Outsource or perish, US firms told

Rediff.com ^ | July 02, 2004 19:23 IST | Rediff News

[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."

[expat_panama]

No politician or government can repleal the Law Of Competitive Advantage....   ...I can, tariffs

That's what it boils down- a clash between those that want to work to feed their families, and those that want to raise taxes on the workers so as to feed others.  The cartoon of post #32 raises an interesting question-- why not fire CEO's and hire others who're willing to work for a tenth as much?    My answer is because the high price CEO's are the one's that they're hiring in the US while they're outsourcing.

And there's a heck of a lot more new jobs in the US than are packed in boxes and mailed over seas.

 

[citizen]

Me too.

[RetiredArmy]

Then we are equally as old, smart and dumb!!! ;^)

[swampfox98]

The government and business are in an unholy alliance, and it will spell death to the middle class voter power in America.

[patriot_wes]

Coming soon...the end game of every democracy.

[alrea]

Without economic populism what does the Democratic Party have ? Gay marriage and Michael Moore ?

The Clinton books, which can serve as progressive textbooks for the kind of changes the US needs

[sukhoi-30mki]

Honestly speaking that is one big self defeating statement-IT&EE are not dead at the moment in the US-the problem is that there is real heavy competetion throughout the world now-if u shy away from it-you get left behind for good.A real good elementary step would be to improve the quality(make harder) of primary&high school math&sciences(my cousins who live in the US say that it is far easier than what they'd have to do in India)-Indians&Chinese are real fanatical about Math,Science&Engineering from a young age hence they pump out tons of graduates in these disciplines.The problem with a poorer standard of school education is it reflects on the graduate system-but not on the post graduate systems-that's why loads of Indians,Chinese&others come to the US to do post graduation&PHDs

&besides these upswings&downswings are cyclical-the US economy&Job market well be up&running again-for eg-the Indian economy was on the verge of crashing in 1991 ,now it grows at nearly 8.5 %-2nd only to China
-From an Indian in India!!!!!!!!!!

[mdmathis6]

We may go thru a period where they will try that but guess what...the super rich will need security and armies to keep what they have stolen. On what economic basis will these super rich be able to call themselves rich? If the poor have no jobs and can't buy any thing...how will the rich "stay" rich?

In the end it will be military force that keeps the hoy poloy at bay...only the rich will find that dependence on force is two edged sword. In the end its thems with the guns that will own everything!

[jpsb]

"That's what it boils down- a clash between those that want to work to feed their families, and those that want to raise taxes on the workers so as to feed others."

How do you feed your family on 20 cents an hour?

[alrea]

US companies would be more competitive if they didn't pay consultants from places like Boston. The US needs tort and tax reform with massive re-privatization of anything the government does except military functions; especially school systems. This is simply "competitive rebithing" focusing on the highest cost items for job creators.

[Hop A Long Cassidy]

>>>"No politician or government can repleal the Law Of Competitive Advantage."

I agree. We in the US received a big benefit when countries like India and China took their labor off the market through Communism and Socialism. Now, these labor markets are coming back on the market and they will drop down domestic US wages in areas where foreign competition can. There's little we, or our government, can do about this.

However, remember that after Sputnik was launched (many years ago) the US started up a concerted effort to catch up with the Ruskies in education. Accelerated programs were started across the US.

I think this offshoring will have the same effect - as it calls into question the low-quality, NEA-controlled monopoly on education that exists now.

(We had our chance once: remember how Republicans promised to eliminate the Dept of Education but didn't have the guts?)

There are many warning signs in this article and in others that US employers are moving offshore for BETTER workers as well as cheaper ones.

To the extent this is true, then we'd better recognize it right away and deal with it quickly. Quality workers depend on education but also on social values such as hard work, punctuality and so forth.

In this regard, we need to address our education crisis along with the parenting crisis in the US: the lack of two parent families. Education is one dimension, and stable families is another. Without fathers in the homes the schools will be mere detention centers for the kids.

We also need to drop much of the welfare that encourages people to not work and to adopt anti-society values. If a person doesn't have to work then why try to better himself.

Unfortuately, a society usually has to reach a deep crisis point before the pain forces a change in behavior. Even then the results might not show up for another generation.

Hopefully we can change peacefully -- ahead of the crisis. But I wouldn't bet that way.

Hoppy

[Fudd]

My gosh, what about value engineering, error reduction, DFM, CAD/CAE/CAM optimization, automation, reduction in non essential absence, reduction in worker substance abuse, performance management, materials science, and the many other demonstrated effective methods of taking landed cost out of products? It is high time for cost management professionals to silence, once and for all, the current myriad of idiocy.

What about reducing regulatory barriers and burdens that add cost to the customer at absolutely no benefit to them or the greater society? The techniques you describe have their advantages, but can be applied in China and India just as easily as in the United States.

[Shermy]

"Comming soon the super rich and the super poor."

That's the globalists' plan.

[jpsb]

Oh we have seen on numberious occasions, if fact almost all of human hstory, how the super rich stay rich in a sea of poor people. First off they, the small ruling elite own EVERYTHING, Europe dark ages, Accient empires, Mexico, Latin America, and many many more.

First they take your means of earning a living, then they take all your money and lastly they take your home. The key is taking away your means of earning a living, once they have done that you and all you have belongs to them.

[y2k_free_radical]

and all this R&D can come back to be used againgst us-MARX was correct when he said that capitalist will sell you the rope to hang them

[CSM]

We all know that it is much better for the employees if the company goes out of businness than it is for them to improve their cost structure. The evil corporation fat cats making their riches off the backs of the little guy!

[expat_panama]

How do you feed your family on 20 cents an hour?

That's got to be a rhetorical question.

Things really are pretty good-- check out all the good news out today.

 

[jpsb]

"and all this R&D can come back to be used againgst us-MARX"

What do you mean us? In the global village there is no us, the American middle class is a problem for the globalists because we have this old outdated document called the Constitution that we stubbornly hang on to. So unless we get with the program and learn to live as peasants in the New World Order, we will be broken, our money stolen, our homes stolen our country administrated by the UN as a resort area for the super rich. Rebellions will be put down by Chinese troops under UN command. All this will be done via international treaties.

[jpsb]

"That's got to be a rhetorical question."

It's not, but since we have minium wage I'll try again. How do you feed a family on $4.50 an hour?

If labor, all labor is a commodity, and it is, and Chinese labor is $0.20/hour why would any same person use even $5/hour American labor if they did not have too? How long before drive thru fast food windows are routed to a Chinese to take your order?

[traumer]

I was involved in a project (consumer electronics) that had the internal software 'developed' in India - it was a disaster...

After many extensions not only the development was moved to Europe, production to China but also the US branch was closed (this year)