American OutsourcingAmerican Outsourcing

February , 2009February , 2009Ted, Tiffany, JordanTed, Tiffany, Jordan

Question 1 – Case IntroductionQuestion 1 – Case Introduction

• 2004-loss of more than 2.5 million jobs since 2001– Outsourcing abroad begun hurting employment in such sectors as professional and business services, information

industries, textiles and apparel, computers and electronics, furniture, vehicles, and fabricated metals.

• NAFTA (93)-driven outsourcing to Mexico (plus Asia and India)• Global Outsourcing…………good or bad for the US?• Transferred manufacturing or service jobs abroad• Outsourcing chief reason behind domestic employment problems?• 14 million U.S. jobs, or 11% of total labor force vulnerable to outsourcing • Skilled professionals with university education – less incentive• Mexico’s maquiladoras / China’s Special Economic Areas (SEAs) / Software

outsourcing to India• GE’s outsourcing / China’s advantages / Mexico’s advantages• Competition between China and India

Question 2 – Types of Jobs Question 2 – Types of Jobs Outsourced to MEXICOOutsourced to MEXICO

• High wage manufacturing positions• General Motors• Hershey• Textiles, apparel, fabricated metal, auto, and

aerospace (Boeing Corporation, General Dynamics, Honeywell International, and GE Aircraft Engines)

• Javid LLC http://www.manufacturing-in-mexico.com/

Question 2 – Disadvantages of Question 2 – Disadvantages of Outsourcing to MEXICOOutsourcing to MEXICO

• Loss of local jobs• The company losses direct control over the

management• Quality problems• Slow response time• Foreign agents sometimes have different accents

(causing slow resolution times, reduction of product sales because of frustrated customers or people who boycott a company’s products because they outsource)

Question 2 – Types of Jobs Question 2 – Types of Jobs Outsourced to INDIAOutsourced to INDIA

• Call Centers• Computer programmers• Financial processing• Some of the companies which are outsourcing

their work to India or which has R&D centres in India are:

• GE, Citigroup, Microsoft, Oracle, IBM, Google, JP Morgan Chase, Morgan Stanley, Goldman Sachs

Question 2 – Why is INDIA a Question 2 – Why is INDIA a Good Location for These Jobs?Good Location for These Jobs?

• Cost-effective services• High-quality services• Time Zone Advantages• India’s stable government• The Indian Advantage• Global organizations’ most preferred choice

Question 2 – Types of Jobs Question 2 – Types of Jobs Outsourced to CHINAOutsourced to CHINA

• Large, publicly held, highly profitable and well established• Those companies who have benefited include:

– Microsoft, Dell, SAP, Nokia, General Electric, Alcatel-Lucent and Unilever (UL)– Accounting and consulting firms – Accenture, BearingPoint and Infosys Technologies– Wal-Mart Stores and other big box retailers– Newell Rubbermaid and other manufacturers

• Those companies that have not benefited include:– Lockheed Martin, Raytheon Company are examples of prime defense contractors

which would have difficulty offshoring their support or technology functions overseas. – Pfizer Pharmaceuticals– IP dependent industries (Intel) would not likely outsource their most cutting edge R&D– Companies dependent on Western language customer service workers like SBC, AOL,

Qwest are less likely to benefit from Chinese outsourcing

Question 2 – Product IssuesQuestion 2 – Product Issuesin CHINAin CHINA

• Infant formula contaminated with melamine– September 12, 2008

• Swimming pool ladders – They break, resulting in 127 reports of injuries, including leg lacerations requiring up to 21

stitches, five reports of bone fractures, two back injuries, two reports of torn ligaments and eight sprained ankles

• 74 miners die, 114 injured in China mine blast – Sunday, February 22, 2009 7:46 AM EST– A gas explosion ripped through a coal mine in northern China on Sunday, killing at least 74

miners and trapping dozens, state media said. It was the deadliest Chinese coal mine accident in more than a year. Government figures show that almost 80 percent of China's 16,000 mines are small, illegal operations.

Question 3 - GE's Outsourcing Question 3 - GE's Outsourcing by Countryby Country

• Mexico– Aircraft Engines, capacitors, electric motors, control devices, lighting

products, • China

– Medical systems, plastics, lighting products, locomotive repair, aircraft engine maintenance facilities, training, component manufacturing, metalwork, small appliances, and tooling.

• India– Software design, software support, research/development, aircraft

engines, capital services, medical systems, industrial, systems, plastics, power systems, broadcasting,

– Capital Services:• Transaction processing, finance and accounting services, call center

services, customer fulfillment activities and processes, data modeling and analytics support, managed IT services, software solutions, and e-learning

Question 3 - GE to Stop Question 3 - GE to Stop Outsourcing in IndiaOutsourcing in India

• Not as high growth potential as China 78% vs. 22% (ref. exhibit 19b)

• India expected to lose competitive IT sourcing to China. (ref. pg. 16)

• China has lower labor and energy cost (for now?) (ref. pg. 16)

• China has a higher FDI confidence level than US or India. (ref. exhibit 19a)

• Mexico has advantages of NAFTA plus proximity of borders for lower transportation expenses and trade convenience.

Question 4 – Outsourcing Question 4 – Outsourcing Destination: PhilippinesDestination: Philippines

• “The new country that is becoming a major player is the Philippines and despite the global economies crashing all around us outsourcing in the Philippines grew a whopping twenty six percent.” (Outsourcing Blog Shots, Feb 9, 2009, www.outsourcing.7dayshootout.com)

• “According to the Philippine Software Industry Assn. (PSIA), the industry had $423 million in revenues from both outsourced and product software in 2007, up from $200 million in 2005, and currently employs around 28,000 software developers.” (Business Week, Jan 5, 2009 http://www.businessweek.com/globalbiz/content/jan2009/gb2009015_871284.htm )

• Labor Pool• Costs• Government• Infrastructure• Expertisehttp://www.forbes.com/2003/08/21/cx_ld_bestcountrieslide_2.html

Question 4 – Outsourcing Question 4 – Outsourcing Destination: PhilippinesDestination: Philippines

• Metro Manila - the nation’s capital-most popular outsourcing destination, government spent money on their infrastructure first.

• The main advantages:– Large scale technical training program– Improved telecom and office infrastructure– 3rd largest English-speaking nation in the world– Well developed IT skill set– Costs of technology workers– Former American colony

• The main disadvantages: – Low graduate turnout– Not having a record of high quality– Political instability –”Additionally, the Philippines has been plagued with serious long-

standing economic and political unrest.” (Forbes)– No disaster recovery facilities or multi-location facilities– Issue of scaling uphttp://www.news.cornell.edu/releases/Oct04/Bronf.outsourcing.rpt.lm.html, Oct 15, 2004

Question 5 - GE's Financial Question 5 - GE's Financial Sector/Profitability/OutsourcingSector/Profitability/Outsourcing

• “The value coupled with the amount of assets held by GE Capital contributed to more than 1/3 of the loss profits at the time of the article. (bloggingstocks.com)

• GE’s financial-services business, GE Capital, made a profit of $383 million -- an 88% drop while its revenues fell 18%. Its CNBC cable channel reported that it would cut 7,000 jobs and save $2 billion (CNBC broadcast Jan. 23, 2009)

• GE is shrinking its GE Capital unit, which in 2007 accounted for about 50% of its profit and sales. Next year GE plans to earn $9 billion from GE Capital, excluding a potential charge of $1 billion to $1.4 billion to speed up cost cuts there.

• GE Capital - bad loans -- its provision is expected to rise from $7.2 billion in 2008 to $9 billion in 2009. (Bloomberg.com Dec. 2nd 2008)

Question 5 – Outsourcing of GE's Question 5 – Outsourcing of GE's Financial SectorFinancial Sector

• China:– China recognizes that labor has brought them to world

dominance in growth of outsourcing opportunity but they also know they are experiencing a rise in energy shortage for their industrial growth and the income potential of services is a low-overhead alternative to revenue generation. “GE Capital Services said today that it had been granted approval to open a representative office in Beijing. The office will focus on developing a range of financial services.” (The New York Times Oct. 19, 1993)

Question 6 – GE Consumer Question 6 – GE Consumer ElectronicsElectronics

• GE has created and bettered the products we use through new technologies for over 100 years (GE Consumer Electronics Website)

• Consumer Electronics provided by GE:– Computer accessories and home electronics– Digital cameras– Generator systems– Holiday Lighting– Housewares– Telephones

Question 6 – GE Consumer Question 6 – GE Consumer ElectronicsElectronics

• GE sells its consumer electronics through Thomsan S.A., a French company that bought GE’s Consumer Electronics sector in 1987 since GE wanted to invest its resources in other more profitable projects (Potts)

• GE Consumer Electronics should outsource to India– Why India?

• “The expertise of Indian designers in 3D modeling and plant engineering in sectors like aerospace, automotive and industrial design has already caught the attention of leading companies from both Europe and America. “ (Now, India a hub for design outsourcing)

• Low cost, highly skilled workforce (Why Outsource to India)• High Quality Services since India uses the latest software, technology, and

infrastructure to provide customers with high quality outsourcing services (Why Outsource to India)

Question 7 – GE HealthcareQuestion 7 – GE Healthcare

• Information about GE Healthcare (taken from GE Healthcare Website):• Located in Chalfont St. Giles, United Kingdom• Is a $17 billion unit of General Electric Company

• What does GE Healthcare Do?• Provide transformational medical technologies and services that are shaping a new age of patient care

(GE Healthcare Website)

• What are GE Healthcare’s skills?• Medical imaging, information technologies, medical diagnostics, patient monitoring systems,

performance improvement, drug discovery, and biopharmaceutical manufacturing technologies (GE Healthcare Website)

• What do GE Healthcare’s products do?• Enable medical professionals better diagnose and treat cancer, heart disease, neurological diseases, and

other conditions earlier (GE Healthcare Website)

• What is GE Healthcare’s vision?• “At GE Healthcare, we strive to see life more clearly. Our purpose is to help healthcare providers predict,

diagnose, inform and treat disease earlier so that every individual can live life to the fullest. Our vision for the future is to enable a new "early health" model of care focused on earlier diagnosis, pre-symptomatic disease detection and disease prevention.” (GE Healthcare Website)

Question 7 – GE HealthcareQuestion 7 – GE Healthcare

• GE began outsourcing 10 years ago and thus already has experience in the field (Carbone 1)

• GE Healthcare should outsource to India• Why India?

• India is filled with inexpensive skilled labor• Having people in India allows the company to sell its products there

(Singer 1)• India plays a crucial role in clinical research program (GE Conducts Trials in

India 1)• India would enable GE Healthcare to tap into the resources of the GE

global research facility located in Bangalore and the expertise of its global medical diagnostics team located in India (GE Conducts Trials in India 2)

• “GE health care has chosen India for setting its first IDC as the country has rich research and development capability, skilled medical professionals, and advanced medical infrastructure.” (GE Conducts Trials in India 2)

Question 8 – Relavance Question 8 – Relavance to this Courseto this Course

• Outsourcing:– Exporting labor and/or material to a foreign country to gain efficiency of

production. This is the focal issue of the case, specifically with GE utilizing Mexico, China, and India for this purpose of gained efficiency.

• Technology:– Combining advanced tools and processes to fill a need. GE assisted China in

high-technology industries by providing business for their embryonic high-tech sector. (pg. 13)

• Infrastructure:– The base support and use of IT equipment and methods to enhance

accuracy, speed, and relevance of data and information. It is an area of outsourcing growth needed to support other avenues of outsourcing (pg.2)

• Diversification:– Division of resources or material to build efficiency of effort as well as

reduction of risk. GE outsourced to meet various and diversified business needs on a global platform. (pg. 13)

Question 9 - ConclusionsQuestion 9 - ConclusionsOutsourcing in America involved the transfer of manufacturing or service jobs

abroad, generally to attain lower costs for sales back to the U.S. The three primary outsourcing markets include: Mexico, China, and India. The governments in all three countries created favorable business environments in which companies could prosper by seizing sales growth or cost-reduction opportunities not available in their home countries. Mexico’s maquiladora is a labor-intensive assembly operation that imports inputs from a foreign country, processes these inputs, and then ships them back to the country of origin. The implementation of NAFTA further increased the number of companies outsourcing their jobs to Mexico. Like Mexico, China’s Special Economic Areas (SEAs) offered tax advantages to companies setting up shop in China. China’s SEAs attracted foreign investors since the labor wages were less costly than Mexico and there were also less stipulations placed on foreign investors. After these two markets were established, India’s conditions became ripe for foreign firms to focus on the country’s manufacturing and intellectual markets. India offered companies, like General Electric inexpensive skilled labor. GE has established itself in over 100 countries and is one of the major firms outsourcing to these three popular destinations.

This case ties to the course because in order to outsource firms must utilize Information Technology to connect country to country. Companies that outsource must develop business infrastructures through intranets and corporate portals in order to communicate with workers located all over the world.

SourcesSources

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http://www.encyclopedia.com/doc/1P2-1334182.html• Singer, Stephen. “GE Chief Defends Outsourcing, Pension Benefits.” • SignOnSanDiego.com. 28 April 2004:1.• Vietor, Richard H.K. and Alexander Veytsman. “American Outsourcing.” Harvard Business School. 2 February 2007: 3-17.• “Why Outsource to India?” 2008. http://www.outsource2india.com/why_india/why_india.asp