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FACTORS INFLUENCING PLANT LOCATION

Selecting the location of a facility is of strategic importance for any organization as it acts as the basis for determining the production technology and cost structure. For example, a manufacturing facility that is located in a less developed country will use a labor-intensive process, to cash in on the low cost labor and will have a different cost structure than the one located in a developed country. In the case of a developed country, the cost of labor will be high because the manufacturing process will be more capital intensive. Second, location decisions require huge financial investments and are not easily reversible in the short term. Third, the location of the facility affects the companys ability to serve customers quickly and conveniently. Major factors that influence plant location decisions are: Market proximity. Integration with other parts of the organization. Availability of labor and skills. Availability of amenities. Availability of transport. Availability of inputs. Availability of services. Suitability of land and climate. Regional regulations. Room for expansion. Safety requirements. Site Cost. Political, Cultural and Economic Situation. Regional taxes, special grants and import/export barriers.

COMPARING CHINESE & INDIAN MANUFACTURING ENVIRONMENTS 1. Labour Issues 24 hours shift Industries in China are allowed to operate all 24 hours. This drastically brings down the investment in plant & machinery. In India, production units cannot operate after 7 p.m. We can, therefore, take only 1/3 of production, in comparison to China. Obviously, it adds to the cost of production in India. Overtime basis In India, workers have to paid double wages for overtime. In China, there are no such provisions. Hence, the cost of labour in China is less than that in India. The workers work in China is based on the output target and not on the number of hours. Work culture In China, workers are highly disciplined and are committed to work. In India, the work culture leaves ample scope for improvement. There is a need for Indian workers to be more disciplined and committed. Chinese workers are 1517% more productive than Indian workers. Labour Laws In China, labour laws are not restrictive. Industrial units are permitted to dismiss a worker, if his productivity is not up to the mark. Whereas in India, in an

industrial unit, a person cannot be dismissed easily. In India, even if a factory is closed, workers cannot be discharged. Minimum wages In China, there are no laws related to minimum wages, a worker is given his salary according to his performance. Whereas in India, a worker has to be paid the minimum salary irrespective of the work done by him. Trade Unions There are no trade unions in China. Therefore, there are no strikes/agitations on behalf of workers. This has benefited the workers, in terms of higher wages due to increased productivity.

2. Cost of Production There are many industrial units in China that are manufacturing all types of raw material and components/parts. This means good quality inputs are available at very competitive prices. This leads to low cost of production. Whereas in India, in segments such as clocks and calculators, the end product manufacturer has to opt for integration, which is not his core competence, which means higher capital investment, increased wastages and higher cost of production.

3. Working Capital Requirements In China, most production units run on the basis of just in time inventory. All inputs such as raw material and components are received by the production units, only on the day of production and finished goods are dispatched from the units the same day. Whereas in India, inventory carrying cost is very high, since producers have to risk raw material for at least two to three months.

4. Problems of Supply Chain In India, suppliers do not maintain delivery schedule, because they are not disciplined. Besides, the delivery schedule cannot be maintained because of labour problems, strike by transporters, or due to power problems. Whereas in China, suppliers are given the time and date of delivery and the production units receive the input on time.

5. Export & Import Chinas import procedure is very simple, which leads to faster clearance of consignments. Goods imported are cleared within 24 hours with the Customs and Ports working continuously for all 365 days in a year. In India, due to the complex procedures, consignments take a long time at the clearance stage. In India, the Customs and Ports work

for about 250 days, leading to delays and resulting in huge inventories

6. Government subsidy In China, the government provides 19-27% subsidy for export. Further, the import of inputs for export purposes are duty free. A large area has been declared as a free zone.

7. Duty structure In India, there are several anomalies in the duty structure. Customs duty on raw material/components/parts is higher than the duty on finished products. Excise duty is required to be paid in retail by local industries, while excise duty on imported goods is paid on the invoiced price. The burden of sales tax, octroi, etc. and also income tax is very high, which add to the cost.

8. Infrastructure The quality of roads in China is very good. Therefore, material can be transported from one place to another place very quickly. While in India, the roads are in a very bad condition, leading to delay in transportation. For example, for a distance of 800 km between Bombay and Rajkot it takes two to three days to get the material. In China, the distance of 800 km can be covered in 10 hours. The communication system in China is very reliable and cheaper than India. In China, there are no power failures and good quality electric energy is available at around Rs 2/ per unit. While in India, the quality of electric energy is poor, there are frequent breakdowns and the cost is Rs 4/- per unit.

ADDITIONAL READINGS & REFERENCES:


1. 2. 3. 4. 5. 6. FICCI to study impact of imports from China, Business Line, November 12, 2000. FICCI suggestions to curb cheap imports from China, Business Line, November 16, 2000. Vidyasagar N, Is Chandni Chowk becoming Chinese Chowk?, The Times of India, November 24, 2000. Dragon in the peacocks nest, www.expressindia.com, November 24, 2000. Srinivas Alam, Singh Gina & Surendar T, China Scare: The Real Story, Businessworld, January 1, 2001. Ajanta goes to China, www.tribuneindia.com, January 4, 2001.

7. 8. 9.

Majumder S, Cheap imports: Crying wont help, Business Line, January 11, 2001. Acharya Kinner, It makes more sense to shift base to China, says Ajanta Clocks boss, www.rediff.com, January 13, 2001. Bajpai Rajendra, China's Latest Invasion, www.asiawise.com, January 16, 2001.

10. Puri Rakshat, Flight of Indian industry to China?, www.tribuneindia.com, January 21, 2001. 11. Fear Psychosis in Indian Markets, www.economicchallenger.com, January-March 2001. 12. Competing with China: Why Indian Companies Find it Difficult?, www.ipcaindia.org, March 2001. 13. Clock maker diversifies into homeappliances, www.homeappliances.globalsources.com, October 10, 2001. 14. www.ajantaquartz.com 15. www.orpatindia.com

Dumping refers to the selling of a product in a destination market at a price that is less than what the product is sold for in the country of origin. It can also mean that a product is sold at destination for less than its production costs. Usually, cheap, inferior goods are dumped in a foreign market either to reduce unwanted stock or to damage the foreign competitors market. CII is a non-government, not-for-profit, industry-led and industry managed organization, partnering the industry and government alike through advisory and consultative services. FICCI is a representative body of Indian companies that looks after the interests of corporates and strives to integrate the Indian economy with the global mainstream. Bureau of Indian Standards (BIS) is the National Standards Body of India looking after all matters concerning Standardization, Certification and Quality. Non-tariff barriers are obstacles imposed on imports other than tariffs and quotas. They include all types of standards and regulations to which imports must conform e.g. product safety. They add cost to the imports and provide advantage to domestically produced good and services.