Download Global Outsourcing Trends

International Business Relations
Global Outsourcing Trends
Bay Area CITD Seminar Series
Tuesday, January 18th, 2005
Kemarra Inc. - Key Marketing Resources & Associates
San Francisco USA
Unlocking Your Market Potential: www.Kemarra.com
Globalization & Outsourcing
 What started it?
 What does it mean for the US?
 What does it mean for the developing
countries?
 Mounting trade deficits
 Productivity and unit labor costs
 Country facts and figures
 What next?
Globalization & Outsourcing
 Cheaper & faster data and voice
telecommunications
 Easier global financial transactions
 Cheaper hardware
 Easy to use, standard software
 Lack of staff in the US
 Educated English speaking workforce abroad
Benefits vs Drawbacks for the US

Corporate benefits
• Lower costs
• greater efficiency without having to invest in people and
technology
• Increased focus on core competences
• Increased corporate profits

Corporate drawbacks
• Increased project management complexity
• Some loss of immediate control
• IP vulnerability

For the US
• Increased corporate profits
• Higher US unemployment
• loss of industrial base
• High trade deficit
– Impact on interest rates?
– Impact on currency exchange rates?
Benefits vs Drawbacks for Developing Countries
 Benefits for developing countries
•
•
•
•
Cash generation
Increased employment & training
Infrastructure build-up
Accumulation of business experience
 Drawbacks
• Lock into low-wage economy
• May become vulnerable to cheaper outsourcing
Reciprocal or one-way?
 Reciprocal returns
• OK if cash earned by countries providing
outsourcing services returns to the US via
purchase of US goods
• One of the reasons for FTAs
 One-way loss
• China buys far less goods from the US
• Complete outflow of US funds without cash return
to the US
Reciprocal or one-way?
 Proponents of NAFTA point out that exports
from the United States to Mexico have risen
150% and exports to Canada are up 66%.
 The Clinton administration estimated in the
late 1990s that expanded trade in North
America had created over 300,000 new U.S.
jobs.
 Detractors argue the trade deficit with NAFTA
represents US jobs shipped abroad
U.S. monthly goods and services deficit
http://www.bea.doc.gov/bea/newsrelarchive/2005/trad1104_fax.pdf
Trade Deficit

The US international trade deficit increased to $60.3 billion in
November 2004 from $56.0 billion in October, as imports increased and
exports decreased. (12 Jan 2005).

In September 2004 the imbalance with China grew to $15.5 billion,
beating the previous high.

The goods deficit with Japan increased from $5.9 billion in October to
$7.3 billion in November. Exports decreased $1.0 billion (primarily
civilian aircraft) to $4.2 billion, while imports increased $0.4 billion
(primarily passenger cars) to $11.5 billion.

The goods deficit with the European Union (25) increased from $9.3
billion in October to $10.5 billion in November. Exports decreased $0.8
billion (primarily pharmaceutical preparations, passenger cars, and fuel
oil) to $14.6 billion, while imports increased $0.3 billion (primarily
pharmaceutical preparations, crude oil, and medicinal equipment) to
$25.0 billion.

The goods deficit with Canada increased from $5.7 billion in October to
$7.3 billion in November. Exports decreased $1.6 billion (primarily
natural gas and trucks, buses, and special purpose vehicles) to $15.4
billion, while imports were virtually unchanged at $22.7 billion.
Trade Deficit
 Interest payments on US external debt add to
burden
 Further deficits reduce confidence in US assets
 Flight away from US assets would weaken
stock market and force interest rate hikes
 But US assets would become cheaper for
foreign investors
http://www.census.gov/foreign-trade/www/
http://www.iie.com/publications/papers/mann0899.htm
http://www.cato.org/research/articles/reynolds-041203.html
Dollar still too high?
 High dollar
• Makes US goods more expensive abroad
• US products therefore less competitive
• Imports become cheaper
 Dollar still high compared to 1995 level
• Global financial crises around 1997 led to flight to $
• Strong US internal growth
 Problems
• Other countries like China still not on open exchange
system – hold their currency artificially low.
http://www.iie.com/publications/papers/mann0899.htm
http://www.imf.org/external/pubs/ft/fandd/2000/03/mann.htm
US Dollar Global Exchange Rate
US Dollar Global Exchange Rate 1973 - 2005
140
120
100
Exchange Rate
80
60
40
20
Dateline
http://www.federalreserve.gov/releases/H10/Summary/
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
Jan-81
Jan-79
Jan-77
Jan-75
Jan-73
0
Declining Dollar – Good or Bad?
US Dollar Global Exchange Rate 1993 - 2005
140
130
120
110
Exchange Rate 100
90
80
70
Dateline
http://www.federalreserve.gov/releases/H10/Summary/
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
60
Labor Productivity
 US workers are highly productive
•
•
•
•
Highly trained
Excellent general infrastructure
Highly automated
Extensive use of software tools
 US workers also work longer hours than
anybody else
 These two factors explain the recent
productivity gains in the US while employment
levels did not rise
Productivity and and unit labour cost comparisons
http://www.ilo.org/public/english/employment/strat/publ/ep00-5.htm
Unit Labor Cost
1970
1980
1996
United States
100
100
100
Canada
99.05
91.41
90.95
Mexico
77.24
66.15
40.64
Austria
80.86
98.34
108.87
Finland
83.33
82.99
88.69
France
82.85
91.64
94.13
Germany
82.64
93.00
109.95
Greece
39.69
57.93
89.24
Italy
76.99
76.59
82.72
Portugal
56.27
69.67
67.54
Spain
82.49
71.60
80.55
UK
105.23
109.47
110.92
Norway
92.76
100.32
116.78
Japan
55.55
67.86
93.50
Korea
44.18
53.77
63.92
Australia
82.76
85.60
88.04
What’s best - you pay someone $1 an hour and they have to work 10 hours to create x,
or you pay someone $10 an hour and it takes them 1 hour to create the same thing …?
Outsourcing Trends

US Companies forced to outsource to stay competitive
against worldwide competition

Current service providers move higher up food chain
• India has very sophisticated BP management
– Now doing design work
– Microsoft, SUN, IBM, investing in infrastructure
– Labor costs rising

Countries such as China and India are producing high
number of IT graduates
• India: 75,000
• China: 50,000

Former East Bloc countries now entering EU
• Russian generates good math graduates
• IP protection enforceability

Life Sciences also a good sector for outsourcing
Some outsourcing profiles
The rapidly-expanding Shanghai Jinqiao High-Tech Park is one of the fastest-growing sites for foreign investment in China.
Some outsourcing profiles
Country
Population
China
1.3 billion
India
IT wage
$3 - 8k
English
Skills
Poor
Transaction processing, low-end
software development and
maintenance
Over 1 billion $5 - 12K
Good
Application development,
maintenance, call centers,
financial processing
Philippines
77 mil
$5 - 10K
Medium
Accounting, finance, call
centers, animation, human
resources.
Russia
155 m
$6 - 10K
Poor
Web design, complex software
development, aerospace
engineering
Canada
107 million
$25 - 50K
Good
Software development and
maintenance, call center, tech
support.
Mexico
107 million
Spanish a
plus
Spanish-language call centers,
software development, data
center outsourcing
Ireland
5.5 million
Good
European shared-services
centers, software development,
call center
$25 - 35K
What the US needs to do …

US needs to continue the pace of innovation

Become design, marketing and sales force for the world?

Government and private corporations needs to educate
workforce continually

Must increase number of technical graduates

US companies must invest internally in the US

Government needs to encourage US employment – tax
breaks - American Jobs Creation Act of 2004

Reduce trade deficit, exchange rate?
• Should not impose protectionist trade barriers
• Should not impose penalties on US companies outsourcing