The Q factor

The Q factor

There is a connection between the presence of lead paint in toys made in China and of bugs in software crunched out in Bangalore. Those who see this connection will realize the opportunity before Indian manufacturers of toys, clothes, shoes and other low-tech products, or what is called soft manufacturing.

If Indian companies make the right moves in response to the opportunity, they could succeed in moving the centre of gravity of the manufacture of these products away from China, which currently dominates this business.

Most outsourcing is usually one of three types: of soft manufacturing, of electronics products and of software. The outsourcing of electronics products is dominated by companies such as Solectron, Flextronics, Jabil and Foxconn, which have operations in China, Taiwan, Malaysia, Singapore, the Philippines, and, of late, in India. The business is driven more by how these companies work than what some economists term country advantages, although these do have a role to play.

The other two types of outsourcing—soft manufacturing, and software (the latter dominated by India)—have more to do with country advantages. Both businesses revolve around cost and labour arbitrage, although the nature of labour differs.

There is, however, one big difference between how China has gone about building its dominance in the soft manufacturing and India in software outsourcing.

The big story in Indian software in the early 2000s was the rush for SEI-CMM certifications. Created by Carnegie Mellon University’s software engineering institute (SEI), this capability maturity model (CMM) certification looks at and audits the processes of a software company. A Level 5 certification indicates a high capability to crunch out code, that is, to simplify things, bug-free and meets the needs of customers. India has among the highest number of companies with SEI-CMM Level 5 certification. That’s one reason why there have not been too many complaints about the quality of Indian software.

By focusing on quality, the Indian firms in the software outsourcing business managed to build a differentiator on top of cost and labour arbitrage. The fact that several Indian software firms have SEI CMM Level 5 certifications makes this differentiator less relevant when a customer is looking to choose between two Indian firms (other factors come into play then, including, all over again, cost). But, that very fact also makes this a “country" differentiator. Such certifications usually make up for the lack or inadequacy of local and global regulations that govern how companies work.

China, and Chinese firms, haven’t done this in the area of soft manufacturing. While Chinese firms have focused on building scale and improving process efficiency, they have not focused their energies on acquiring international quality certifications relevant for the soft manufacturing industry.

That presents an opportunity for Indian companies in this area. By going out and acquiring internationally recognized quality certifications, they can profit from the backlash China will no doubt suffer from the whole lead-in-toys controversy. There are local issues to be addressed, including scale or the lack of it and the fact that some soft-manufacturingareas still continue to be reserved for small industry, but these are not insurmountable problems.

Will the Q thing work? It should, judging from the recent example of the auto-parts industry. In the early 2000s, Indian auto-parts firms were working towards winning globally recognized awards instituted by organizations such as the Japanese Union of Scientists (and the award is quality’s Oscar, the Deming medal) and the Japanese Institute of Plant Management. It was following this that auto-parts exports from India really took off.