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Outsource or perish, US firms told
Rediff.com ^ | July 02, 2004 19:23 IST | Rediff News

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."


TOPICS: Business/Economy; Constitution/Conservatism; Culture/Society; Foreign Affairs; Front Page News; Government; News/Current Events; Politics/Elections
KEYWORDS: bangalore; bush; china; economy; elections; india; jobs; outsourcing; pakistan; trade
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To: CarrotAndStick
Actually Concorde was killed because they let the quality decline dramatically. The planes were getting very old and unsafe. The cancellation of all concorde flights actually began after after Air France's concorde crash.

There certainly is a place for 'cheap' but many companies are finding out that you don't outsource critical functions... doing so is a killer. Cheap or not, if the job doesn't get done... you've just thrown away good money. At least in software, that is starting to become understood by CIO's.
41 posted on 07/02/2004 9:19:53 AM PDT by StolarStorm
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To: CarrotAndStick
I have just reached the point in my life, where, sadly, I trust only my wonderful little wife. I trust no one. I find that 95% of the things that people tell you are either a lie, a distortion, has their spin on it, or they have no clue what they are talking about. I believe what I see, not what I hear. They "want" you to believe what "they say." But, I have learned not to believe that. I have to see it to believe it now-days. I find that the truth is a lost art. Honesty and integrity are a lost art. I find more people will simply lie than face the music. Even when caught red handed, they will still try to lie.

When I was 12, my mother was approached by a man who lived across the street from my grandmother (my mother's mom). He was going to move and wanted to know if my mom wanted to buy his house. She did. They sat on the front porch and worked out the details. They DID NOT WRITE THEM DOWN. They simply agreed. They stood, shook hands on the deal. When my dad got home, my mom told him she bought the house across from my grandmother. My dad said fine. When do we move? A handshake. The man came by the house twice a month, on my dad's pay day and my mom gave him a check. He did that for the period of the few years it took for my mom to pay for the house. No interest, no lawyers, no body but them. They went to the county office to sign the papers to change the house into my mom and dad's name. Try doing that now! No way. Honesty ruled. Now, lies do. We can thank the good Bill Clinton for his assistance in that regard. Lie and be president of the USA. Noproblemento.

42 posted on 07/02/2004 9:22:22 AM PDT by RetiredArmy ( I am a Vietnam Vet. I have been accused of war crimes by the ADMITTED WAR CRIMINAL Kerry)
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To: citadel84

Perhaps you misunderstood my post. To me, outsourcing is both a fad, and, a cop out for enterprises (or those who run them) which either lack the skill to do comprehensive cost management, or, in spite of having the skills, choose not to turn them into comprehensive strategies due to pressure for short term cost reduction, or both.


43 posted on 07/02/2004 9:23:35 AM PDT by GOP_1900AD (Stomping on "PC," destroying the Left, and smoking out faux "conservatives" - Right makes right!)
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To: GOP_1900AD

Many of the QC/QA things you mentioned will be handled remotely by utilizing the ever increasing data transfer rate of the internet. Gigs [if necessary] of job data/docs/drawings/specs/3D-models being sent for review from Far East in mere minutes.

Add in video conferencing and you achieve pretty effective project control from afar.

A lot of the folks that busted their butt to improve the internet aren't too happy about it now being used to send their jobs overseas.


44 posted on 07/02/2004 9:24:24 AM PDT by citizen (Write-in Tom Tancredo President 2004!)
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To: StolarStorm
But still, I don't think the concordes were more accident prone, plane-for-plane, than regular jets. Considering the very demanding envelope within which the concorde operated, it seems like it is the better performer on safety.

Okay, if my comparison was imperfect, then wouldn't you atleast say cheap no-frills airlines are giving the big ones a run for their money?

45 posted on 07/02/2004 9:24:34 AM PDT by CarrotAndStick (The articles posted by me needn't necessarily reflect my opinion.)
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To: RetiredArmy

I was not even born the time you were a kid. But if what you say can be believed >;) ,then those times really must have been golden.


46 posted on 07/02/2004 9:29:17 AM PDT by CarrotAndStick (The articles posted by me needn't necessarily reflect my opinion.)
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To: CarrotAndStick

I was born in 1951. Not that long ago really. I will be 53 next month.


47 posted on 07/02/2004 9:31:04 AM PDT by RetiredArmy ( I am a Vietnam Vet. I have been accused of war crimes by the ADMITTED WAR CRIMINAL Kerry)
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To: jpsb
if you don't like it they throw you in jail

Nice truck.

48 posted on 07/02/2004 9:31:30 AM PDT by RightWhale (Destroy the dark; restore the light)
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To: CarrotAndStick
If I may interject -

I perceive a market progression to a bimodal pattern.

The cheap no-frills airlines are doing well. The high end - not the Concord type, but rather the real high end such as private jet ownership and fractional ownership are doing well. Those in the middle languish.

Take a look at NetJets.

49 posted on 07/02/2004 9:31:56 AM PDT by neutrino (Against stupidity the very Gods themselves contend in vain.)
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To: thulldud
When the natural feedback loop between incompetence and failure is broken, both are perpetuated.

Well said and worth repeating. That is why the left rewards incompetence and sloth with "safety nets" and punishes initiative and success with high taxes. Throw in unreasonable enviromental restrictions, leftist labor unions, and multiple taxes and you wonder how any American company stays in business. That is not by accident.

50 posted on 07/02/2004 9:32:08 AM PDT by Mind-numbed Robot (Not all things that need to be done need to be done by the government.)
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To: CarrotAndStick
Defense subcontractors are fired if they try to outsource Engineering to a foreign country.


BUMP

51 posted on 07/02/2004 9:32:33 AM PDT by tm22721 (May the UN rest in peace)
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To: CarrotAndStick
"Okay, if my comparison was imperfect, then wouldn't you atleast say cheap no-frills airlines are giving the big ones a run for their money?"

Of course, but when times are good the legacy airlines do very well indeed. My company is doing better than many of the LCC's this quarter, granted I work for one of the more effective big carriers. But there is a place for both quality and cheap.

Best of course to be a provider of both... as we are. But rather than relying on foreign outsourcing or other gimmicks, we focus on automation, efficient utilization of planes, fuel and labor.
52 posted on 07/02/2004 9:32:40 AM PDT by StolarStorm
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To: neutrino
Almost went to work for netjets... they wanted some of my software. Good company, but they are actually hurting financially right now.
53 posted on 07/02/2004 9:33:50 AM PDT by StolarStorm
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To: neutrino
"Those in the middle languish."

That is giving me such a splitting, bimodal headache.

54 posted on 07/02/2004 9:34:18 AM PDT by CarrotAndStick (The articles posted by me needn't necessarily reflect my opinion.)
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To: RetiredArmy
Honesty ruled. Now, lies do.

I'm fairly trustworthy, I guess. But I still like to take some advice from Ronald Reagan: Trust, but Verify.

55 posted on 07/02/2004 9:35:11 AM PDT by Koblenz (Not bad, not bad at all. -- Ronald Reagan, the Greatest President.)
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To: CarrotAndStick

Provide $hitty Customer service or perish, US firms told.


56 posted on 07/02/2004 9:35:25 AM PDT by Delbert
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To: RetiredArmy

Yet their 17-24 year old peers just wasted the 4th largest army in the world, and ended the 30 year rule of a dictator that NOBODY had been able to touch.

BTW, from what I've seen, public schools are better now then they were when I went through...1976-1988. Things are improving. The young crop of teachers are devout Communists either.


57 posted on 07/02/2004 9:35:30 AM PDT by Dead Dog (Expose the Media to Light, Expose the Media to Market Forces.)
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To: CarrotAndStick

this is why every college bound freeper - or parents of such - need to steer themselves or their children away from engineering, especially IT and EE. Its dead in the US.


58 posted on 07/02/2004 9:38:56 AM PDT by oceanview
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To: Koblenz

Well, I flip those two words around. Verify, then trust. Sorry, I am just not a trusting person anymore. I have been burned way too many times. Way too many times.


59 posted on 07/02/2004 9:40:02 AM PDT by RetiredArmy ( I am a Vietnam Vet. I have been accused of war crimes by the ADMITTED WAR CRIMINAL Kerry)
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To: Dead Dog

And, I said the split was 40% - 40%. These wonderful people in uniform now are in our 40%. But, the other 60% are the problem. Maybe the schools are doing well where you are, but I live in the socialist hell hole of Washington state (for a couple more years anyway till my wife retires then we are getting out), and things here suck. Schools suck. Students suck. Grades suck. Low test scores for the amount of tax dollars thrown at it.


60 posted on 07/02/2004 9:42:36 AM PDT by RetiredArmy ( I am a Vietnam Vet. I have been accused of war crimes by the ADMITTED WAR CRIMINAL Kerry)
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