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."
As more abject failures are reported CEO's will start to notice.
In any case the hourly rate for 'first' rate indian outsourcers has already tripled. Markets work. The chaos caused by the newly affluant chinese and indian children in their own sociaties will be fun to watch.
EmptyVee will be chinas and indias downfall, same as ours.
yes I did see your post. And it is correct, I busted my ass over my life.
However, how do you live on $4.50 per hour today and raise a family, or live even as a single person on that amount, in the USA?
http://www.webhostingpal.com/appliance/appliancelifespan.htm
Here are the average life expectancies of some common American household appliances:
Microwave oven: 10 years
Garbage disposal: 10 years
Trash compactor: 10 years
Water heater: 10 to 15 years
Smoke detector: 10 years
Refridgerator: 11 years
Washing machine: 10-13 years
Dryer: 15 years
Range: 20 years
Keep in mind over 80% of Appliances don't have any problems before 5 years.
I have rarely had any trouble with any household appliance in these categories. I once had to replace a drive belt on a 15 year old dryer, and a sticky valve on a dish washer (I went away for the summer and it froze up). Other than that, appliances I have had around the world work very well and consistently, including my American, Japanese, German, and Italian ones.
The only major trouble I found consistently was the front loading washers, from every country, leak out the front door when you get too many clothes or soap in them.
However, the smaller appliances, fans and countertop ovens, and slow cookers - All from China - only seem to last about a year, while the American ones they replaced ran forever. (my current american fan is now running 3 years straight without stopping). It cost me $5 more than each of the 3 chinese fans I replaced (in 1 year). Which were replacements for a Japanese fan I bought overseas which lasted 17 years.
219 - "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"
GE used to build fine appliances. My brother is still running his just fine GE stove (1953) (wife loves the built in cook pot and he loves the griddle not available today. A good friend has the same beer refrigerator in his garage now for 30 years still working fine (in a Texas Garage - including the summers).
However, about 5-10 years ago, GE got screwed up and moved most of their production to China, and now sells mostly crap, For some reason. I now refuse to buy anything GE. I can't find any US made GE products.
Ugh, outsourcing. I work with assigning work to an offshore firm. The last two weeks have been utter h*ll. There is an Indian liason that I work mainly with, he is in the States and so we all know how much he is getting paid. That's not my concern, the quality of his work, well, there is no quality. He said things to make himself look good (oh yes, the Novell network and terminal services are up and running weeks ago, I made the assignment and then found out that they weren't, but they would be this coming week.)
The Indian team can't follow the test case steps, if I write them, then they pick them to pieces. Someone assigned them one of my modules to update with new specs and they totally messed them up. Good thing I kept a backup somewhere else.
I finally did go to management a couple of weeks ago and voice my concerns. And Mr Indian Liason was let go, Friday was his last day. Turns out I was the last in a long list of complainers about his quality of work. Unfortunately they think they just got a bad apple, and that everything will be OK. I'm not holding my breath.
Managements are swayed by this "you can have development and testing going on for 24 hours a day" line. Yeah, well all I do is babysit and dumb down the tests so that they can understand them. And the whole exercise becomes a matter of perfect test cases, while any kind of useful code testing goes right out the window.
Thanks for listening. :)
"You can't work a person like a dog and get their best from them. It does not work."
I think this actually WORKS in China. The prisoners and child labor - for sure....
Revelation 6:6
Then I heard what sounded like a voice among the four living creatures, saying, "A quart of wheat for a day's wages, and three quarts of barley for a day's wages, and do not damage the oil and the wine!"
The oil and wine is a reference to the rich.
>> I wish I could see more positive signs, but when over 1/2 of this country believes in the likes of Kerry, the democrats, Michael Moore, Bill Klinton type people as their heroes, this country is doomed
Yeah, but the other half believes in George Bush and the Republican congress which hasn't done a damn thing to stem the tide of socialism.
More government = less freedeom
less freedom = less capitalism
less capitalism = lower standard of living
everyplace, everytime
"We aren't thinking ahead.... and when we lose our technological edge"
That' what you get we corporations are drive purely by the quarterly results (profits).
$$$ is the bottom line - it's their God. And the government
won't advise them.
"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.... "
I had an interview in 1999(?) with a SW start-up in a very modern glass and steel building... The interviewer boasted repeatedly about The Company, having just got the second round of financing and burning the V.Cap. fast !
Not having an economic backgroung I was clueless but I didn't want to ask.
As of to day I am still clueless about that....
And I would disagree. And I'd point to the failure rate of those projects as evidence.
China gets exactly what they pay for. Those workers are *not* the equal of a well paid, well trained, free worker. It's self-evident.
And on this 4th of July weekend, I'd like to point out that this has been the single greatest strength of American workers for the last few centuries.
American software developers are more productive, and do superior work, than the vast majority of off-shore workers. In my direct experience.
Now don't get me wrong -- there are some very, very talented Indian developers. Most of them are over here, and they charge what I charge (or more).
But there is no free lunch. You can't just go to a place, hire a bunch of folks and viola! have a software shop. Not even here in the states, really. It's much harder than that. You have to hunt and search for good people, then keep them happy to retain them.
It's a 'talent' business. The big corps are slowly finding that out. Reluctantly. Like sports, you can pay one person $100k and get 10 times the production of 2 people you pay $50k. The trick is finding the talent.
These corps are going to have a very hard time with that. It's not what they've been use to. Most other industries are 'factory' type situations, in which workers are just numbers, interchangeable. You hire someone, train them for a week or a month, and you have a solid producer.
Software, of course, is *not* like that at all. But that doesn't stop them from trying to run development shops as "software factories". They're failing, and will eventually evolve/adapt. But this is a very new industry, relatively speaking. And it's just a mere shadow of what it *will* be. I believe the internet is like Radio was, the paralells are too similar. And radio went thru a big boom and bust, and then began to grow. Slowly, at first, but eventually radio came to be what it is today.
Those examples are the things that caused me to not renew my membership in the RNC. They have sent me tons and tons of mail wanting me to give to this, give to that, give here, give there, sign this, sign that, rejoin, rejoin and send money. I have told them that I am a conservative individual first, and I was not rejoining. Do not send me any more of the mailings. They will not stop. They continue to send the stuff. I just toss it in the trash. They don't listen when I expressed my displeasure about all the spending, and now they will not listen when I tell them not to send me stuff that I am not going to rejoin the part. Mainly because you will not find liberals in the conservative movement, yet you find liberals in the republican party. That is why I did not rejoin. I am back to voting for the person who has my kind of thoughts and ideas. I would vote for Zell before I would vote for 75% of current republican senators. He is more conservative than they.
"In a certain sense, I think this may be true. Corporations hire CEO's and other top executives who seem to come in and chop away at the established corporate structures in order to increase the value of the company's stock. These executives move from company to company, getting larger and larger compensation packages, probably work there a year or two, and bail out with golden parachutes."
Your entire post is based on this premise. Please name 3 CEO's that have moved to multiple (3 or more) in the last 10 years. I am not saying that individual cases can be made where the Executive was overcompensated after his failure, however I don't think Executive's are making a living at job hopping every year or two. Most of them that go down in flames are still given lucrative packages after being fired. The difference is that they are not re-hired as a CEO. Once they are known in those circles as being a failure, they will not be able to secure employment in the future.
The "Golden Parachute" is done for a variety of reasons. The most important is that the Board is buying the CEO's silence. They do not want the CEO to divulge company secrets, future strategies, future products, etc. This disclosure of a new product to the market that might not be launched for 3-5 years could cost the company well over a Billion dollars. Given the risk that a disgruntled CEO can pose, the buyoff of $10-20 Million is very small.
I'm not disputing that CEO's make mistakes and I am not disputing that cost cutting is often an incorrect focus. However, the continual "class envy" tool often used in this argument is the wrong tool to use. In addition, the customer's keep demanding cheaper goods and higher compensation. The very customer that drives the costs down is driving the cost up. When customers are willing to pay a premium for "American Made" labels, then their complaining about outsourcing will be taken seriously (By me).
In addition, take any company that takes a financial hit in the present to ensure that in the future they will be profitable. Their stock takes a dive (temporary) so that they will be profitable in the future. Then we hear society complaining that their 401K and Pension funds are taking a hit and they weren't able to retire as planned. Instead they have to work another 3-5 years to retirement.
The point is that regardless of the CEO's action, short term stock increase vs. long term profitablity, the evil CEO and evil Corporation is against the little guy. Those evil profiteers do it off the backs of the poor little worker. Jealousy drives these discussions and personally I think its obvious.
They may have a fancy building, but I'm guessing the software they produce is crap. Inexpensive crap, but crap nonetheless.
In my experience, the software that comes out of India, even from those companies that are "SEI Level V", just flat doesn't work.
Unfortunately, the cost of fixing and/or rewriting it on-shore doesn't seem to be figured in to the cost of doing business off-shore.
If Iraq gets and keeps a Republic, give creds to the Iraqis. They are the only ones that can do it.
I will agree on this one, I worked in appliance tech support for an un-named major appliance retailer (Sears).
The best appliances to buy are the basic models, not fancy sensors, no multiple settings, just your basic run of the mill appliance, and it helps alot of they're made by whirlpool.
Essentually you purchase the best basic model appliance you can find, it'll last longer than average for appliances of that type.
I wonder if one of those "risks that can be managed" is the possibility of one of these third world governments nationalizing all foreign owned businesses within their borders. It's happened in the past, is it too far fetched to think it can happen again? I wonder if we'll be hearing about how great outsourcing and offshoring are then.
bttfl
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