Online Business Review of SCIBC

by Pawan Varma, CEO & Founder, IntraWorld Outsourcing Management Center

There is a lot of noise in the media these days about India and China.  As expected, the hype is exaggerated, but for companies in Europe and America there is real cause for concern.

To get a sense of what is happening, just consider the foreign acquisitions by Chinese and Indian companies.  In 2009, China overtook Germany and became the #2 country in terms of acquiring companies in the UK.  This translates into a nearly $22 billion expenditure by Chinese companies, or roughly 150 billion Yuan.

We are seeing high profile acquisitions in the oil & gas, mining, media, and automotive industries.  When state-owned enterprises such as CNOOC (China’s largest oil & gas production company) take over a foreign oil company, the purpose is to divert production to China.  This effectively reduces the available supply to the rest of the world.  Your cost for these commodities goes up, along with the corresponding supply chain costs.

Similarly, Indian companies are moving offshore.  In a high profile move, an Indian company acquired 2 divisions of Ford Motor Co. a couple of years ago.  2010’s acquisition of the African operations of Kuwait’s Zain Networks is an example of India-based investment banks working with India-based companies to fulfill global ambitions.  Most major industrial giants in India are looking out for acquisitions in Europe and North America as the economic slowdown continues to make these companies cheaper.

When acquisitions are executed, Asian companies get two significant benefits.  First, they can use their Asian resources to operate using an Asian cost base.  This means that if a company uses their Asian resources, they can reduce their costs anywhere from 25% to 65% depending on the operational areas targeted.  If you happen to be in the same industry, then you will face a competitor whose operating costs (and resulting profits) are 25% lower than yours.

Second, they gain direct access to European and American markets.  Not only that, but they get an inside view into how these markets work, who the competitors are, and what their customers need.  New products and services can be developed or acquired at a fraction of the cost in Asia.  European and American products can also be offered to their existing Asian client base, giving the acquired company a more stable customer base.

If you compete with these companies, you are dealing with a group that has already succeeded in the most competitive markets, has the backing of abundant funds in all currencies, and direct access to operational excellence through world-class facilities in countries where operating costs are dramatically lower than yours.

Consider now, the world outside of simple outward acquisitions by Indian and Chinese companies.  Take a look at foreign acquisitions of large companies that operate entirely in China and India.

In the first quarter of 2010, over $89 billion worth of acquisitions were announced in Asia, excluding Japan (according to the Financial Times, March 30, 2010).  This means that your direct competitors are potentially looking to acquire companies in Asia, and in the process acquiring the same capabilities in terms of cost savings and market expansion.

While the economy slowly comes back to life in the West, it is booming in the East.  Consumption is on the rise.  Infrastructure is improving day-by-day.  And in this climate, where would an ambitious, aggressive competitor go?  Obviously, they will go to where money can be made and costs can be reduced. And if you look outside the world of acquisitions, you see more and more sophisticated outsourcing, global collaborations, and specific joint ventures designed to give local businesses (in Europe and America) a stronger footing in the rapidly-changing global economy.

In the next article, we will look at the “global economy” in order to identify where the opportunities and challenges are.  Through this analysis, you will have a basis for deciding where to focus your attention for maximum profit.  Opportunities for both cost reduction and revenue expansion are abundant if you know where to look.

Article submitted on 2nd April, 2010; All Rights Reserved ©, SCIBC Business Review

About the Author Pawan Varma's background is centered around delivering results to clients in difficult circumstances. Since 1987, Pawan has directly worked in more than 45 different industries, rescued 5 projects (over $116 million in value) from failure, created 2 centers of excellence, and had 4 clients send him to India to set up or improve their offshore capabilities. Having spent the last 14 months intensely studying the outsourcing industry, Pawan has embarked on a mission to help companies become better at operating globally. This means mastering: a) outsourcing; b) offshore branches; and c) global collaborations.