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."
Written a few years ago but an interesting synopsis.
In the annals of contemporary change literature, Alvin Toffler is the 600-pound gorilla. He and his wife and collaborator Heidi Toffler have written a baker's dozen of books that have all been best-sellers, starting way, way back in 1970 with Future Shock. The family tree of thousands of books about the future, and about how to cope with it, all lead to the leafy canopy where he makes his roost.
He has written about society, culture, the media, organizations, science, computers, politics, and economics. We could easily have picked his brain for an entire day. So how much could we expect to squeeze from him in 90 minutes?
Quite a lot, as it turned out. Toffler's session was like one of those pony cart rides you take through Old Williamsburg, only the driver is going at breakneck speed, and the pony is wide-eyed and snorting, and what you are looking at is not a restoration of the past, but fleeting glimpses of the future.
Wave theory
The central premise of Toffler's talk was that human history, while it is complex and contradictory, can be seen to fit patterns. The pattern he has been seeing in his career takes the shape of three great advances or waves. The first wave of transformation began when some prescient person about 10,000 years ago, probably a woman, planted a seed and nurtured its growth. The age of agriculture began, and its significance was that people moved away from nomadic wandering and hunting and began to cluster into villages and develop culture.
The second wave was an expression of machine muscle, the Industrial Revolution that began in the 18th century and gathered steam after America's Civil War. People began to leave the peasant culture of farming to come to work in city factories. It culminated in the Second World War, a clash of smokestack juggernauts, and the explosion of the atomic bombs over Japan.
Just as the machine seemed at its most invincible, however, we began to receive intimations of a gathering third wave, based not on muscle but on mind. It is what we variously call the information or the knowledge age, and while it is powerfully driven by information technology, it has co-drivers as well, among them social demands worldwide for greater freedom and individuation.
Economics old and new
In the first wave, wealth was land, and it was exclusive; if I grew rice on my acres, you could not.
In the second wave, wealth diversified into three factors of production: land, labor, and capital. As with the rice paddy of the agrarian regime, each of these was discrete, allowing for only one use at a time.
To illustrate: In the industrial regime, General Motors became rich by combining its resources (its factories, its manpower, and its money) to make cars. Each car loaded onto the truck slightly drained the company of its resources.
Today's counterpart to General Motors, Microsoft, makes cars that anyone can easily replicate at home (by copying disks). Microsoft is not drained of its resources when it ships a package of Windows 95. The land, muscle, and money in Redmond, Washington, are not the source of the company's wealth; the knowledge of its software developers is.
(Nicholas Negroponte's talk following Toffler's was based on this very notion of the undiminishable resources of the information age. Atoms, Negroponte said, are dedicated in nature: they cannot be put to two uses simultaneously. Bits, the atomic equivalents in the cyberworld, upon which all digital information is based, are endlessly interchangeable and reusable. When you download a file, the file you downloaded is still there.)
Economics has been lovingly defined as "the science of the allocation of scarce resources." From the standpoint of the third wave, in which the primary resource is knowledge, that second-wave definition rings hollow. In the first place, economics has never been much of a science, Toffler said. More to the point, our supply of knowledge is anything but scarce.
Indeed, like paper money, in which the tangible gold of the earlier waves has been replaced by alpha-numeric figures stamped on intrinsically worthless sheets of paper, our knowledge is inexhaustible.
Massification and demassification
A central theme of the industrial regime was centralization and standardization. Where the first wave lacked the technology to connect locale to locale, and to organize large systems, the second wave provided highway systems, cars, telephones, and mainframe computers, linking remote outposts to central controls. At the height of the second wave everything was "mass," from mass production to mass destruction.
Both Alvin and Heidi Toffler worked in factories when they were young, and they knew, as all factory workers of that era knew, that the job was to turn out the longest possible line of identical products. This was one point on which assembly-line capitalist Henry Ford and assembly-line Marxist Joseph Stalin could agree: the virtue of mass production. The larger the quantity, the cheaper the run.
But the economics changed. Computers make changeovers less expensive. A recent Siemens manufacturing product went by the name Lot Size One.
To be sure, the bureaucracy and pyramid power structure of the second wave made possible many wonderful things. Consumer goods streamed through factories at an unprecedented pace. Medicines, appliances, government services, and entertainment all found their way from production centers to every nook and market niche.
But the price of quality goods was sameness. In the famous words of Henry Ford, "They can have a car any color they like, so long as it's black." The completion of the Union Pacific Railroad in 1867 created a single transcontinental megamarket that wouldsoon overwhelm every micromarket it passed through.
1984 and beyond
The tyranny of the factory inspired a bleak futurism in which Big Brother ruled the planet through centralized information control. But something happened that prevented the nightmares ofGeorge Orwell (1984) and Aldous Huxley (Brave New World) fromcoming to pass. Technology took a sharp turn away from standardization and toward individuation and diversity.
In a not-always-pleasant way, the third wave began decentralizing the machine heart. Today is a time of transition, in which we witness the curious spectacle of massive second-wave-type enterprises adapting to the third-wave appetite for differentiation.
Take the coffee example. In the 1920s each town had its distinct coffee flavor. In the 1970s it was Maxwell House and McDonald's scalding coffee, from sea to shining sea. By the 1990s, an explosion of mom-and-pop coffeehouses took place across the country. Today you stop, as I did recently, at a coffee shop in Talladega, Alabama, and order a double latt of decaffeinated Kenyan with a finger of amaretto hazelnut syrup in .
Or you can have the best of all worlds, second wave McDonalds' standardization combined with third wave product choice, by walking into any of the 2,000 Starbucks coffee shops nationwide.
In retail, we have witnessed the second-wave juggernaut Wal-Mart break upon cities small and large, with the third-wave possibility of a single store selling 100,000 different items.
Again, the Tofflers have coined a term for a third-wave predicament, familiar to anyone who has surfed the Internet, shopped at a warehouse grocery store, or installed satellite download television : overchoice.
Mass culture
Mass culture has not vanished with the arrival of the third wave. We still have Disney, rock and roll, Powerball, and CBS.
But alongside these mainstream cultural entities, there have developed a vast array of demassified niches. The Usenet on Internet boasts 10,000 special interest newsgroups. On the radioit is possible to turn the dial and find stations dedicated to certain types of music, from classical and contemporary tobluegrass, zydeco, salsa, tejana, tropical, bomba, and bangra.
To a thousand different strains, the tastes of individuals are emerging as a market force to be dealt with.
The emerging politics
The clearest sign of changing politics is the decay of political parties. The day when a Franklin Roosevelt can put together astring of four elections by combining a handful of voter blocs(farmers, labor, intellectuals, the rural South, and the urban North) into a single lasting coalition is gone. Election todayrequires stringing together hundreds of splintered grassrootsgroups : the nonsmokers, AIDS activists, save-the-whales peopleand what-have-you.
Every group is passionate, and narrow in focus. It is in every way a more daunting process, and it is conducted, as making frankfurters should not be, in full view of the public. It is no wonder that no one, in the United States, in Japan, in Italy, or anywhere, believes in parties any more. Parties were a static second-wave, homogenized, massified function that do not seem relevant in the more volatile, diversified, heterogeneous third wave.
The state of the family
Many people share the sense that the traditional nuclear family of the '50s, with working father and stay-at-home mother, is the best defense against the wrong kinds of changes in a society.But is it reasonable to expect that everything else in society will change, but the family unit will undergo no change?
Thus we have the proliferation of family types today : the remarrieds, the adopteds, the blended family, the single-parent family, the same-sex family, the zero-parent family, the family of convenience, the virtual family.
Toffler does not endorse the fracturing of the American family that has occurred in the past 30 years, but he notes that it is of a piece with everything else that has happened.
A management revolution
Centralized management made the world go round from the rise of the nation-state through World War II. In a simple system, a single individual could provide the wisdom and authority to guide a large enterprise.
No one believes that anymore. The emphasis, since the 1970s at least, has been on decentralization, on delegation of authority and empowerment, on self-managing teams, on the leader-as-facilitator as opposed to the leader-as-god.
Running a large enterprise from a hub on the basis of a single person's competence, Toffler said, is like a doctor making morning rounds and prescribing Valium for everybody. You can't doctor an entire economy, or even an entire organization, with one medicine anymore. In the demassified organization of today, one-size-fits-all doesn't cut it anymore.
Diversity and change are key. Every leader should check for the novelty ratio on the organization's product offerings: how many are six months old or less versus five years old or more?
The same can be applied to people: how many have arrived in the past six months, versus those who have been around five years or longer?
How old are the organization's existing managerial practices? When was the form you are now holding in your hand last changed? How might it be improved?
In every company new ideas, new products, and new people are waiting to be born. The leader's task is to get them out and breathing.
The demassification of intelligence
It sometimes seems that in the competitive third wave you must be a rocket scientist to survive. But Toffler sees the current era as one in which multiple intelligences are finally identified and given their due.
In the third wave, good ideas can come from anywhere and anyone. It does not behoove management to treat like dummies people who are supplying the native wit that allows organizations to succeed.
Conventionally "smart" people without motivation or energy or good health tend not to amount to much, he said. Indeed, reducing a person's gifts to an IQ number is a kind of ultimate unintelligence, but about what you might expect of a second-wave educational system that still sees teaching as a factory activity and young human beings as products to be processed.
The new intelligence will be all over the place. It may mean courage, imagination, entrepreneurialism, warmth, organizational savvy, or street smarts. These are the kinds of brains that will thrive in the third wave. Reduction of intelligence to a bell curve is a toxic supersimplification of reality.
Third-wave playthings
Beside human intelligence, Toffler is interested in where we are embedding machine intelligence, creating smart products. Microchips have already migrated from the desktop to our environment, so that the average home today has 200 chips performing discrete tasks.
The connectivity specialists at Novell have floated a goal of networking a billion different products. Why don't the 200 chips in your house talk to one another? If your toilet develops a leak, why can't it diagnose itself, research the matter, and call the plumber on its own?
The high price of sleeping
At a dinner party held for the Chinese ambassador in the late 1970s, Toffler found himself seated with the top executives from NBC and RCA. Since it would be unlike him not to take advantage of such access, he asked them how broadcasting would be different five years hence. Both smiled languidly and assured Toffler there would be no major changes.
They, like everyone else who would lose their jobs in the years ahead for not seeing the approaching third wave, saw a future of fine tuning and incremental adjustments. Amidst the tremendous upheaval of our times, they were asleep at the wheel and proud of it.
The power of the third wave has taken even the Tofflers by surprise. When they published Future Shock in 1971, they saw the knowledge age as an outgrowth of the industrial age that would require only a bit of fine tuning. They now see it as more revolutionary than that. The regime of the smokestacks has been toppled forever. What remains is still frothing and changing its shape. It is a whole new era, with dangers and opportunities uniquely its own.
Dr. Livingston, I prosume . . .
We are not currently in Toffler's third wave; we are still in transition between the second and third waves, and that is why the implications of the transformation are not immediately obvious.
Just as knowledge is replacing material and manpower as the fulcrum of the new economy, the old roles of producer and consumer are blurring. In the case of Windows 95, which anyone with a disk drive can duplicate as well as GM made Cadillacs, those roles have lost much meaning. The Tofflers have come up with a word that describes the blurred role we all play : prosumer.
As prosumers we have a new set of responsibilities, to educate ourselves. We are no longer a passive market upon which industry dumps consumer goods but a part of the process, pulling toward us the information and services that we design from our own imagination.
It is a version of capitalism that colonial economics ("There's a sucker born every minute") never envisaged. In the third wave, the prosumer is always right.
Cuppa joe
Like a steamroller grinding across the landscape, the massification of America ran roughshod over local individuality, replacing it with one-size-fits-all conformity. Toffler recalled how every town had a different-tasting cup of coffee at onetime, because every town had its own roaster. With the emergence of mass production and mass merchandising, small-town roasters were replaced by the central roaster at Chase and Sanborn or Chock Full o' Nuts.
Yes sir, no sir
Toffler, consulting with the Department of Defense, had doubts about such a hierarchical organization mustering the will to change itself.
He took heart when he learned what the new motto among many in the military is:
Disagreement will not be treated as disloyalty.
It is a motto he recommends for organizations that think themselves much less hierarchical.
IOW, any U.S. company attempting to compete against them is actually competing against the Chinese government. Which is executing an industrial policy designed to win all the business they can get, at any cost to the state.
The dogmatists will say, "well, good. so they can tax themselves to supply us". But in the end, they will have the industry, and slowly be able to ratchet the prices as the U.S. competition goes bankrupt.
Free Trade my ass.
Just realize that the 'offshoring' companies are the latest brainchild of the industry that brought us the 'dot com' boom and bust.
Then it'll be clear.
Big shiny new buildings don't mean anything except that they *started* with a lot of venture capital. Check back in 10 years, and let's see how many of them are still in existence.
Or, even more simply -- you could ask around, in the industry, and see how these projects are fairing. And once you did, and you saw the failure rates, and then heard the horror stories about these Indian firms burning the entire budget just coming up with a (worthless) design document, and wonderful anecdotes like that, then you might be ready to draw a conclusion.
But never, never be fooled by a shiny new building. Here in Austin, we had a bunch during the dot com days. Gardening.com, DrKoop.com, Living.com -- all with big, expensive offices, at the time. And all now gone belly-up. Bust. Kaput.
It just takes more than start-up capital to succeed in software.
As I see Toffler, either he is wrong, or boringly obvious, on the "well, duh" level. I wish I could write something so banal and get so much money for it!
184 - "Well calibrated minimum wage defends the weakest members from exploatation. When all employers have to pay a certain minimum and when tariffs protect workers from competition from countries with lower costs and standard of living the market can build society up. Otherwise market becomes a destructive force leading to the corrupt and violent oligarchy Latin American style or socialism."
Exploitation - the hall mark of free-traitors.
Japan has long been an 'insular' market, and Akihabara is a very typical reflection of it.
It is here, The Japanese 'test run' small quantities, and perfect their machines/products before subjecting them to the massive production and markets of the world, particularly the US.
Akihabara is the beginning and the end of the life cycle of many products. For example, I remember a radio as a keychain fob I bought there in 1970 which never made it out of Akihabara, and a 1/2 frame camera design in the 60's which did. I also remember bargaining very hard in the early-mid 1970's to buy one of the very earliest LCD calculators, and getting it for $30, then coming home 6 months later and seeing it advertized in a big ad at Nieman-Marcus for $29.95.
It's an interesting place, but this info on their advanced products is nothing new.
ping =
"106 - "I can tell you about how I've done it and have been happy. " (live on $4.50/hour).
And don'tell me to collect a US salary/retirement from a US source and live in a low cost of living place like Panama."
did you see my post 164?
That's just what I was thinking.
Outsource or perish = Outsource and perish
We had better export our unions, and CEO's along with the other jobs. Why should a CEO give himself/herself a multimillionaire dollar bonus for a job well done. In my opinion his reward for a job well done should be he keeps his job for another year at the same handsome salary. (which many times is a multi million dollar salary to start with.) Perks should be paid out of his earnings.
"I don't know what is going on with this country; when Sputnik first flew, we went into a frenzy to teach a new generation of scientists and engineers. We resolved to put a man on the moon in 10 years. Our response to the current explosion of new technological progress abroad is not even tepid, it is completely apathetic." Snowislander
Thanks for that interesting post. The difference is in the 50's we still valued ourselves as a country and wanted our country as a whole to do well in the world. We placed promoted and helped pay for the prograns that would ensure we could compete. (On a side note, the new private competition in spacecrafts looks like a positive move).
I say we export these consultants or so called "experts." Who needs these parasites. Companies should just quit using them or should I say being used by them.
A TRUE RIGHIST, TRUE CONSERVATIVE bump! Indeed, it has been the fall of the main pillars of Western Civilization - traditional Judeo-Christian living and beliefs among these, which has resulted in many of our current woes!
Now the main objective is to increase profits for the reform minded oligarchs and to reduce the cost of American labor.
From what figures that I have seen on what Japan is spending on this project, the direct costs aren't even that high. I seem to remember that the official direct costs are roughly 200 million dollars, and JAXA's total annual budget appears to be around $2 billion. ( Here is a very neat pamphlet about JAXA, but it's large (3 megabytes) ).
In the U.S., apparently about all you can buy are General Electric, Maytag, and Whirlpool. None of those that I have had or even seen (and my experience is pretty limited here, so take this with a grain of salt) can compare with the Panasonic (Matsushita), Toshiba, Sanyo, National, etc. brands all available in Akihabara. I had a Sanyo washer and dryer, and it was just fantastic, not a single problem in five years.
I have had nothing but problems with G.E. and Maytag appliances in the U.S.; poorly built out of the flimsiest sheet metal, crude internal mechanisms, it's a crying shame compared to a fine Japanese machine. My experience has been that many U.S. washers and dryers have to be replaced every few years. And G.E. products certainly don't sell in Japan; I did find a G.E. appliance dealer location in the backstreets of Shinochanomizu, and I don't remember ever seeing the dealer open. The catalog portion of the website for G.E. Japan Appliances seems to be in disrepair; I can only find mention of a refrigerator in it.
If you think Japanese automobiles are great ( and even the Germans do), then you should try their appliances. They literally sweep the competition.
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