Agile Asian Firms Winning the Race
Many of Asia’s resurgent players such as Mahindra Tractors have created large-volume operations in their home countries by serving their large domestic markets and doing contract operations for overseas buyers. That has given them huge economies of scale on top of the low labour costs of their home countries. What is important to recognise, however, is these firms go beyond leveraging local low-cost labour by focusing relentlessly and continuously on driving down costs through innovation.
Consider BYD Auto. When the mainland carmaker decided to enter lithium-ion battery manufacturing, it went shopping for a manufacturing line in Japan, as Japanese companies were world leaders in the technology. To BYD’s surprise and horror, the cost of even a single battery manufacturing line was several orders of magnitude more expensive than the total capital of BYD because of the clean room, which was crucial to the production. Undeterred by this setback, BYD innovated and built the world’s first “clean box”. Instead of working inside a clean room, workers at BYD could now insert their hands into the clean box via rubber gloves built into the box and undertake the tasks required to be done in a dry, dust-free environment. The clean box not only reduced the fixed capital cost of a manufacturing line, but it also converted the fixed costs to variable costs; the clean boxes could be quickly scaled up, or allocated in different configurations, depending on the production requirements. That improved productivity. The innovation catapulted BYD to a leadership position in lithium-ion batteries. These cost-lowering innovations, then, are endowing emerging market companies with specific advantages that enable them to compete against the incumbent multinationals from the developed world.