Posted on 07/02/2004 8:37:28 AM PDT by CarrotAndStick
In a significant report, an influential consultancy firm has warned American companies that either they outsource more work to India, including high-powered functions like research and development, or face extinction.
Companies risk extinction if they hesitate to shift facilities to low-cost countries because the potential savings are so vast, said a recently released report by Boston Consulting Group.
Outsourcing and India: Complete Coverage
The report also cited US executives who felt quality of American workers were deteriorating, compared to the high quality of workers in countries like India and China, the Washington Post reported.
"The largest competitive advantage will lie with those companies that move soon," the report states.
"Companies that wait will be caught in a vicious cycle of uncompetitive costs, lost business, underutilised capacity, and the irreversible destruction of value," said the report, released in May.
Boston Consulting, which counts among its clients many of the biggest corporations in the US, tells the companies that they have been too reluctant rather than too eager to outsource production to LCCs (low-cost countries).
"Successful companies," says the report, "ask themselves, 'What must I keep at home?' rather than 'What can I shift to LCCs,'" says the report. "Their question is not 'Why outsource to LCCs?' but "Why not?"
The study suggests that the movement of jobs to countries like India and China is likely to accelerate strongly in the coming years.
The report also revealed that during confidential discussions with executives at Boston Consulting's client companies, many conveyed low opinions of their American employees compared with labour available abroad.
Not only are factory workers in low-cost countries much cheaper -- well below $1 per hour in China, compared with $15 to $30 an hour in the United States and Europe -- but they quickly achieve quality levels that are "equivalent to or even higher than the best plants in the West," said the report.
"More than 40 per cent of the companies we talked with expressed significant concerns about the erosion of skills in the work force (in the US). They cited machine operators who are unable to handle specialised equipment properly or to make the transition to new work materials. In contrast, LCCs provide large pools of skilled workers who are eager to apply their 'craftsman' talents."
Midlevel engineers in low-cost countries, says the report, "Tend to be more motivated than mid-level engineers in the West," said the report.
It cites General Electric Co, Motorola Inc, Alcatel and Diemens AG as examples of companies that have set up research and development centres in both India and China "to leverage the substantial pools of engineering talent that are based in the two countries."
Indeed, the report undercuts the view that research and development jobs in Western countries will increase even as low-skill jobs migrate to nations like India and China.
Among companies with large operations in low-cost nations, "one of the most intriguing advantages we have come across is faster (and lower cost) R&D," the report states.
The report, the Post points out, provides reason after reason why US firms should locate operations offshore, and rebuts the arguments for why the trend is likely to slacken.
In contrast to experts who have predicted that rapidly rising wages in China and India will dampen their appeal to corporations, Boston Consulting contends that the Indian and Chinese cost advantage "may actually increase" in coming years.
"If wages increase at an annual rate of 8 per cent in China, while in the United States and Germany they increase at annual rates of 2.5 per cent and 2 per cent respectively in 2009, the average hourly wages will be approximately $1.30 in China, $25.30 in the United States, and $34.50 in Germany. So, in dollar terms, the wage gap will have expanded rather than shrunk."
Moreover, it says, "the growth of wages in China and India will be limited because of the enormous reservoir of underemployed people in these countries," noting that 800 million Chinese living in the countryside "are expected to exert very strong downward pressure on wages for low-skilled positions over the next few decades.
India, for its part, has a pool of 25 million highly educated English-speaking workers, expanding by a million every year, it notes and advises that some products -- such as those where patents and copyrights are at high risk -- should not be moved overseas.
It says that companies incur high initial costs, including severance payments, when they go abroad -- in the range of $25,000 to $100,000 per transferred full-time employee.
Establishing and managing a supply chain in a foreign country can also entail significant initial outlays, it warns.
But these drawbacks, it emphasises, melt away as companies recognise the other advantages to offshoring, including gaining access to huge and growing markets.
"China is a very special entity in this respect," says the report, "having already become the world's largest market for machine tools."
"Although the risks are real," it concludes, "experience shows that they can be managed -- and that there may be greater risk in failing to make the move to counries like India and China).
"Companies that continue to hesitate do so at their peril."
When you are totally poor, you are welcome to move to low tax, Christian European, much empty landed and protectionist Russia...unemployement around 7% and on drop, tons of factories (after Putins 25% tarrrif on import cars was to kill all auto sales...then Jeep, Tyoto, Chrystler, Ford, Saab, Mercadies and BMW all seem to appear and open factories...what by God, the US economists and IMFers were wrong? and on flat tax too?)
Far from everywhere...mostly just US.
Ask how many chinese on $.20 per hour can afford to buy anything they make?
Then there is the whole issue of popular revolutions of the numberless super poor against the handful of super rich and their bought guns...we all through history know how those keep ending...and after 50-70 years US citizens will free themselves of own personal communist experience...maybe then they too have flat tax?
Armed with 30-50 years old tanks and no planes and 20 year old missiles and manned by Arabs who outnumbered Jews 10 to 1 and loose 5 wars...not much for accomplishment of super power...now change Arab culture to allow Republic to survive when US gone and I give you big creds.
Who needs Boston Consulting when you can hire Bombay Consulting for 1/10 the price?
At one time Americans had the most educated productive citizens of any country on the face of the Earth, but those days are long gone. Multinational companies based in the USA with productive workers all over the globe, are the major, if not only reason, that America still has the highest productivity numbers in the world.
Many Americans think that if someone in a third world country can do your job at 1/10 of your salary, then your job must have been pretty easy and you probably never deserved your high salary to begin with.
The arrogance and ignorance of many Americans on this topic is the major reason that America will become a third world nation. When the majority of Americans finally do wake up to the truth, it more than likely will be too late to save their country from utter poverty and destruction.
A lot of truth in what you say. Evident in this very post. Extremely depressing. The sword knows not it is rusting.
Why should they? Want to learn about new technology?? It's just a Google search away, for free.
LOL! Thanks for your input!
Precisely correct. The creation of the proletarian class (i.e. that class which has no means of obtaining income other than wages for labor) shattered the traditional Christian and Western economy. Small crofters, farmers, artisans, and others who had formerly eked out a living from their various self-owned enterprises were stripped of their livelihoods by social or economic factors (pun intended) and reduced to working for wages rather than workingfor a living. This social upheaval stripped labr of its intrinsic dignity and social character and transformed it into a commodity. This is why G.K. Chesterton said
"The truth is that what we call Capitalism ought to be called Proletarianism. The point of it is not that some people have capital, but that most people only have wages because they do not have capital."In other words: Capitalism is not defined by private ownership of Capital; it is defined by the existence of a mass of people without capital. Capitalism is defined by the presence of a propertyless working class.
The commodification of labor has been a disaster for the vast majority of people. A man whose sole means of supporting his family is his (commodified) wage is going to suffer every time market forces reduce the value of that wage. (This is why trade unions were created — they were attempts by the owners of a given commodity (labor) to "corner the market" in that commodity, establishing a monopoly power over the price of labor which Capital would be forced to pay.) This worked as long as Capital was largely tied to local or national structures that prevented it from moving. The problem with this idea is that Capital is now more mobile. In a teleconnected, jet-speed world, Capital is free to seek markets where the commodity price of labor is as low as possible, i.e. sweatshops. All unions do today is "bid up" the price of labor in their locales, driving Capital (and jobs) to low-priced labor markets overseas. Ecce outsourcing; one cannot blame Capital for buying labor as cheaply as possible; those who manage it on behalf of their shareholders have a duty to maximize their investors' returns.
Communism, socialism, and the collectivist sorts of anarchism was an attempt to rig the market by creating "one big union" (the Party) and "one big company" (the State), both owned by the working class (the "dictatorship of the proletariat"). In theory, this would allow the State to match supply and demand ccording to plan and ensure an equal distribution of both work and wages to all ("From each according to his ability, to each according to his needs"). In practice, however, the Party nomenklatura not the people at large, ended up in control of both the State and the People, using both for their own ends. Under the Soviet system, ruthlessness was the coin of the realm, not labor, and most of the State's revenues were used for things that tended to soldify State power. (i.e. military adventurism, prestige projects, subversion of other countries, etc.) Unable to to match supply and demand by bureaucratic fiat, the State concentrated on the production of staple goods for the masses, but without the profit motive to motivate them, Soviet laborers had no incentive to work any harder than was necessary to avoid criminal charges; in return, wages just above subsistence were the norm for workers in State-owned industries ("We pretend to work, they pretend to pay us"). Such a system was doomed from the outset.
The situation in the West is similar. Most people in the U.S., Europe, and Japan own no capital of any sort outside of the equity value of their own homes. By exchanging their labor for wages, most are able to live reasonably comfortable lives and accumulate a wide variety of consumer products through installment buying, high-interest debt, and other forms of credit. Owning a business is considered by most workers to be a prerogative of the wealthy — something impossible for the Average Joe. This leads to both a sense of cynical fatalism about the system ("The rich get richer, the poor get poorer") and a sense of futility ("No matter how good a job I do, the Company pays me the same"). Without the profit motive to motivate them, Western laborers have no incentive to work any harder than is necessary to avoid getting fired from their jobs; in return, wages just above the level needed to live and support one's heavy consumer debts are the norm.
The lessons of history show that in a command economy a dearth of physical commodities is unavoidable, leaving the average worker impoverished and angry. In a free market economy, the flight of commodified labor prices to the lowest levels possible cannot be stopped, leaving the average worker bankrupt and angry. In both, working people are alienated both from Capital and from their labor: work becomes drudgery, something one does for the State (or the Man) in order to get enough money to live on.
What is to be done? The solution won't be easy. Capitalism and communism are siblings — both cannot exist without masses of proles who have nothing to trade but their labor. In order to escape the tyranny of these two monsters, it may be necessary to rethink the relationships between man and capital and man and labor by which our economy has organized itself over the past several centuries since the death of Christendom and the rise of Man, the Measure of All Things. Perhaps we should reconsider the idea of the West as a Christian civilization, and with it the idea of work as both sacrament and vocation.
One thing is clear: in a world of ten billion people, the price of labor will only continue to drop. In time, even the most inexpensive sweatshop labor will be undersold; after all, the ultimate low-wage worker is a slave (or a machine). In areas of the world where Western concepts of law and order and human rights do not hold sway, slavery and other forms of forced and uncompensated labor (such as the Chinese laogai system) will be Capital's outsourcing option of choice; in high-tech countries, robots will bear the burden of productive labor. In both cases, the era of the Job is over. Man the Human Resource – individual men as disposable labor units, easily discardable should he becomes expensive — is ended. Without jobs, those billions without other means of generating income will have no wages, and no way to support themselves and their loved ones — and a man with hungry children is capable of anything. If there is to be any hope, it lies in the elimination of the proles — by restoring them to their proper place in Christian society, that of human beings created in the Maker's image. Rather than human resources, men need to be restored to the dignity of human beings — each working at his own vocation with his own tools, each benefting directly from the profits made by his own hands. An economic philosophy that champions such a revanchiste theory of economy exists. It is called Distributism.
The word distributism comes from the idea that a just social order can be achieved through a much more widespread distribution of property. Distributism means a society of owners. It means that property belongs to the many rather than the few. It is related to the idea of subsidiarity, emphasized in all papal encyclicals relating to social teaching and economics. Subsidiarity, in the words of the Quadragesimo Anno, means that "It is an injustice and at the same time a great evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organizations can do. For every social activity ought of its very nature to furnish help to the members of the body social and never destroy and absorb them."
Dorothy Day, writing in The Catholic Worker in June, 1948, described Distributism thus:
"The aim of distributism is family ownership of land, workshops, stores, transport, trades, professions, and so on. Family ownership in the means of production so widely distributed as to be the mark of the economic life of the community-this is the Distributist's desire. It is also the world's desire."If you are a worker, and your desire is to own your own business instead of being a wage-slave your entire life, Distributism may be the answer.
Or -- too many Americans have lost faith in the American people.
Say what you want, I see this every day. And I've not seen one single 'success' story from off-shoring, when compared to doing the project here in the states.
It takes longer. The quality is poor. And the "total failure" rate is very, very high, on the order of 80+%.
American developers just are better, in my direct experience.
"McDonalds cuts food costs by cutting the 'meat' out of their hamburgers!"
IT companies who off-shore work are failing at it. The ones that will stay in business are bringing it back on-shore as we speak.
For the rest, the ones intent on failing -- yes, off-shoring will help them fail cheaper than using American talent. But that's all off-shoring has turned out to be, what failing IT shops do to cut costs so they can fail more cheaply. It can buy them a little time, in *some* instances.
You mean like the privilege of not being shaken down at the airport? Oh, wait, we backtracked on that one already!
Another factor not considered is that often the cost of doing the work is dwarfed by the actual or anticipated value of the product, and that in such cases shipping the goose that lays the golden eggs offshore just to get a cheaper barnyard simply is not an option. (e.g. if Google moved their search engine development offshore tomorrow then I would expect to get access to their technology in short order.)
Also not addressed is the fact that lower cost of offshore labor allows companies to explore new directions and product offerings that they could not even consider previously - thereby creating *MORE* work.
I asked a business insurance agent last week how the economy was doing from her vantage point. She said that last year there were many more (and urgent) requests for small business insurance for startups from laid-off workers. This year not as many, not as urgent. So, if outsourcing, immigration, h1-b's, and automation result in da big corps shedding alot of native workers, I think you'll see more small startup activity.
Great article - did you write it? For publication somewhere?
In China in the 1920's, labor was so cheap that humans were used instead of horses to pull loads. The horses actually had to be fed, where the humans...were left to their own devices.
Which usually mean't starving.
Isn't that already occuring? What percentage of Americans have investments in the stock market, either through 401Ks, mutual funds, direct stock ownership? Isn't that property, too? Or are you only talking about tangible property?
The structure of the modern corporation, which insulates stock owners from liability, while at the same time removing them from making decisions about the way the corporation is run (with the exception of maximizing the bottom line), has much to do with our current predicament.
This deserves a bump!!
Capitalism and communism are siblings — both cannot exist without masses of proles who have nothing to trade but their labor.
I would go even further to say that Capitalism and Communism both have the same fatal flaw: Neither takes into consideration human nature. In capitalism greed, varying abilities between people and the hording instinct are not taken into account and the result is that capitalism creates a schism between those that have the abilities, are willing to ignore greed as a sin and have the desire to hoard wealth. Communism, on the other side of the coin, does not take into account creativity, man's desire for freedom and the fact that some people are more capable of producing and managing for themselves.
Both doctrines arrive at the same conclusion from different routes: A highly disenfranchised proletariat that at some point must rebel in order to reclaim their human dignity. We have seen the fall of communism in most parts of the world. What we are seeing now is capitalism filling in the vacuum left behind.
Far too many people think that capitalism, as a sole doctrine for society, will solve all problems. While capitalism is better than communism in most respects it still retains the fatal flaws stated above. Once people realize what capitalism's end are (a mass proletariat governed by a select and elite few) not that far off what will they do?
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