January 2006 VOLUME 1 NUMBER 2

Contents
India: The Next Automobile Giant
Emerging Market Sourcing – Strategies for Success
Measuring ERP projects
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India: The Next Automobile Giant

By Aditya Nath, CEO

(This is the first in a series of articles on the Global Automobile industry. The author is the CEO and Managing Partner of CGN & Associates
Inc., Aditya Nath.)

A powerful force in the global auto market

The last few years have witnessed revolutionary changes in the management systems and manufacturing innovations of the worldwide
automotive industry. The focus has tilted away from volumes to a lower cost model as espoused by the emerging markets. Of these emerging
markets, India stakes a major claim with its role in shaping and leading the outsourcing market.

India has been hailed by market analysts as an emerging hub for the manufacturing industry with its focus on engineering, innovation, and
overall growth leading it to the bastions of market leaders. Recently, a United Nations Development Program (UNDP) report hailed India as a
powerful force in the global automobile industry, and recognized that it has the strength to sustain leadership and growth in the face of the
global trading order.

The growth curve of India Auto Inc. has been on an upswing for the past few years. According to the Society of Indian Automobile
Manufacturers (SIAM), the Indian automobile industry has maintained a steady growth of 20 percent till May 2005, with passenger cars and
utility vehicles growing around 13 percent and 16 percent respectively.

Consequent to liberalization, the arrival of new and contemporary models, the availability of financing at relatively low interest rates, and price
discounts offered by the dealers and manufacturers appear to have stimulated vehicle demand and a strong industry growth.

According to SIAM’s projections, domestic sales of passenger vehicles (cars and utility vehicles) are set to grow at 20 percent over the next
two years given the current GDP growth and exports are expected to grow at 40 percent.

Foreign automotive companies in India

There is a long list of foreign companies that are forging alliances with their Indian counterparts. Corporate participation in these alliances
varies from 10 to 100 percent (i.e. wholly owned foreign subsidiaries). The Government of India is no longer regulating the alliance’s equity
participation and instead allows the drivers such as the technological, financial and market strengths of the partners to set the participation
percentages. The setting up of joint ventures has led to an enhanced capacity creation in the vehicle sector, particularly in the passenger car
sector where the additional capacity is forecasted to produce 3 million passenger cars in the next five years.

India has become a preferred destination for American, European and Japanese automotive companies because they realize that in the
future, auto manufacturing will require world-class, cost effective IT and engineering expertise and India has an abundance of both.
Furthermore, the low cost of manufacturing and a supportive government have been the key drivers for companies shifting focus to India.

GM India posted a staggering growth of 121 percent in December 2005 compared with its performance in 2004. Its Japanese competitor,
Toyota, which has a partnership with the Indian firm, Kirloskar Motors, posted its highest ever retail sales in 2005. Another Korean giant,
Hyundai Motors, which has made its Indian subsidiary the manufacturing hub for small cars, exports to around 60 countries globally. Recently,
they made a foray into the UK where they shipped over 8,000 units in December 2005 alone.

Earlier this financial year, Ford Motor Company announced its intention to launch its fifth new product in India where the Chairman noted that
among the growing markets around the world - India tops the list.

Coming out of the shadows

India and its biggest competition in the changed global order, China, share several similarities as emerging economies, but India does not
receive the same global attention as compared to China, yet. This fact reflects itself in the automotive industry where China has been losing
ground in terms of its markets; but still continues to attract the major percentage of global investments.

Having said this, I am tempted to predict that this scenario may be changing. A growing impetus in auto sales coupled with the fact that only a
handful of individuals in India own a vehicle is making foreign investors take notice of this emerging auto giant.

Market watchers and analysts agree that in recent years, India has displayed its economic potential and the impact it promises for the global
auto industry. It already seems to be on its way to becoming the giant that market research firms are predicting it to become in the next decade

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or so. India’s preparation to embrace this opportunity with aplomb is evident in its well developed components industry and the current
production levels of over a million four-wheeled vehicles a year.

India is now the fastest growing global auto market as is emphatically apparent in the record 2004-05 auto sales. India has clearly arrived in
the big leagues. Recording a 24 percent growth in 2004-05 car sales, India has emerged as the fastest-growing car market in the world,
comparing favorably to China's 13.7 percent growth last year. Recently the investment banking firm Goldman Sachs predicted that India will
have the largest number of cars by 2050.

The immediate future looks very promising. The Society of Indian Automobile Manufacturers (SIAM) predicts that the next three to four years
could see the industry pump in as much as $5 billion in investments, out of which foreign direct investment would be close to $3 billion. I
concede that this figure still makes India a David to the Chinese Goliath, but India cannot be compared to China on figures alone. The Indian
auto market is more stable than China and it has steered its own growth momentum as vouched by the Goldman Sachs report.

The Indian auto industry and its increasing competitiveness has driven an enormous amount of innovation in the sector. They have made sure
to utilize the available low-cost labor instead of expensive automation, and the abundant engineering talent has developed innovative new
products such as the Scorpio—an SUV that sells for a fraction of the price of an equivalent car in the United States.

An educated workforce, a large middle class, and a sincere desire to become a major player in the industry globally are some of the key
drivers which are propelling India into the big league. The government’s zeal to push through further reforms in the industry bodes well for this
emerging giant.

Foreign ventures
Indian auto companies realize the opportunity they are sitting on and are moving aggressively into foreign markets. They are following a two
pronged strategy to not only tap the Indian and overseas market potential, but also to lower their production costs by outsourcing from other
countries.

In the recent past, utility vehicle manufacturer Mahindra & Mahindra (M&M) emerged as the fourth-largest tractor brand in the US in the 15-90
horsepower (HP) segment. During the last financial year, Mahindra US touched sales of $128M and is expected to cross $250M by December
2008. It has already successfully created a market for itself in the Latin American and South African markets. It has opened an assembly line
for its Bolero Range vehicles in Uruguay. The firm also launched its sports utility vehicle, the Scorpio, in July 2004 in Kuwait.

Another of India’s leading truck manufacturers, Tata Motors Ltd., acquired a Daewoo truck manufacturing unit in South Korea last year. The
firm now plans to introduce its heavy-duty trucks in India in the next 12 months. These trucks will be launched in India and select countries as
part of Tata's strategy to enter the global transportation market.

The old horse of the Indian market, the Ambassador, is back in demand in Wales. Merlin Garages of Carmarthenshire, the UK's only importer
of the Ambassador, is now planning a new, soft-top version of the Ambassador for the British market.

With changes at all levels and looking at India’s preparedness for the global challenge, it seems to be fully equipped and ready to become a
leading player in the worldwide automotive sector.

References:
Department of Heavy Industries, Ministry of Heavy Industries and Public Enterprises, New Delhi.

Society of Indian Automobile Manufacturers

Emerging Market Sourcing – Strategies for Success

By Matt Anderson, CGN Associate Partner

Enticed by the low cost of offshore manufacturing and driven by their desire to penetrate emerging demand markets, companies have been
experimenting with offshore supply since the 1980s. In recent years, trends such as globalization, profitability and margin pressure, and the
increased demand for innovation have accelerated the need for business’ to leverage offshore supply sources. But for all the hype associated
with emerging market sourcing, many companies that have engaged in an offshore strategy have been disappointed with the results.

Avoiding Disappointment
The most effective way to avoid disappointment when engaging in global sourcing is to develop a long-term strategy with clearly defined goals
and drive execution through a structured management framework designed to ensure initiative success. Part of this framework is a global
sourcing methodology.

Because most global project teams are established on a temporary basis and therefore are unable to sustain a consistent long-term approach,
a structured methodology is critical to maintaining consistency and continuity across corporate teams and initiatives. A focused,
well-communicated strategy is a necessary precursor to successfully qualify suppliers, negotiate agreements, and achieve the expected cost
benefits.

Qualifying Suppliers

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Qualifying foreign suppliers continues to be the leading challenge for purchasing organizations. In a never-ending search for qualified global
capacity, it is critical to maintain consistent supplier qualification measures. When evaluating overseas supplier capabilities, engineering and
manufacturing standards are often overlooked. Instead, these capabilities are overshadowed and even substituted by more cursory
parameters such as regional political stability, financial viability, and product fit – items that are considered “givens” by North American and
Western European customers. In many cases, this has resulted in satellite offices qualifying suppliers that, upon delivery, fail to meet
customer requirements. Effective supplier qualification is the linchpin to successful global sourcing. The better a company is at identifying and
qualifying suppliers, the lower the supply risk exposure.

Once qualified suppliers have been identified, the negotiation process is often complicated by more than just language, time zones, and
cross-border legalities and regulation requirements. Purchasing and supply managers find collaborating and negotiating with foreign suppliers
to be extremely challenging. Companies cite program management and ongoing engineering support capabilities as key differentiators for
successful foreign exporters.

Several companies rely on a mixture of online and offline sourcing technologies to exchange documentation and collaborate with suppliers.
This mixture suggests that some suppliers, especially those in emerging market countries, have not yet implemented more advanced
collaboration techniques and enablers necessary to effectively communicate program information with their North American and Western
European customers. This will change as emerging market capabilities continue to mature. Companies using e-enabled process automation
tools (e.g. e-sourcing tools, CRM, ERP, etc.) find fewer challenges and greater satisfaction with their global sourcing initiatives as compared to
companies using manual or marginally automated procedures.

Supplier Cost Competitiveness

While supplier qualification is the key to successful global sourcing, supplier cost competitiveness is the yardstick by which qualified suppliers
are measured. Once a pool of qualified suppliers is defined, purchasing stakeholders must conduct a comprehensive financial analysis of the
true costs and benefits of sourcing to emerging markets. Sourcing to emerging markets is the “order of the day” in the manufacturing industry,
but these decisions must be driven by a detailed understanding of the total costs of doing business with these suppliers. There is often a
direct, inverse relationship between the price reductions available from an emerging market supplier and the accompanying increases in other
areas such as freight charges, taxes, and inventory carrying costs.

Critical Cost Categories

Companies must make their sourcing decisions based on an evaluation and understanding of critical cost categories as they are manifested in
global supply markets. These cost categories are as follows:

Material Costs
Labor Costs
Cross-Border Taxes and Tariff Costs
Transportation Costs
Supply Chain Performance
Inventory Carrying Costs
Risk Management (political, currency, market, operational, etc.)

Understanding the Impact of Emerging Market Sourcing

The continuous shift of purchasing roles and responsibilities into two key areas of functional support (strategic vs. transactional) provides an
opportunity to analyze market behavior and its impact on buying decisions. As globalization drives the development of new supply and
demand markets, purchasing resources need to continually develop their understanding of global economics. Continuously changing areas
such as tariffs, trade regulations, and geopolitical circumstances will increasingly drive strategic buying decisions. Purchasing organizations
must understand the impact of these drivers on their company’s profitability and be prepared to take informed action.

Emerging market sourcing will also change the role of logistics professionals. Due to the cross-border nature of these activities, logistics
managers will become more critical to success in emerging market sourcing. They may need to add language and specialized import/export
compliance skills to their capabilities. Logistics managers also provide valuable insight into supply chain costs and help determine the best
International Commerce Terms (Incoterms) to use for specific sourcing initiatives. CEO Magazine estimates that the top 1000 American
companies have over 20% ($460 billion) of their cash tied-up in working capital due to logistics/supply chain issues, inefficient purchasing
practices, and a lack of supplier consolidation. Logistics managers will be constantly evaluating the best supply chain configuration as
emerging market opportunities continue to mature and shift.

Conclusion
Effective global sourcing requires companies to coordinate sourcing requirements, work activities, and buying decisions across the
organization to maximize buying leverage and supply chain performance across all geographies. A long-term sourcing strategy with the
supporting management framework to drive execution is the key to sustaining a successful emerging market source of supply. Understanding
emerging market supplier capabilities; accurately measuring total, landed costs of sourcing to emerging market suppliers; and driving the
necessary process and roles/responsibility changes through the organization (and the value chain) will ensure success in developing a
sustainable emerging market sourcing strategy.

Measuring ERP projects

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It is important to not only understand the factors influencing success, but also to have an approach for measuring and tracking an ERP
project’s success. ERP implementation projects are very different from most other types of projects such as building construction, network
installation, etc. The key difference is that there are no precise industry standards, legislated codes, or published performance benchmarks
against which success can be quantitatively measured. This lack of benchmarks and measurement techniques has created an environment in
which ERP projects are declared a success or failure based on arbitrary criteria, individual perceptions, partisan motivations, or other
subjective factors. This article discusses an objective approach to measuring the success of an ERP implementation project.

Deficiencies in Measuring Return on Investment (ROI) Only

In the search for quantitative metrics, many companies have attempted to define the success metrics of ERP initiatives based on a single
financial dimension: Project Return on Investment (ROI). Even though this seems to be an objective metric, few companies have successfully
defined up-front the expected ROI. Instead, they measure the actual ROI after project completion and compare the two. When analyzing many
“successful” and “failed” ERP implementations, it has been found that the categorization of “success” or “failure” could not be correlated to the
“official” project ROI in most cases.

The fallacy in this approach is the belief that the implementation of an ERP software package can provide significant business benefits and
generate the expected ROI. Too much focus is given to software implementation and too little focus is given to business transformation. It is,
in fact, only the change in business models, the changes to a process-focused business organization, and the changes in relationships and
processes with customers and suppliers that have proven to provide significant business value. The ERP project can be considered as the
foundational backbone that enables such changes and is only the first step in the required business transformation process.

Measurement should also entail a holistic approach that assesses how well the ERP project has established the foundation for business
transformation and has provided the organization with opportunities to achieve substantial business benefits. With this understanding, we
therefore need to find new ways for measuring the success of these programs.

A New Method of Measuring Success

If we want to measure the success of ERP programs, we need to properly identify the targets to be achieved and the constituents who will be
impacted. Then assess whether the targets were achieved and decide how to monitor and measure the level of achievement attained against
pre-defined targets. This approach differs from a single-dimensional, purely financial ROI evaluation perspective by having three key
dimensions:

Targets,
Constituencies, and
Time frames.

Targets
There are many target types, some of which can be clearly articulated and associated with easily measurable numerical attributes, while
others are more qualitative or strategic in nature and do not easily translate into numerical representations. Measuring the achievement of
both target types is important in assessing the success of an ERP program. We therefore believe that these targets should be categorized into
four groups: Political, Operational, Economic, and Technical with different measurement methods adopted for each group.

Political
Political Targets are typically aligned with new strategic directions, changes in culture or company image in its marketplace, or specific
goals of key executive management stakeholders. In many of these cases, the ultimate objective may be clear, but a well-defined path
to achieving it is not. Some examples may be increased security risk management, increased focus on customer satisfaction, and the
management of risk during a major downsizing.

Operational
Operational Targets represent changes in some of the major operational and organizational structures of the business. Some examples
may be the restructuring of regional business models to global business models, the integration of a new acquisition, and the creation of
shared services organizations.

Economic
Economic Targets are the most commonly used targets, and they represent specific, tangible goals focused on either revenue increase
or cost reduction. Some examples include reduced inventory or manufacturing costs and the increase of revenue due to the
introduction of new sales channels.

Technical
Technical Targets represent technical capabilities of the implemented ERP solution and its support organization. These types of targets
can normally be well-defined and measured. They can include the retirement of legacy technology, the deployment of faster network
connectivity, and improvements in system response time. In many instances, these targets set a level of expectation for the users of the
system prior to deployment.

Constituencies
It is imperative to always analyze and correlate the perspectives of key constituents that are affected by such systems. Among them are the
following parties:

Executive management and key program stakeholders

Internal users (e.g. customer support agents, buyers, sales reps)
External users (e.g. customers, suppliers, partners)

Time frames

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It is a known fact that at the time of go-live, organizational effectiveness and performance will invariably be affected due to the learning
ramp-up time of users and potential organizational change management issues, as well as normal imperfections in the early lifecycle of
complex solutions.

ERP systems are foundational enablers to business transformation. Their success cannot be measured by project timelines but need to be
based on longer time frames that incorporate the business transformation impacts. Only by understanding these various dimensions and
taking a more holistic evaluation approach can one truly define metrics for ERP programs (see Figure 1).

Figure 1 Performance Changes Over Time

Execution of Measurement
The approach we recommend for measuring and ERP implementation’s success is based on an up-front definition that needs to be completed
when the program is initiated. It is part of the approval process and includes an ongoing sampling of measurements and trending analysis after
the system go-live.

For the up-front definition, we recommend the following three steps.

Step 1: Select the top 5 specific targets within each group (i.e. Political, Operational, Economic, and Technical) and clearly articulate
the target. In some cases, numerical attributes are possible; in others, they might not be.

Step 2: Align the targets with the various constituencies and define the assessment criteria for validating the achievement or
non-achievement of the target.

Step 3: Define the time intervals when the measurements will be performed. Typical sampling intervals could be one month post
go-live, three months post go-live, six months post go-live, one year post go-live, and two years post go-live. Over time, one will be able
to determine whether more targets are being achieved or corrective actions are required.

For the post go-live measurement phase, we recommend that all defined targets be assessed, rated, aggregated, and plotted by their
respective constituents as shown in Figure 2.

Figure 2 Sample balance scorecard

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As planned measurements and observations are performed over time and the trending is observed, it becomes very clear how successful the
ERP project has been. Figure 3 demonstrates a typical trending for a successful ERP implementation.

Figure 3 ERP Implementation Trending

Conclusion
We have found that the most successful projects were those where there was a high degree of Political and Operational achievement. On the
contrary, the ones that had high Technical and Economic achievement, but low Political and Operational achievements were perceived as
less successful in the long term.

To determine the true success of an ERP project, firms must make a paradigm shift that incorporates a holistic approach and
multi-dimensional view that includes targets, constituents, and a sequence of measurements over a long-range time frame. Only by
transcending the traditional, singular financial view of ROI can one truly identify and differentiate successful ERP programs that provide
long-term strategic value.

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Published by CGN Business Performance Consulting
Copyrights © CGN & Associates Inc.

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