofproductivity. It is true that in LCCs the output percapita is lower. But this is mainly because LCCs usefar less capital than do developed countries. In theWest, where companies invest heavily in automa-tion, head counts are kept low and output percapita is high. In LCCs, companies can use less cap-ital and more labor. So while per capita productiv-ity is lower, capital productivity is far higher. Anyanalysis of relative productivity should include bothmeasures.

Companies often look at average country-level pro-ductivity data. To be meaningful, the data must bede-averaged to remove distortions caused by, forinstance, the many millions of farmers in China orthe xiagang—workers in state-owned factories whoare paid a nominal wage to stay home. To be mean-ingful, productivity data must be de-averaged to thelevels of individual plants and products.

Similarly, country-level productivity data must bede-averaged to permit apples-to-apples comparisonsof the level of value added to products. On average,

24 BCG REPORT

products in high-cost countries have a higher levelof technology and intellectual capital invested perunit of output. This distorts the view of how pro-ductive the workers in LCCs actually are.

In fact, the productivity of workers in LCCs is usu-ally high. Here again, most companies we havetalked to for this report or worked with directlyshare a common view, based on their own experi-ence: For manual tasks, the productivity of workerson the factory floor, with proper management andprocedures, is equivalent to what they find in theWest. For tasks requiring skilled labor, productivitycan be even higher in LCCs than in the West, espe-cially for fairly routine tasks. One reason for thisdifferential, according to several multinationalcompanies we spoke with, is that midlevel engineersin LCCs tend to be more motivated than midlevelengineers in the West. In addition, manufacturingcompanies find it easier to attract top talent inLCCs than in the West. Taken together, these fac-tors often translate into higher average productivityon the part of skilled labor in LCCs.

R&D speed. One of the most intriguing advantageswe have come across is faster (and lower-cost) R&D.Because companies that are established in LCCseliminate a lot of automation and tooling require-ments from their operations, they can be much

more responsive to R&D requests. Testing ischeaper because it involves less tooling. It is alsomuch faster, especially for very new products forwhich no base tooling exists. This flexibility, cou-pled with the much lower cost of skilled researchstaff, allows companies to dramatically increase theamount of research they do—often three to fivetimes more than in the West for the same budget. Inaddition, having team members working in oppo-site time zones allows companies to advance R&Dprojects around the clock.

* * *

As all the trends discussed above come together toenhance the attractiveness of a given country, thepace of relocation accelerates, creating a kind ofcritical mass. Clearly this is now happening inChina for manufacturing and in India for services.As more and more companies arrive seeking sup-pliers, they spur the development of infrastructure,which in turn lures more companies seeking moresuppliers. Communication costs drop and formerlyscarce resources become more readily available,attracting still more companies. Our researchdemonstrates that this complex set of interactionsplays an important role in explaining why compa-nies that just months ago were “watching and wait-ing” are now making the move to LCCs.


The Strategic Challenge: What to Relocate Where?

26 BCG REPORT

Deciding which elements of a company’s valuechain to relocate to which LCC is complex.Although general rules of thumb are emerging,they require tailoring to each company’s unique sit-uation. It can be extremely helpful to put in place astrict and systematic decision-making process, inwhich each economic decision is based on a com-prehensive analysis of the risks the company faces.Because of the complexity of the multiple factorsinvolved in these strategic analyses, companiesshould consider all LCC investment decisions time-limited and should revisit them regularly. The basicdecisions to be made are which products and ser-vices should go to LCCs, which should not go,which LCC or LCCs they should go to, and how toassess the economics involved in each decision.

As a first step, companies should use the LCCMatrix, described above, to generate a systematiclook at their own playing field: to identify whichproducts and customers are in motion and, as aconsequence, which assets are likely to become lia-bilities. The LCC Matrix creates clarity for execu-tives for whom the LCC issue is often still a “blackbox” and whose primary source of information onthis issue may be the generic messages of the massmedia. It helps managers make discrete, informeddecisions, while at the same time providing a com-munication tool for strategic-planning purposes. Inaddition, it allows companies to benchmark them-selves against industry averages and peer activity.Because most data can easily be updated regularly,the tool enables companies to monitor their mar-kets continuously and spot trends early.

What Should Go?

To relocate any products or services successfully toan LCC, a company must be able to manage the dis-tance disadvantage and still meet delivery require-ments in terms of lead-times and flexibility. Buteven if the company can clear these hurdles, not all

product and service families are created equal.Some are far better candidates than others for relo-cation to LCCs. These include products and ser-vices with high labor content, high growth poten-tial, large LCC markets, developed bases ofsuppliers in LCCs, and standard manufacturinginterfaces or processes. (See Exhibit 9.)

Products and services disadvantaged by high laborcontent. Not surprisingly, these are the prime can-didates for relocation to LCCs. While this statementseems obvious, a remarkable number of companiesget this part of the analysis wrong. Part of the prob-lem is that the very measures used to assess thepotential benefits of moving often mask those ben-efits. Time and time again, we have found flawedfinancial analysis justifying the wrong decisions—usually to keep a product at home. For example,companies sometimes fail to take overhead costsinto account in calculating the total cost of home-country manufacturing. Or they may neglect toapply capital charges to product and process costs.

Similarly, many companies overlook the fact that alot of labor content is hidden in purchased partsand components. Today most modern industrialcompanies have become engineering and assemblycompanies, buying most of their components ratherthan making them. As a consequence, the coststructures of large parts of their value chains arenot transparent to them, and the opacity of theparts they cannot see lulls them into a state of falseconfidence.

For example, a U.S. motor manufacturer hadinvested heavily in automation, relocated its plantto the southern part of the United States, and out-sourced aggressively. Management estimated thatlabor represented only 10 percent of its costs andon that basis believed that the company wasimmune from LCC-based competition. In fact, oncethe company recognized all the labor going into itspurchased parts, components, and materials, the


labor content of the motors it produced turned outto be closer to 40 percent of costs—representing con-siderable vulnerability to LCC-based competition.

In services, the processes most easily relocated toLCCs are those that have few “handoffs,” have well-defined process maps, or are rules based (for exam-ple, they have training manuals). Of course, notevery backroom process can be outsourced to anLCC vendor. Certain statutory, strategic, and cus-tomer-facing processes—such as controllerprocesses, taxes, and legal procedures—generallyhave less migration potential. Most other processes,however, are candidates for possible relocation. Inevaluating the exportability of each process, it isimportant to take into account factors such as howinterconnected the process is to other processes,and whether standard operating procedures andtraining manuals are available for it. We have foundthat anywhere from 30 to 40 percent of nonmanu-facturing roles can potentially be performed bycompany employees or vendors in LCCs.

Products with high potential for growth. Such prod-ucts are easy to relocate to LCCs, while “sunset,” orlow-growth, categories are often difficult to shift.

This important point may appear counterintuitive:one might expect that the cost advantage of movingto LCCs would be all the more important in lessdynamic categories, where the competitive battle isbased on price only and therefore on costs.However, there are strong economic drawbacks tomoving products in such categories.

Relocating purchasing or production to LCCsrequires an initial investment of both cash andresources that sunset product lines often cannotafford. This investment includes, for instance, thecosts of closing home production facilities, buildinga plant in the LCC, and developing a network ofLCC suppliers. Product categories that generate lowmargins will find it difficult to fund such efforts.

The head of Chinese manufacturing for a largeindustrial company uses a product’s potential forgrowth as one of his main criteria when discussingpotential product relocations with his internalclients. The company has an “internal market” forproduction, whereby operating units bid out theirproduction to several potential internal and exter-nal suppliers. Time and time again, the head ofChinese manufacturing has found that for low-

E X H I B I T 9

SEVEN KEY CRITERIA CAN HELP COMPANIES DETERMINE WHICH PRODUCTS TO OUTSOURCE TO LCCSAND WHICH TO KEEP AT HOME


Intellectual property content

Improve competitiveness of home-based manufacturing

Emphasize technology-based differentiation

Intensify new-product R&D

Rediscover value of service, such as short lead-times

Drive aggressive productivity improvements

Low HighLabor content

Size of LCC markets

Degree of standardization

Growth of demand in home market

Degree of development of LCC supplier base

Relocate to LCCs

Select supply-chain model

Decide on scope:• which products• which services

Decide whether and how to capture LCC domestic market opportunities

Decide whether to make or buy:• ownership arrangements• supplier selection

Low High

Low High

Low High

Low High

High Low

Logistics requirementsHigh Low

28 BCG REPORT

growth products, a full cost analysis has ended withproduction staying in the home country. He nowsees bidding for products of this type as a waste ofhis group’s time and money.

Perhaps the most persuasive reason to move growthitems to LCCs is to build your strongest position inyour best products, not your worst ones. Movingsunset categories to LCCs while leaving the “com-pany jewels” in a high-cost environment does notmake a lot of strategic sense. Experienced compa-nies find other ways to deal with sunset product cat-egories—including, whenthe time is right, pruningthem from their portfolios.

Finally, it is much easier toconvince labor unions of themerits of shifting additional or new jobs to LCCs,rather than existing jobs. Many companies havetaken this approach to outsourcing processes,focusing first on processes that are resource con-strained. For example, an executive at one companywe worked with, facing a cap on his R&D budgetand an ever growing pipeline of new projects,decided to outsource parts of the company’s R&Dprocesses—including 3-D modeling, simulation,and component testing—to an LCC. He thenoffered these LCC-based services to his R&D teamat zero cost, as an incentive for the team to use them.

Products with large LCC markets. As discussedabove, LCC markets are becoming an integral partof global strategy. Product families that have largeactual or potential markets in LCCs are obviouscandidates for relocation. In this respect, China’semergence has rewritten the basic calculus of relo-cation. In the past, many companies tended to con-sider LCC markets as a mere footnote to their over-all strategies—if that. The vast majority of boththeir sales and their prospects for growth wereinvariably in developed economies. Today Chinahas turned this logic on its head. Especially forupstream industrial companies—those active inmetals, machine tools, and automation equipment,for instance—the growth of China’s domestic con-sumption is compounded by the massive relocation

of industrial companies to China, creating marketsso huge and fast growing that companies cannotafford not to serve them.

Products and services with developed LCC supplierbases. Clearly, products and services for which well-developed supplier bases exist in an LCC are likelyto be easier to transfer than those for which suppli-ers must be developed. Outsourced services inIndia—whether entire processes or call centers—are a good example. Over the last few years, Indiahas built a critical mass of skills and infrastructure

in this area. The exist-ing supply base attractsnew business in a vir-tual circle: a large num-ber of entrepreneursoffer these facilities,

attracting an inflow of skilled people and the devel-opment of telecom infrastructure (fast becomingworld class), which in turn attracts more businessand new entrepreneurs.

Auto components in Thailand have followed thesame pattern. From a small base ten years ago, thegradual establishment of manufacturing facilities inRayong, south of Bangkok, has led to the develop-ment of a base of suppliers, facilitating the entry ofnew players. A similar pattern developed inMalaysia for electronics, allowing Malaysia to builda 20 percent share of total LCC exports of electron-ics to the United States—quite a feat for this rela-tively small economy.

Products with standard manufacturing interfaces,and services with standard processes. Products withthese manufacturing characteristics will be fairlyeasy to relocate to LCCs because they do notrequire specialized human resources for routineproduction. It is important to note that these char-acteristics are independent of the technologicalcomplexity of the products in question. Electronics,for instance, moved early and aggressively to LCCs.Plans have been announced to construct some 70wafer-fabrication plants in China, at a total esti-mated cost of well over $100 billion. Intel has builtR&D labs in China, and Sony has taken its laptopPC assembly there. AMP, one of the world’s leading

China’s domestic markets areso huge and fast growing thatcompanies cannot afford not

to serve them.


manufacturers of electrical and electronic connec-tors and interconnection systems, is moving muchof its production to China, including even its highlyproprietary plating operation, which must be donein-line.

On the services side, Capital One, Citibank, andProvidian have all shifted their telemarketing func-tions to India. Since telemarketing focuses on out-bound calling, it requires little interaction withother functions; moreover, it is largely script based,making it easy to relocate.

What Should Not Go?

Some products and services are intrinsically lesssuitable for LCC sourcing. These include industrialproducts that are not disadvantaged by labor cost,as well as products that require production cus-tomization, such as high-end machine tools andspecialized drilling equipment. Similarly, servicesrequiring considerable interaction and decisionmaking—such as gathering market intelligence anddoing product planning—are less likely to besourced from LCCs. While there are exceptions toevery rule, products and services that should stay athome generally include those for which protectionof intellectual property is critical, those withextreme logistics requirements, those with veryhigh technology content or performance require-ments, and those for which customers are highlysensitive to the location of production.

Products and services for which protection of intel-lectual property is critical. Concern about potentialviolations of intellectual property (IP) is a majorissue in most LCCs, and especially in China. Thisconcern is based on the difficult experiences ofearly movers, the often unclear laws governingintellectual property in some LCCs, and the reluc-tance or inability of some LCC legal systems to pro-vide timely redress. Many companies simply do notbelieve that they can deploy strategically importantprocesses or technology in this context. However,this attitude is changing quite rapidly; as more andmore companies develop their own operations inLCCs, they feel more confident that they can main-tain better control over their IP.

In addition, it is important to note that approachesto IP protection vary widely among LCCs. India, forexample, has intellectual property laws based onthe Anglo-Saxon system familiar to most Westerncompanies. Though the Indian legal system movesslowly, the protection of intellectual property is anestablished practice. Microsoft, for example, hasnoted that India has the lowest piracy rate amongthe “BRIC” countries—Brazil, Russia, India, andChina. In addition, for companies seeking to out-source services, IP concerns may suggest setting upcaptive offshore service centers, rather than out-sourcing to vendors—or not outsourcing at all.

Products with extreme logistics requirements.Some products must meet very short lead-timecycles, as in just-in-time production in the automo-tive industry. Most LCC supply chains have three- toeight-week order-to-delivery times. Therefore, theywould not meet these stringent requirements—orwould require prohibitively expensive logisticsinfrastructures, such as significant safety stocks onboth the sending and the receiving ends of theprocess, which would reduce working capital pro-ductivity. In other cases, extreme volatility indemand might aggravate the lead-time issue. Forexample, in the building and construction industry,weather conditions often drive purchasing up ordown significantly beyond original order forecasts.Responding to these sudden short-term changes,when response is even possible, would require suchsubstantial investment in logistics infrastructurethat the LCC cost advantage could be obliterated.

Products and services with very high technologycontent or performance requirements. These cate-gories sometimes cannot initially be moved toLCCs, simply because necessary resources are lack-ing. Advanced technologies—including both toolsand the human resources trained to use them—often are just not available in LCCs at this stage.And although it is physically possible to import orrelocate the necessary resources, the cost of doingso would far outweigh the advantages to be gainedin the LCC. However, this technological or per-formance boundary is an ever moving target.Investments by the LCCs themselves and by early-mover companies are rapidly changing the rules of

30 BCG REPORT

the game. An example is GE’s nanotechnologyresearch in India.

It is essential to explore this issue relative to eachindustry in each LCC location. For instance, it iscommon wisdom today that certain metals—forexample, high-grade specialty steel—cannot besourced from China. This is especially true in thefast-growing categories needed for appliances andcars. However, this gap is closing fast, thanks to mas-sive investments by both global and local producers.In fact, many product categories may face an over-supply situation in the next several years.

Plastic parts are another example. Companies inthis industry started working in China by producinglow-tech, commodity-material injected parts, usingimported resins and molds. Clusters of activitiesgrew around Guangzhou and Ningbo. Then com-panies started to make their own molds locally. Atfirst they had to use poor materials that didn’t lastlong. As profits accrued, they could afford high-car-bon steel for better molds, which led to improveddomestic resins.

In evaluating LCC capabilities in this respect,Western companies need to keep very open minds,resisting the natural tendency of their technicalcenters at home to produce conservative assess-ments of the capabilities of LCCs. Companies needto perform frequent and exhaustive scans of theenvironment.

Products for which customers are highly sensitive tothe location of production. In some cases, such ascertain military contracts, stringent local-contentrequirements prevent companies from sourcingfrom LCCs, at least for the time being. In othercases, customers may have strong feelings about var-ious qualities—perceived or real—associated withspecific production locations. All else being equal,most customers would choose home production atLCC prices. The key is to understand the tradeoffsthey are willing to make.

In industrial sectors, this concern can be mani-fested as an issue of transition management.Companies sometimes find that when they relocateproduction to an LCC, their customers require

them to undergo a full requalification process—even if they relocate only a single key component.Although the process can be expensive and compli-cated, if the company can provide high quality atlow cost, the orders continue flowing. Nevertheless,customer sensitivity can be a major issue in relocat-ing sourcing to LCCs.

How to Decide Where to Go?

Now, more than ever, choosing where to source orproduce goods and services is a complex issue,involving multiple location options, multipleparameters, and multiple decision makers—all ofwhom are likely to have differing perspectives onthe locations and parameters to be considered. Thecomplexity of the issue can be daunting.

A framework for reducing complexity and clarify-ing the options. In making these decisions, compa-nies face a virtually infinite array of possible combi-nations. We have found it helpful to think of supplychains as falling into five basic models, rangingfrom internal optimization to truly global produc-tion. (See Exhibit 10.) Referring to this range ofmodels, companies can create a manageable num-ber—generally four to seven—of supply chainoptions that combine various locations and sourc-ing and assembly configurations.

They can then analyze the economic, strategic, andoperational pros, cons, and risks associated witheach option. In this way, companies can make deci-sions that are both creative and pragmatic. Theprocess can also serve to get the many decisionmakers across the company to buy into the ultimatedecision.

Critical parameters for making the decision. Essentialparameters to be considered in deciding where to goinclude proximity to the company’s home base or tomarkets, a critical mass of industry activities, the loca-tions of the company’s existing investments, the avail-ability of talent, and government policies in the vari-ous LCCs under consideration.

Proximity to the company’s home base or to markets.Naturally, some products benefit from proximity totheir destinations—because they are very heavy or


bulky to ship or because they are best sourced from“backyard” countries. For companies in the UnitedStates, that means sourcing from Latin America(especially Mexico), whereas for companies inEurope it means sourcing from Eastern Europe (forexample, Hungary, Poland, or the Czech Republic).

Other products that currently benefit from beingsourced from Mexico or Eastern Europe, ratherthan China or India, are those with unpredictabledemand. This is especially true if these productsalso have short lead-times. However, our researchhas revealed an evolving pattern in the sourcing ofthese products. First, as companies grow more con-fident in their supply chains, they tend to shift agreater range of products to faraway places.Second, recognizing that their investment decisionshave long half-lives, companies that are advanced intheir use of LCCs are paying more attention to thelong-run competitiveness of various LCCs. China’slong-term cost advantage and growing sophistica-tion are prompting companies to move some prod-ucts from Mexico, despite the issues of longer sup-ply chains.

Some companies are experimenting with a combi-nation approach, locating base production inChina and a “burst” capacity in Mexico or EasternEurope to handle peak demand. At present, resultsare mixed. The “close to home” facilities are oftensubscale and expensive. Moreover, companies can-not develop local supplier networks for these facili-ties effectively because of lack of volume. So theymust often import key components from elsewhere(typically from the main plant in China).

Critical industry mass. An important criterion inchoosing an LCC is whether there is a critical massof companies, in the industry in question and inrelated industries, that are already doing businessthere. Clearly, LCCs that have highly developedinfrastructures, including relevant suppliers, canoffer more compelling advantages than lower-costlocations that don’t have such infrastructures. Asmentioned above, the automotive industry enjoyssuch critical mass in Thailand, for example, as doesthe electronics industry in Malaysia. China is nowemerging as such a locus for industrial goods as awhole, as India is for services.

E X H I B I T 1 0

COMPANIES NEED TO CHOOSE THEIR OPTIMAL SUPPLY-CHAIN MODEL

Single-line sourcing: sourcing 100 percent of a core line on a direct import basis

Base-line sourcing: sourcing base-line, peak-season demand of top SKUs

Option Description

Fully implementing lean manufacturing

Achieving reductions in the cost of materials

Assembling to order, in the home country, components sourced from low-cost countries

Producing 100 percent of core lines in low-cost countries

Supply Chain Model

Single-SKU sourcing: sourcing a limited volume of low-priced parts for tactical use

Assembling to order, in a low-cost country, components sourced from other low-cost countries

Optimization of existing plants

Selective sourcing

Domestic assembly

Global production

Low-cost production

Option A

Option B

Option C


32 BCG REPORT

Locations of existing investments. A company’s exist-ing investments in one or more LCCs can have amajor bearing on its decisions about sourcingother products or services. On the one hand, thisfactor works in favor of countries where a companyis already invested. When a company establishes abase in an LCC, it tends to expand in that country,particularly in the same product category. On theother hand, many companies look to diversifytheir portfolios of locations in order to managetheir exposure to any given country.

Companies for which asingle plant can efficientlyserve global markets—and there are many—donot have the luxury ofmanaging portfolios ofplants. They need to makean all-or-nothing decision to choose one LCC. Overthe past several years, many companies have locatedsingle-sourced factories for global products in LCCs.For example, GE put its medical-imaging facilities inChina and its call centers in India. AmericanExpress, British Airways, Citibank, StandardChartered, and Siemens are examples of companiesthat set up back offices in India early on and havesince expanded those operations significantly.

Availability of talent. Talent of the right kind is a keyissue in choosing a location. Language, industryknowledge, and cultural compatibility are amongthe parameters that define desirable talent—andaffect location decisions. For example, because it isdifficult to find many people who speak French orGerman in China or India, French and Germancompanies tend to favor outsourcing locations inEastern Europe and North Africa. Similarly, humanresources services such as investment advice are noteasily handled out of LCCs, given the lack of localknowledge about Western financial markets.Contact centers established in India spend a fairamount of time training their teams on the culturalnuances of the regions from which they receivecalls, to avoid faux pas.

Government policies. Government policies are often amajor determinant in the choice of a particular

LCC, since they can significantly affect the eco-nomics of an investment. Beyond incentives, dis-cussed above, overall policies toward trade andinternational relations can be a significant factorfor companies. For instance, China’s economicopenness has been increasingly attractive to compa-nies, in contrast to the relative lack of openness thatprevails in India.

Not India versus China, but India and China.Ultimately, companies that are testing the waters ofLCC sourcing—or cautiously expanding their cur-

rent levels of sourcing—must choose which prod-uct families to sourcefrom which LCCs on thebasis of their own criteriaand priorities. For exam-ple, if they decide to

source, say, castings and call center services, theyshould evaluate and compare the LCCs to decidewhich locations offer the greatest advantage.However, leading companies are not simply select-ing a particular product-country combination butproactively developing the LCC value chain into anetwork of products and services. For example, aleading retail chain in the United States has its softtoys designed in India and manufactured in China,with the vendors tightly linked in the company’sglobal supply chain.

GE, which operates four BPO centers in India andone each in China, Mexico, and Hungary, has out-sourced more than $35 billion of purchase ordersto these centers. GE’s global “work tools” for oper-ating these LCC-networked processes are so robustthat a single purchase order from the United Statesmight be processed in more than one center.

Successful companies keep the choices simple.Some simplify the equation to one of a few selectlocations. Often this will boil down to Mexico andChina for companies in the United States or toPoland and China for companies in Europe. Thekey here is not to reinvent the wheel. China shouldbe a default on everyone’s list. Mexico and EasternEurope should also make the list in the UnitedStates and Europe, respectively. Other countries

Leading companies are proactively developing the LCC

value chain into a network of products and services.


where a company has invested in the past (if any)could also be included, and India should be con-sidered for processes. When companies attempt togo much beyond this framework, they often fall intoanalysis paralysis.

Setting the Scope and Speed of Low-Cost-CountryStrategy Rollout

Industrial companies are at different stages withrespect to deriving advantage from LCC sourcingand manufacturing. In our experience, companiestend to be at one of five levels. (See Exhibit 11.)

Level 1: Testing the Water. Many companies today stillhave not undertaken any formal initiatives in LCCs,although some may be sourcing basic commodities ona trial basis. In our view, there is little competitiveadvantage to moving so cautiously. One small benefit

may be the chance to learn from the mistakes and suc-cesses of other companies. But that learning certainlydoes not outweigh the opportunity cost.

Level 2: Purchasing Components or CompleteProducts. Most large companies active in LCCs areessentially buying or manufacturing basic productsand components that meet their standards at thelowest possible cost. The advantage they gain is alower cost structure than their less aggressive com-petitors enjoy, as well as the knowledge gained fromworking with particular suppliers and a greaterunderstanding of the overall supply base. Valuableas these advantages are, they can be quickly wipedout as competitors rush to achieve the same savingsand insight.

Level 3: Developing Comprehensive Sourcing.Motorola intends to have $10 billion in accumu-

E X H I B I T 1 1

COMPANIES ARE AT DIFFERENT LEVELS IN CAPTURING GLOBAL ADVANTAGE


Purchasing components or complete products

• Focused on cutting purchasing costs

• Gaining valuable knowledge of supply base

• But creating little defensible advantage

Developingcomprehensive sourcing

• Sourcing parts, products, talent, and R&D

• Building sustainable advantage

– supplier relations

– product development

– market intelligence

Adopting an integratedLCC strategy

• Viewing LCCs as both a market and a sourcing location

• Has an integrated strategy for particular LCCs

• Fully leveraging synergies between export sourcing and domestic production, for example,

– integrated capacity planning

Capturing global advantage

• Has a globally optimized cost structure

• Has a global manufacturing strategy

• Has a globally integrated supply chain

• Leveraging the best global capabilities

• Deploying high-cost assets effectivelyTesting the water

• Attracted by LCC potential

• Conducting sourcing trials

• Has no formal LCC initiatives

• Not yet organized for LCC sourcing

Domestic

Export

Level 1 Level 3 Level 4 Level 5Level 2

34 BCG REPORT

lated purchase volume from China and to be pro-ducing $10 billion a year in goods there by 2006. Italso intends by then to have made investments inChina that total $10 billion, including building aglobal R&D center in Beijing and hiring almost5,000 researchers. This type of sourcing strategygoes well beyond procuring simple commoditiesand components to include services and talent suchas product design and engineering. Because othercompanies can’t easily replicate the close relation-ships with key suppliers or attract the best designersand engineers, comprehensive sourcing locks in acompetitive edge, reducing dependence on importsfrom high-cost countries. There are also potentialtime-based advantages, such as accelerating prod-uct-development cycles.

Level 4: Adopting an Integrated LCC Strategy.Increasingly, global automotive OEMs operating inLCCs, as well as their suppliers, see LCCs not just asan important market or as a principal supply basefor goods to be sold elsewhere, but as both. Forthese players and others, operating in LCCsdemands an integrated strategy. Each business linemust be designed to outsource components forproducts that will be sold both abroad and to thelocal market. Although the Chinese market isuniquely vast in scale, the same logic applies toother LCCs with healthy and growing domestic mar-kets. An integrated strategy offers additional syner-gies due to scale, boosting potential savings. Also,capacity planning is integrated: plants are sized torealize full economies of scale and configured tomeet both local and global requirements.

Level 5: Capturing Global Advantage. Althoughmany companies talk about integrating LCC sourc-ing into a business model that is truly managedacross many countries, only a few are close toachieving that goal. For example, Toyota, with itsclosely coordinated manufacturing and supplyoperations across regions, successfully sources sub-assemblies from all over Asia, enabling the com-pany to optimize manufacturing costs and just-in-time delivery.

The five levels of advantage are not a ladder: a com-pany doesn’t necessarily move from Level 1 to Level

2 to Level 3, and so on. Companies sometimes shiftquickly from, say, a cost-focused strategy for basiccomponents to an ambitious integrated strategy.Similarly, many companies that have been selling inChina for some time are now, in a sense, backinginto sourcing, and they are also beginning to man-ufacture for export. Examples include Siemens, GEAppliances, and several global automotive OEMs.

Considering the speed with which cost structuresare globalizing, specific windows of opportunity areopening and closing, and many competitors areputting stakes in the LCC ground, companiesshould aim high and act fast. For most companies,Level 4—adopting an integrated LCC strategy—should be the prime target. For a few companies, apure Level 2 or Level 3 play will provide sufficientadvantage in the medium to long term. Players thatmaster Level 4 will reap the vast range of LCC ben-efits, whether through sourcing, selling in the new,fast-growing markets, or both. Developing a broadset of experiences will enable them eventually tomove to Level 5, which provides the maximum ben-efits of global advantage.

One word of caution: in many cases, the scope andspeed of a company’s LCC rollout will depend asmuch on the management team’s ability to imple-ment a comprehensive LCC strategy as on the ben-efits of such a strategy. A key aspect of managing themove is understanding the economics involved.

Getting the Economics Right

Many companies, as they approach decisions aboutsourcing or manufacturing in LCCs, make funda-mental miscalculations of one kind or another. Toavoid such mistakes, it is critically important tomodel the right elements of both advantage andcost. (See Exhibit 12.)

Your calculations should cover not only the initialinvestments involved but also ongoing costs and sav-ings—including anticipated productivity improve-ments. The most effective way to determine the netattractiveness of multiple sourcing or relocationalternatives, as for many other types of investments,is by performing a net present value (NPV) calcula-


tion. This calculation forecasts the expected savingsstream of a particular investment based on theincremental LCC-specific costs to be incurred overthe investment period—typically five to ten years.The NPV assessment model is a comprehensive,number-based decision-support framework. Not-ably, it enables a company to “stress-test” the eco-nomics of the potential investment under variouspositive and negative scenarios. Understanding theimpact of sudden changes in factor costs such aslabor, energy, or materials, as well as exchange ratesor duty rates, is absolutely vital. So is a comparativeanalysis of investments across competing countries.In our experience, the exercise of formulating theright set of what-if scenarios is a valuable part ofbest-practice LCC planning routines. Such simula-tions can provide critical information on the riskprofiles of competing options relative to the riskappetite of a specific investor.

In doing this kind of modeling, it is important toadapt your products and services to the conditionsof the LCC. The capital-intensive product designsof the West are not directly applicable to LCC con-ditions. Companies that aim merely to source exist-ing parts, without putting any investment intodeveloping suppliers or local production, may seeonly modest cost improvements—on the order of10 percent. In this case, why bother going?

Similarly, it is important not to underestimate theinitial investments involved. Developing a supplybase can be quite expensive and difficult. For exam-ple, Carrier, a major manufacturer of air-condition-ing equipment with deep expertise in sourcing inChina, obtained 1,600 quotes before making its firstorder in its first year of operation. In addition,restructuring existing facilities in the West can takemany years and cost huge amounts. Estimating the

E X H I B I T 1 2

IT IS IMPORTANT TO MODEL ALL THE ELEMENTS OF BOTH LCC SAVINGS AND ADDITIONAL COSTSModeled Economics for a Typical Industrial Product Sourced from an LCC

SOURCE: BCG case experience.

100 20–25

5–10 10–15

0–5 0–5 50

10 5

5 70

100

80

60

40

20

U.S. or WesternEuropean

manufacturing cost

Labor Depreciation Materials,components, and tooling

Scale Specialincentives

LCCmanufacturing

cost

Othermanagement

costs

Duties Landedcost

from LCC

Savings Additional costs

Logisticscosts

(transportation,additional inventory,

and expediting)

Percentage

0

36 BCG REPORT

setup costs for outsourcing a process, including sen-ior management time, is not a trivial exercise; mostcompanies get it wrong.

On the positive side, be sure to factor in significantongoing productivity improvements. Improvementsof 10 to 15 percent per year are routine for well-established players in China. Often, players that arenot established in China shy away from buildingthese expectations into their cost analyses(although they happily include anticipated year-on-year improvements in their home-country costs).

Finally, do not overdo theanalysis. Many companiesbecome completely over-loaded with analysis—andparalyzed by it. Get the basicnumbers you need to com-pare several solid options, and then make a decision.

Identifying and Mitigating the Risks

Clearly, concern about various kinds of risk—including delivery execution risk, competitivenessrisk, transition risk, risk to intellectual property,price erosion risk, and several kinds of country-related risk—can be a major impediment to mov-ing to LCCs. Although these risks are real, experi-ence has shown that they can be managed—andthat there may be greater risk in failing to make the move.

Delivery execution risk. This form of risk shouldnot be underestimated, particularly in long supplychains such as those from Asia to the United Statesor Europe. These risks have multiple sources.Some, such as shipping delays, unavailability ofshipping capacity, and customs issues, are related tothe physical transport of goods. Others are linkedto procurement issues. Examples include highnumbers of rejects, inability of vendors to scale up,and disruption in delivery schedules. Another largeproblem is the risk of being unable to access thelocal market because of distribution challenges.

Loss of cost competitiveness. LCCs can lose part oftheir competitive edge over time through unex-

pectedly steep increases in factor costs and drasticexchange-rate movements. The exposure can besignificant. In our experience, however, companiestend to be overly concerned about labor rates.Though rate hikes of 10 percent and higher arelikely to occur in many LCCs, those raises are onvery small bases. Moreover, they are often morethan offset by productivity improvements.

Energy costs are another major concern. In manyLCCs, electricity generation is reaching its limits,driving market prices up until new power-plant

capacity comes online.

The most importantissue may be LCC ex-change rates. A 30 per-cent revaluation of theChinese yuan, for ex-

ample, could erode a major portion of the costadvantage. We expect that, in reaction, Chinesecompanies would substantially accelerate productiv-ity enhancements that could compensate for amajor part of the currency disadvantage. Never-theless, it would be hard to capture the full originaladvantage. Currency hedging can be a (costly)short-term answer, but it is not an option for com-panies investing for the next decade. The currencygame can also result in significant unexpectedgains, such as in the case of Thailand after the 1997Asian crisis, when sourcing costs dropped by 40 per-cent almost overnight. There is no magic formulato protect against currency swings. In our experi-ence, building a portfolio of assets and suppliersacross a range of LCCs is one of the most effectiveapproaches.

Transition risk. This includes the risk of customerdefections because of the move to foreign produc-tion. Initially, as many as 5 to 10 percent of cus-tomers may be disaffected, though over the longrun the impact is usually limited.

Intellectual property risk. As discussed above, theprotection of intellectual property has a very poortrack record in many LCCs. A company might havespent millions to develop a patented process ortechnology, only to see it reverse-engineered in an

Productivity improvements of10 to 15 percent per year areroutine for well-established

players in China.

LCC. While it is unlikely that a producer usingstolen technology would be able to export it, thetheft could seriously undermine the ability of thelegitimate technology owner to sell in the local mar-ket. Although there is no foolproof method of pro-tecting intellectual property, our experience sug-gests that the best approach combines severalelements:

• Keeping the most sensitive products andprocesses in-house, even if they are produced in LCCs

• Keeping some critical elements out of LCCs, sothat the product or subassembly cannot be copied

• Leveraging contracts to the full extent, includingstringent enforcement

• Investing in supplier qualification, training,reward programs, contracts, and enforcement

• Investing in employee retention programs

• Lobbying LCC governments—alone or in coop-eration with industry groups—to continually raise the bar on the protection of intellectualproperty

Price erosion risk. In all likelihood, LCC-basedcompetition will ultimately lead to some degree ofprice deflation. To stave off this eventuality as longas possible, companies must vigorously maintaintheir original standards for product quality andservice. On the service side, it is absolutely criticalto provide the same lead-times and delivery per-formance that the company offered before going tothe LCC. Meeting these customer expectations usu-ally means incurring higher costs for buffer inven-tories along the LCC supply chain, as well as mak-ing occasional “emergency” shipments. Companiesmaking the transition to alternative sources havefound that a proactive customer-communicationprogram, explaining what will change and what willremain the same, is one of the most effective waysto maintain customer satisfaction and pricing.

In cases where LCC sourcing will initially not meetthe original service standards, companies shouldconsider introducing a two-tiered pricing structurewith a dedicated slightly lower price for the LCCproduct. In semifinished metal products, for exam-ple, the price differential should be based on theadditional cost a metal service center will incur tomaintain additional inventories to compensate forthe increased variability in lead-time and deliveryperformance. In parallel, the franchise of a strongindustrial brand will play an increasingly importantrole, regardless of origin. The automobile industryprovides several compelling examples of premiumproducts manufactured in LCCs without sacrificingprice point: the Volkswagen Touareg SUV is madein VW’s Bratislava plant in Slovakia, while Audi’s TTsports car is made in Győr, Hungary.

General country risk. This type of risk includes awhole range of social issues, such as education,health care, union militancy, and government cor-ruption. Political risk is also much on investors’minds. The instability in Southeast Asia in recentyears has caused considerable concern. Economicrisk also looms large. Some companies will have anintrinsic advantage in managing such risks. Forexample, a South African investor in Mozambiqueshould be able to better manage the various aspectsof local country risk because of strong bilateral gov-ernment relationships, better country intelligencedriven by geographic proximity, and greater famil-iarity with local business practices.

* * *

The careful analysis of relative advantage, cost, andrisk under various scenarios is not a calculation tobe made just once. Because the components ofcompetitive advantage are constantly evolving, sub-stantial shifts in risk are possible. Savvy companiesfrequently reexamine their assumptions, revisittheir analyses, and keep their contingency plans upto date. They also boost the odds in favor of successby paying meticulous attention to the day-to-daybusiness of managing their global operations.


Printer toplace cor-rect font

The economics driving the globalization of coststructures and business models will persist indefi-nitely. The competitive advantage of a truly globalbusiness, which leverages the lowest costs and thebest capabilities, is structural in terms of both scaleand locked-in relationships. Moreover, because it isbased on capabilities, it is very difficult for com-petitors to replicate. It is also very difficult toachieve. Often the biggest hurdles are organiza-tional barriers.

Overcoming Organizational Barriers

Regardless of where a company is in the process ofrelocating procurement, production, or other oper-ations to LCCs, establishing the new operations andthen managing them from day to day can be highlychallenging, both in the LCC and back in the homecountry. For example, a recent BCG benchmarkingstudy revealed that five global engineering compa-nies have had very different experiences establish-ing engineering centers in India. While the mostsuccessful of the companies has grown from fewerthan 50 engineers to more than 1,400 in just fouryears and has filed for more than 20 U.S. patentsduring the period, the least successful has grown toonly a few hundred engineers—despite having beenin India for more than six years. What made the dif-ference between the front-runner and the muchless successful company? The former was able tosurmount the organizational hurdles and sustainmomentum, while the latter was not.

Most relocation efforts start off with a great deal offanfare. Either the chairman sets ambitious targetsor there is a grass-roots bootstrap effort led by a fewpeople, typically purchasing managers under seri-ous cost pressure. In either case, the team in chargeof the effort is brimming with ambition. After a fewmonths, however, the team finds its momentumflagging. The volumes of products or service orderstransferred to the LCC are smaller than expected,so the savings are lower. Back home, meanwhile,many business units, product lines, and functions

are delaying their promised participation in theproject. Initial quality problems emerge, furthercompounding the problem. The overall effort getsstuck and is difficult to restart. How can companiesavoid this trap?

In our experience, companies can do a number ofthings to ensure that their LCC initiatives are suc-cessful. These include leading from the top, settingaggressive targets and links to personal incentives,establishing ambitious productivity-improvementtargets in the home country, fine-tuning individu-als’ incentives, defining appropriate structural link-ages and mechanisms, putting one person in chargeof LCC operations companywide, separating localoperations from global efforts, seeking vendors thatmanage risk meticulously, and communicating earlyand often.

Leading from the top. This is the single most impor-tant element in taking advantage of LLC opportu-nities. Every successful company we have workedwith and every executive we have interviewed posi-tioned this element as the foremost success factor.Companies that do not benefit from active leader-ship from the very top often fail to get their opera-tions off the ground. Companies that have leader-ship from the top often achieve excellent results.Why is senior-level leadership so important?

First, LCC operations are by their nature a cross-departmental issue. Whether an organization isstructured regionally, by customer segments, bytechnologies, or as a matrix, LCC operations willcut across the existing departments. It will thusforce one or more parts of the organization toassume some level of cost or risk for a potential ben-efit that will accrue to another part or parts.

How does this play out in practice? The head ofChinese operations needs to support an effort thatwill be reflected in the P&L of his or her Europeanor U.S. colleagues. The head of technical activitiesin Germany must qualify suppliers in Poland, know-ing that the move will increase the chances of his or

The Operational Challenge: Making It Work

38 BCG REPORT

her department being downsized in the near future.The head of logistics must support a process thatwill by definition increase lead-times and inventorycosts (because of the longer supply chains involvedin LCC sourcing) when his or her incentives (andbonus) are based on reducing both measures.

How do you overcome these conflicts of interest?What does leadership from the top mean? First ofall, the company’s chairman or CEO must getdirectly involved. The leader’s involvement oftentakes the form of internal sponsorship of the proj-ect: holding regular meet-ings and updates, cele-brating key successes,regularly tracking agreed-upon measures. Increas-ingly, we also find CEOsusing externally set targetsas a means of getting results. For example, they flagthis topic with analysts, thus making the success orfailure of the effort their own problem.

Beyond this CEO engagement, one or more seniormanagers must drive the effort. For instance, thehead of global purchasing for a major industrialcompany chaired a meeting at 5 a.m. everyThursday over several years. He chose the earlyhour in order to allow teams across the globe toparticipate by means of several dozen video links.This forum made it possible to resolve issues on thespot, in real time. Moreover, the evident dedicationof the senior manager made it clear to all con-cerned that the effort must not fail.

The stability of the senior sponsors of LCC opera-tions is crucial. In companies that fail to sustain andgrow their LCC efforts, we often see a pattern inwhich the project is assigned to various executivesin succession over a period of a few years. None ofthem really get their hands around the issues suffi-ciently to become effective advocates. At GE, trulyeffective advocates are called zealots, and unlessthere is a zealot sponsoring a BPO project, it doesnot get launched.

Setting aggressive targets and links to personalincentives. We have found that companies that are

successful in relocating operations to LCCs gener-ally ask different questions of their organizationsthan companies that are not successful. Successfulcompanies change the paradigm. They ask them-selves, “What must I keep at home?” rather than“What can I shift to LCCs?” Their question is not“Why outsource to LCCs?” but “Why not?” Thisapparently subtle distinction reflects a fundamentaldifference in attitude and goals. The burden ofproof shifts from the LCC sponsors to the existingorganization, which now needs to prove—andimprove—its own competitiveness.

Companies that operatethis way start from thepremise that everything isprobably better producedin LCCs. They then workbackward to identify what

needs to be kept at home, for the various reasonsdiscussed above. The decision process is very differ-ent, and the outcome is always more aggressively infavor of LCC operations.

GE had a very simple rule to push executives tosource more IT services from India: the rule of 70-70-70. That is, 70 percent of IT developed should beoutsourced, 70 percent of that work should go toGE’s Global Development Centers, and 70 percentof this should be outsourced to LCCs. Performancewas measured against this rule at every operations-review meeting. GE also set an ambitious target of$1 billion in sourcing from China, starting fromzero in 2002. The key is to set targets of this kind—very clear, very visible targets, with teeth that arebig enough to cause disruptive behavior.

Establishing ambitious productivity-improvementtargets in the home country. Most companies basetheir cost-reduction targets for their LCC opera-tions on levels of reduction that have been possiblehistorically in the home country. In the West, thisapproach most often leads to targets of 3-to-5-per-cent improvement per year—or even less. What iswrong with this approach?

A productivity improvement target of 3 to 5 percentis simply too low to give a company an incentive tolook into LCCs. Most companies can meet this tar-


Successful companies askthemselves, “What must I keepat home?” rather than “What

can I shift to LCCs?”

get with current suppliers and current operations,through production process reengineering, invest-ments in technology, and reduced costs at suppli-ers. Managers will very likely say, “If I need to hit a4 percent improvement target, I know I can do itwith my current guys. But it will require a lot ofhard work. I don’t want to put this effort in jeop-ardy by diverting a lot of time and effort to themore risky LCC alternative. If I achieve more thanthe 4 percent savings, I won’t get anything for itanyhow.” This attitude is widespread in companiesthat are finding it difficult to achieve momentum.

Companies with experiencein LCCs set ambitious im-provement targets of 10 to15 percent per year—levelsthat can be achieved onlythrough a massive reloca-tion of sourcing, production, or other operations toLCCs. One head of purchasing told us that raisingthe improvement target to this level was the mostimportant change he made in mobilizing his organi-zation behind the effort.

In business processes, our study revealed that fewcompanies have detailed performance metrics thatthey monitor regularly. One of the benefits of out-sourcing is that it forces a company to set up themetrics for each outsourced process and then to setambitious targets for the vendor.

Beyond the productivity improvement targetsdefined in percentage terms, it is also crucial tohave ambitious absolute targets for LCC operations.Companies that have succeeded in China have gen-erally set stretch targets and communicated themvery clearly. GE is again an excellent case in point,with its Chinese-slogan-style 5-5-5 program: $5 bil-lion in sourcing, $5 billion in sales, by 2005.

Fine-tuning individuals’ incentives. Like incentivesin general, individual incentives can be potentialbarriers if not addressed. Most departments andindividual staff members don’t have direct incen-tives to support LCC operations, let alone activelypromote them. Often they even have disincentives.The head of product development will not benefit

directly from a reduction in cost, but he or sheneeds to work hard to make the move to the LCChappen. The head of logistics is typically rewardedfor reducing freight and inventory costs—both ofwhich will increase with sourcing from LCCs.Buyers will lose local volume and therefore leveragewith their existing suppliers. The head of Chinamay be asked to fund a global-sourcing office fromhis or her own budget for several years. And every-one faces the risk of transition.

Defining appropriate structural linkages and mech-anisms. The first princi-ple here is to build link-ages among all thedepartments involved.LCC sourcing, for exam-ple, can’t be done by thepurchasing or manufac-

turing function alone; it requires cooperation fromevery department in the organization, includinglegal, R&D, human resources, finance, and logis-tics. Linking mechanisms include, for instance,processes and conference calls to coordinate cross-functional, cross-regional, and cross-business-unitinputs; decision-making meetings to drive sourcingdecisions; global e-rooms to share relevant data;and numerous coordinating schedules and trackingtools. Whether the company has an internal mech-anism to make these functions work together or notis critical to its success in LCCs.

Second, it’s important to build linkages between LCCsand home countries. A number of the companies thathave set up global-sourcing offices in China haveadopted a “baseball” model: there is a “pitcher” in thehome market who manages the links with the homeorganizations and a “catcher” in the LCC who coordi-nates with the business units locally. The catcher alsoworks with buyers (usually organized by commodi-ties). The key is constant communication.

In another model, highly successful BPO firms orin-house centers located in LCCs often station a“front end” team in the LCC office that consumesthis service. This team builds linkages, trou-bleshoots, and also does evangelical marketing onbehalf of the LCC team.

40 BCG REPORT

LCC sourcing requires cooperation from legal, R&D,

human resources, finance, and logistics departments.

Putting one person in charge of LCC operationscompanywide. This person must have executionauthority, because splitting this authority amongseveral people, one in each unit, leads to ineffec-tual decision making. Typically, U.S. units of globalcompanies might consider LCCs to mean onlyMexico, while European units might look only atEastern Europe, even though the company overallcould gain much bigger advantage from China. It isdifficult to manage these issues across organiza-tional boundaries unless one person heads up theactivity companywide and looks at opportunitiesglobally.

In addition, it is important to identify your startingpoint and construct balancing mechanisms. In ourexperience, companies that are organized region-ally often face the greatest barriers. If your com-pany is organized regionally, set up a council at thevery top level to ensure that someone is pursuingnonregional and transregional opportunities. Ifyour organization is focused on business units—asis often the case in industrial groups—establish aspecial task force under CEO direction to create thescale required to look into LCCs.

Separating local operations from global efforts.These activities are too different in nature to coex-ist comfortably in one start-up operation. The localoperations function in day-to-day operationalmode, focusing on the commodities required fortheir factories. In general, the people hired to man-age those operations are skilled in that activity andknow only that market. They are not trained tointerface with Western counterparts. Certainly,global and local operations in the same LCC canrealize synergies through various coordinatingmechanisms, but they should not risk losing theirrespective focuses by becoming entirely integrated.

In the global operations office, in addition to thepeople who manage the global links and the localbusiness units, technical resources are needed toqualify suppliers, inspect parts, and ensure quality.Supply chain managers complete the office. Whilethe size and type of office naturally depend on thesize and complexity of the operations being man-aged, such offices usually have at least 20 to 30 peo-

ple and can have as many as several hundred. Theyare typically located close to or within the LCCwhere the company has its largest operation. In Asiathis tends to means Hong Kong or, increasingly,China itself.

Seeking vendors that manage risk meticulously. Asvolumes have increased and supplier basesmatured, LCC-based supplier companies havelearned to deploy robust risk-managementapproaches to address most of the kinds of risk dis-cussed above. For example, to address country risk,a BPO vendor would have multiple sites and wouldcross-train agents. To manage performance andpricing risks, a vendor might install switchablebandwidth, set up real-time data mirroring inanother country, write tightly defined SLAs withearly-warning signals, buy insurance from an inter-national insurance firm, and agree to arbitration ina client’s home country rather than in the LCC.

Communicating early and often. Effective commu-nication—both internal and external—has becomeparticularly important recently, given the wide-spread concern about the impact of outsourcing onjobs in home countries. On the one hand, analystsare looking for more aggressive LCC strategies; onthe other hand, the popular press and politiciansare targeting companies that have been aggressiveon this front. Several companies have responded bydemonstrating persuasively how their LCC strate-gies are linked to their long-term vision to createshareholder value. It is also critical not just toaddress risks but also to communicate throughoutthe organization, explaining how the various riskshave been addressed, so that concern about themdoesn’t remain a barrier.

Getting Your Low-Cost-Country Operations Right

While each LCC operation necessarily faces uniquecircumstances, there are a number of critical ele-ments common to all of them. Management can goa long way toward ensuring success by designingprocesses and products to address LCC issues,investing in good government relations, buildingthe local organization quickly, getting productsflowing to markets fast, building a process that


spans LCCs and the home country, aggressivelymanaging suppliers, using modern tools effectively,and exiting marginal assets in high-cost countriesefficiently.

Designing processes and products to address LCCissues. For example, companies may need to estab-lish human rights policies. In some LCCs, produc-tion labor is often required to work prolongedhours under conditions that would not be accept-able in other countries. Many companies definehuman rights policies before selecting suppliers andthen monitor compliance carefully, ensuring, forexample, that basic working conditions meet accept-able standards, especially with respect to safety.

Processes may also need to be redesigned to protectintellectual property. Many companies avoid locat-ing sensitive technology in LCCs. When there is nochoice, they take extreme steps to protect it. Forexample, in China, AMP has its key process per-formed in a secret, enclosed bay, using U.S. materi-als and technicians; the workers are under a specialhigh-reward/high-penalty contract. Other ways toencourage integrity among employees include jobrotation, education, training, and the incorporationof integrity assessments into performance reviews.

Products should be engineered to suit LCCs. Thismay require simplifying the product so that it canbe produced with more manual operations orchanging the material specifications so that localmaterials can be used. It could also involve recon-figuring the product so that subassemblies can beunbundled or rebundled to further optimize sourc-ing and assembly in various locations and using var-ious suppliers. This task requires skills that need tobe developed locally; often it requires investing intechnical resources that have experience in LCCmanufacturing.

Investing in good government relations. Companiesmust dedicate significant resources to establishingand maintaining good government relations, espe-cially in China. For example, Kodak has a unit of 15 people led by a senior vice president responsiblefor government relations; Motorola has a unit of 10.Specialized firms can also help in this regard.

Former officials are often useful because of theirgovernment connections. Senior company man-agers must be actively involved in the relationship-building process. Typically, companies fund theseactivities at the headquarters level in order to bene-fit all the business units, but they manage them onthree levels: global, national, and provincial.

Building the local organization quickly. The parentcompany should not automatically assign the proj-ect to the current managers of the local sales oper-ation in the LCC (if any). Their main focus hasbeen to develop the local market, and they areunlikely to have the time—and may not have theexperience—to take on the additional challenge ofa complex interface role. Experience is at a pre-mium in this process. It is invaluable to hire some-one who has been through this before with anotherorganization and who knows the country. While it isimportant to build for the long term regardingpeople, management, and HR, it is also importantto put in an infrastructure fast, investing ahead ofthe curve. At the same time, it’s a good idea tocreate a truly “value added” role for the countryorganization in order to attract good local staffmembers.

Getting products flowing to markets—fast. To dothis, you will need to build up your technicalresources aggressively. Generally speaking, thescarcest resources are the technical people requiredto qualify suppliers and parts. Companies mustchoose whether to move these people to the LCC orkeep them in the home country. Many companiesbegin by moving expatriates to LCCs while at thesame time aggressively hiring local staff memberswho can be trained for the necessary positions.More experienced companies hire local staff mem-bers well in advance and send them to the homecountry for 6 to 12 months of training, so that theycan build personal contacts and credibility with col-leagues at headquarters. Organizational trust is animportant success factor.

Building a process that spans LCCs and the homecountry. Cooperation between the LCC and thehome country spans a wide range of processes andrequires building tailored support tools. For

42 BCG REPORT

instance, a process that companies typically need todevelop early in their outsourcing experience is on-site assessment of suppliers. Often, the company’sLCC operation initially does not have the staff orthe credibility to perform this complex task, whichrequires technical experience, familiarity with theparticular commercial situation in question, andmastery of the company’s approach to suppliermanagement. Over time, this competency can bedeveloped, along with mutual trust between theLCC operation and home-country functions.

Managing the request-for-qualifications process isalso a challenge. In LCCs,the RFQ is often a pricediscovery process. There isextreme price variabilityin the answers received,and one needs to be able to qualify the relevance ofthe extremes quickly. This task often requires adetailed evaluation and comparison of differentsuppliers. To support these various processes, com-panies need basic tools, which they must oftenbuild from scratch. These include quote-trackingdatabases, RFQ forms, and site inspection forms. Inaddition, they must build the IT infrastructure tofacilitate communication across departments andcountries within the global organization.

Aggressively managing suppliers. LCC operatingenvironments are generally less stable than theenvironments that companies are used to in theWest. Lead-times, delivery performance, and prod-uct quality can vary widely. In some instances, sup-pliers may not be able to meet their original pricequotes over the long term. LCC suppliers oftenquote very low prices initially to attract business; inaddition, their costing systems are generally notvery sophisticated, so they frequently make substan-tial errors when providing first-time quotes. Buyersmust be prepared for several rounds of price rene-gotiations. For instance, in one recent BCG projectin China, quotes obtained for auto parts variedwidely among suppliers—by as much as 80 percentfor some products—compared with variations of 2to 5 percent for similar parts in the United States.Capacity may also become an issue. In China in

recent years, many suppliers have had difficultykeeping pace with the requirements of rapid eco-nomic growth and increasing product demand. Tohandle these issues and qualify suppliers for long-term, sustainable performance, companies need toinstitute stringent purchasing practices, such asearly audits of supplier operations and costs.Putting such practices in place often requires trans-ferring seasoned purchasing professionals to LCClocations early in the migration process.

Using modern tools effectively. Several of the moreexperienced companieswe talked to in Chinaprocess all their pur-chases through onlineauctions—an approachthat they do not take intheir home countries. In

many sectors, auctions have become a way of life.They allow companies to put a lot of pressure onthe market. Several companies told us that auctionswere the prime tool that had allowed them to getproductivity improvement of more than 10 percentfrom their existing supplier base in China (on topof the initial savings achieved by moving to China).

Auctions are also a cheap and effective way of find-ing suppliers. One company routinely takes thisapproach. It sets no prequalifications for suppliers(although, of course, it systematically checks thereferences of low-bidding suppliers). This companyreports that the suppliers it has found in this wayhave generally met its quality standards and havepassed the subsequent qualification process. Thesize and scale of China must be kept in mind in thiscontext. Without the Internet, a systematic search isimpractical; with it, the process is fairly straightfor-ward. In this area, LCCs are quite sophisticated.

Moreover, the auction process is not restricted tosimple commodity-like products. One companygave us an example of a product category with1,900 drawings that it had successfully bid on theInternet in China. The company worked with anengineer to segment and organize the product cat-egory into ten lots. (In the process, they eliminatedone small-volume category that in itself accounted


Companies need to institutestringent purchasing practices,such as early audits of supplier

operations and costs.

for 900 drawings.) The auction was very wellattended and resulted in an average savings of 15 percent.

Exiting marginal assets in high-cost countries effi-ciently. Exiting legacy assets and processes in high-cost countries can be very expensive and compli-cated. As noted earlier, many companiesacknowledge that although they could increase prof-its by moving to LCCs, they nonetheless keep theirplants in HCCs because the costs of exiting HCCassets are too high or the process is too complex andpainful. Companies must learn to exit their legacyassets efficiently so that those assets do not becomea barrier to growth and competitiveness.

A fundamental first step for corporate managementis to develop a long-term asset-management strategyfor its portfolio of plants and play an active role inoverseeing that portfolio. Management should con-tinually monitor each of its plants’ performance ontwo dimensions: its cost advantage or disadvantagein comparison with alternative sources, and itsfinancial performance, such as return on capital.(See Exhibit 13.)

Such an assessment will allow management to setthe right priorities, identifying which plants toreplace within the next 12 months, which to rampdown slowly for future exit, and which to invest in.

Corporations should plan their plant exit strategiesyears in advance to minimize costs, reduce theimpact on the work force, and maximize revenues.

44 BCG REPORT

E X H I B I T 1 3

COMPANIES SHOULD REGULARLY ASSESS THE LCCCOMPETITIVENESS OF THEIR ASSET PORTFOLIOS


1Or another measure of financial performance.

Cost ofcapital

Cost advantage or disadvantage compared with LCC source (%)

ROCtarget

10

5

0

–5

–10

–15

–20

–25

–30

–35

–400 5 10 15 20 25 30

Improve businessmix and pricing

Grow

Replace as soon as possible

Manage for cash and initiate

ramp-down

Improve and manage for cash

Return on capital (ROC)1

G

F D

EB A

HI

K

LM

O

N

J

C

Plant with $10 million in revenues

Managing staff repositioning and attrition early inthe process can substantially reduce personnel-restructuring costs. Another reason to start early isto avoid the penalties that are commonly includedin long-term contracts with suppliers and cus-tomers. Corporations that plan early enough canavoid renewing such contracts for the year of exit,and thus avoid penalties.

An Agenda for Industrial Companies—and for Governments

The globalization of cost structures and businessmodels will continue relentlessly. The deconstruc-tion and reintegration of business systems every-where is already happening faster than forecasted,in ways that were not expected, with results moreprofound than were ever anticipated. The earlymovers are creating competitive advantage by lock-ing up sources, building relationships, developingorganizational capabilities, and learning, learning,learning.

Within their respective industries, leading compa-nies are pulling even further out in front by exploit-ing the powerful synergies arising from lower costs,better efficiencies, and pioneering access to largeand fast-growing markets. They will push othersinto a “doom loop” of steeper costs, lower efficien-cies, smaller or stagnant markets, and higher hur-dles to leap.

Many U.S. and Western European companies aresurprised when their customers move their opera-tions to LCCs. Other companies see their own per-formance surpassed as their competitors roll outextensive LCC programs. Still others are trapped inthe web of complexity created by LCC strategiesthat try to tackle everything at once. Our experi-ence with industrial companies worldwide indicatesthat many organizations are not thinking aboutLCC operations in terms of both risks and opportu-nities for improving competitive positions, andtherefore are not adequately preparing both offen-sive and defensive strategies. In most cases, compa-nies could have avoided unpleasant—and costly—surprises by identifying industry trends and settingbusiness priorities early.

Far too few management teams are carefully think-ing through how their cost structures, businessmodels, and current competitive positions couldchange as globalization rewrites the “established”rules of competition in their industries. Fewer stillare taking strategic action now to create long-term

advantage for their stakeholders. Why are so manyhesitating?

• Some are misjudging the pace of change in thebusiness infrastructure

• Some are misled by their current “international”revenue into thinking that they are already oper-ating globally

• Some are postponing tough decisions aroundlegacy assets and liabilities

• Some are taking a static view of their cost struc-tures rather than a dynamic one

• Some are still operating from outdated perspec-tives gained from decades-old experiments

• Some are thinking about markets rather thanabout systems

• Some are operating with a false sense of securitybased on weak alliances and nascent positions

• Some are sticking to old aspirations and measuresof success in a new world

Many companies will be blind-sided—perhaps notall at once, but in bits and pieces, as competitorscarve out advantage in terms of factor costs, assetfootprints, trade flows, business models, supplychains, human capital demographics, and manage-ment processes. Whether this process occurs all atonce or takes the form of “death by a thousandcuts,” the cumulative effects will be crippling tocompetitive position.

Implications for Management

Whether a company is already operating in LCCs orjust beginning to test the waters, its managementteam should be continually examining the dynam-ics of global advantage—in each piece of the busi-ness and for the business as a whole. At a minimum,


every company should perform an initial assess-ment of LCC opportunities and potential threats.To our surprise, few companies have a solid grasp ofthe inroads globalization is making into their busi-nesses. Even fewer actually pursue a systematicapproach to evaluating their business portfolios forLCC threats and opportunities. The LCC Matrix,introduced on page 10, can be a valuable way for amanagement team to achieve clarity and sharedunderstanding about the magnitude and pace ofthe threat. It offers an excellent first step in a base-line evaluation of a company’s current position.

In conducting such an evaluation, a company needsto ask itself some fundamental questions.

Which products are in motion? Determine how fastyour industry is migrating offshore. What is thetrend by product line? Be sure to consider not onlyyour current products but also the new ones still indevelopment. How much of the import volumewithin each product line originates from currentdomestic competitors now producing or sourcingabroad? Who are the new competitors? Is the domes-tic industry maintaining or losing share within thoseimported volumes? How much of the product volume is now lost to assemblies also produced off-shore? Then analyze, for each product line, the eco-nomics and efficiencies driving that trend (such asgrowing cost advantages in LCCs, improved availabil-ity of qualified suppliers, shorter transportationchains, and the migration of customers to LCCs), aswell as its likely rate of acceleration.

Which customers are in motion? Which of yourcompany’s customer industries are moving theiroperations abroad? How much and how fast? Areyour customers winning or losing the globalizationdrive? Which of your customers are likely to main-tain significant operations in the high-cost country?How can you improve your value proposition sothat they will choose your company for their domes-tic supplies? And how will you serve the customersthat are likely to move?

Which assets will become liabilities? In light of thelikely migration patterns of products and cus-tomers, identify the physical assets, current invest-

ments, and people that might be affected by migra-tion to LCCs. Plan today for the eventual impact.Which facilities must be repositioned, restructured,or ultimately closed? What actions can you under-take now to reduce obligations and minimize even-tual shutdown costs? Which employees are at risk,and what can you do to reposition them so that theycan contribute to new sources of value? Which sup-plier partners must also be prepared to move capac-ity offshore?

Thinking systematically about your business portfo-lio in terms of the LCC Matrix and arriving at initialanswers to the above questions will be valuable firststeps in the design of LCC strategies. Companiesthat take these steps will have a base line to helpthem in planning product, customer, and assetportfolios that integrate LCCs, and in making deci-sions about which operations to strengthen domes-tically in the high-cost country, which to divest, andwhich to relocate to LCCs.

With this information in place, the team can imag-ine a “what’s best” global business built on lowestglobal cost, best global capabilities (whether inBangalore, Boise, or Böblingen), largest and fastest-growing markets, and most promising customerconnections. Once you have that business firmly insight, you can score the P&L, balance sheet, andorganization accordingly, face the inevitable gaps,hedge the risks, and reset your company’s priori-ties, strategies, and organization to ride the wave ofglobalization.

Implications for Governments

It is not just companies in high-cost countries thatneed to develop strategies to address the challengesof globalization; governments, too, must do so. Themigration of operations to LCCs is already dramati-cally reshaping the industrial-manufacturing basein developed countries, where some 15 to 20 per-cent of manufacturing jobs will be at risk over thenext ten years, together with additional jobs in sup-porting service sectors.

Clearly, this development poses a significant public-policy challenge for governments in North America

46 BCG REPORT

and Western Europe. The traditional governmentalresponse to threats of this kind has been to imposetariffs and quotas on imports—a tactic that hasrarely achieved the desired results. Instead, govern-ments should focus on promoting economic devel-opment in advantaged sectors while supporting theinevitable transition to global production in theother sectors. Specifically, they should invest inareas in which their local industries have strong,sustainable competitive advantage, reshaping pub-lic policy to support those industries. For example:

• Investments in productivity-enhancing technolo-gies can create or extend competitive advantage

• Many countries urgently need long-term reformsto their health-care systems in order to lower theexcessive health-care costs borne by companies

• In the United States, investments in educationand training are needed immediately to stem andreverse the continuous degradation of skills inthe work force

In short, for industries to flourish in high-costcountries, governments need to foster an interna-tionally competitive business environment at home.A key part of that process is finding ways to mitigatethe social impact caused by the restructuring ofuncompetitive legacy assets. Dying assets are a farbigger and more costly problem than most govern-

ments have fully appreciated. Although the processis irreversible, it can be partly mitigated through acombination of public and private initiatives to revi-talize brownfield sites and local economies. Forinstance, governments could encourage the privatesector to offer its finances, capacity, and expertise.In the United States, for example, there are onlytwo national private-equity firms that focus solelyon brownfield redevelopment. Governments couldalso create economic development plans for indus-tries that will be hardest hit. The public sectorshould offer supplemental funding and the removalof environmental liabilities.

Although the movement of industrial operations toLCCs cannot be reversed or stopped, governmentscan still take action, in concert with the private sec-tor, to safeguard the health of much of theirremaining domestic manufacturing economies.And companies can take action to avoid the risksthis movement poses and capture the advantages it offers.

* * *

Companies that continue to hesitate do so at theirperil. Globalizing your company’s cost structureand business model, with China and India as first-pass options, is rapidly becoming not merely astrategic alternative but a competitive imperative.


48 BCG REPORT

“What Is Globalization Doing to Your Business?”

Opportunities for Action in Industrial Goods, February 2004

(This publication summarizes a section of the present report.)

“Made in China: Why Industrial Goods Are Going Next”

Opportunities for Action in Industrial Goods, November 2003

“Rethinking Automotive Purchasing: From Price Pressure to Partnership”

Opportunities for Action in the Automotive Industry, November 2003

“Innovation to Cash: Orchestrating the Process”

Opportunities for Action in Industrial Goods, September 2003

“Boosting Innovation Productivity”

Opportunities for Action in Industrial Goods, April 2003

“Asset Productivity: A Potent Lever for Competitive Advantage”

Opportunities for Action in Industrial Goods, March 2003

“Competing to Win in China’s Fast-Growing Automotive Market”

Opportunities for Action in the Automotive Industry, December 2002

“Rethinking ‘Made in China’ Cars and Parts”

Opportunities for Action in the Automotive Industry, December 2002

Breaking the Stalemate: Value Creation Strategies for the Global Steel Industry

A report by The Boston Consulting Group, July 2002

For a complete list of BCG publications and information about how to

obtain copies, please visit our Web site at www.bcg.com.

To receive future publications in electronic form about this topic or others,

please visit our subscription Web site at www.bcg.com/subscribe.

The Boston Consulting Group publishes other reports and articles that may be of interest to industrial executives.

Recent examples include:

AmsterdamAthensAtlantaAucklandBangkokBarcelonaBeijingBerlinBostonBrusselsBudapestBuenos AiresChicagoCologneCopenhagenDallasDüsseldorfFrankfurt HamburgHelsinkiHong Kong

HoustonIstanbulJakartaKuala LumpurLisbonLondonLos AngelesMadridMelbourneMexico CityMiamiMilan MonterreyMoscowMumbaiMunichNagoyaNew DelhiNew YorkOsloParis

PragueRomeSan FranciscoSantiagoSão PauloSeoulShanghaiSingaporeStockholmStuttgartSydneyTaipeiTokyoTorontoViennaWarsawWashingtonZürich

www.bcg.com

BCG

capturing global advantage - management consulting€¦ · capturing global advantage 5 industrial...

Documents