Low-cost country sourcing is a strategy that companies use to source lower cost materials from other countries due to their lower labor and production costs.

As consumer demand continues to grow at an alarming rate, businesses are scrambling for new ways to meet growing demand. The manufacturing industry understands this all too well, and is one of the main sectors seeing this type of demand due to growing market consumption.

Historically, the low-cost country for sourcing has been China. Obviously, the top reason for sourcing from China, India or another country is cost savings; but it’s not the only factor nor does it tell the full story. So how does one decide which country they should source from?

To begin this exploration, it’s helpful to start by learning some of the differences between Indian versus Chinese sourcing:

  • More relaxed policies: India has departed from its history of restrictive policies on investment, licensing and production. Since liberalization began in the 1980s, both the country’s GDP growth and exports have surged. Prime Minister Narendra Modi’s re-election for another five-year term, economic growth, corporate competitiveness, and continued government reforms all give a good outlook, especially for those looking for relief from tariffs and other disruptions that have resulted from the trade dispute between the U.S. and China. India’s government is also heavily investing in railway, highway, port and airport development, which is expected to cut transportation times and costs by 20 percent. In the meantime, China’s pick-up, over-the-road transport and final delivery are rarely done by the same company, making shipments much harder to track.

  • Different demographics: India’s population is much younger than China’s, which has a positive impact on workforce availability at a low cost. “In GDP growth, “China’s demographic dividend will tail off in the next 10 years, while demographic rates in India will promote savings growth,” writes The National Academies Press.

  • Tariffs: Tariffs on many Chinese products have been steadily increasing, which gives India an advantage in this area. Tariffs have increased by as much as 25 percent on steel products, according to the New York Times.

  • Competitive costs and wage levels: India has much more competitive costs and wages, making labor costs much cheaper and leading to lower prices. To put this into context, Chinese wages were US $1,197.32 per month in 2019 while India’s were US $115.31 per month as of 2014, according to Take-profit. More specifically, the average cost of manufacturing labor per hour was $0.92 in India and $3.52 in China for 2014. Relatedly, the two countries’ GDPs per capita are vastly different: China’s stood at US $10,261.70 in 2019 compared to India’s US $2,099.60, according to The World Bank.

  • Foreign language skills: English is the second official language in India and executives often use it to conduct business, making communication easier for US and many European clients. Education is also improving in India and is approaching China’s levels.

  • Product differentiation: India does well in sectors where product differentiation is required as opposed to China’s more general manufacturing. Some of India’s common exports include metal castings, pumps, and industrial engineering products. China’s main exports are electrical machinery, computers, and furniture.

When outsourcing to another country, it’s always important to carefully consider all of the specific external factors that could impact your supply chain.