International Business RelationsInternational Business RelationsGlobal Outsourcing TrendsGlobal Outsourcing Trends

Bay Area CITD Seminar Series Bay Area CITD Seminar Series Tuesday, January 18th, 2005Tuesday, January 18th, 2005

Kemarra Inc. - Key Marketing Resources & AssociatesSan Francisco USA 

Unlocking Your Market Potential: www.Kemarra.com

Globalization & Outsourcing

What started it?

What does it mean for the US?

What does it mean for the developing countries?

Mounting trade deficits

Productivity and unit labor costs

Country facts and figures

What next?

Globalization & Outsourcing

Cheaper & faster data and voice telecommunications

Easier global financial transactions

Cheaper hardware

Easy to use, standard software

Lack of staff in the US

Educated English speaking workforce abroad

Benefits vs Drawbacks for the US

Corporate benefits• Lower costs • greater efficiency without having to invest in people and technology • Increased focus on core competences• Increased corporate profits

Corporate drawbacks• Increased project management complexity• Some loss of immediate control• IP vulnerability

For the US• Increased corporate profits• Higher US unemployment• loss of industrial base• High trade deficit

– Impact on interest rates?– Impact on currency exchange rates?

Benefits vs Drawbacks for Developing Countries

Benefits for developing countries• Cash generation• Increased employment & training• Infrastructure build-up• Accumulation of business experience

Drawbacks• Lock into low-wage economy• May become vulnerable to cheaper outsourcing

Reciprocal or one-way?

Reciprocal returns• OK if cash earned by countries providing

outsourcing services returns to the US via purchase of US goods

• One of the reasons for FTAs

One-way loss • China buys far less goods from the US• Complete outflow of US funds without cash return

to the US

Reciprocal or one-way?

Proponents of NAFTA point out that exports from the United States to Mexico have risen 150% and exports to Canada are up 66%.

The Clinton administration estimated in the late 1990s that expanded trade in North America had created over 300,000 new U.S. jobs.

Detractors argue the trade deficit with NAFTA represents US jobs shipped abroad

U.S. monthly goods and services deficit

http://www.bea.doc.gov/bea/newsrelarchive/2005/trad1104_fax.pdf

Trade Deficit

The US international trade deficit increased to $60.3 billion in November 2004 from $56.0 billion in October, as imports increased and exports decreased. (12 Jan 2005).

In September 2004 the imbalance with China grew to $15.5 billion, beating the previous high.

The goods deficit with Japan increased from $5.9 billion in October to $7.3 billion in November. Exports decreased $1.0 billion (primarily civilian aircraft) to $4.2 billion, while imports increased $0.4 billion (primarily passenger cars) to $11.5 billion.

The goods deficit with the European Union (25) increased from $9.3 billion in October to $10.5 billion in November. Exports decreased $0.8 billion (primarily pharmaceutical preparations, passenger cars, and fuel oil) to $14.6 billion, while imports increased $0.3 billion (primarily pharmaceutical preparations, crude oil, and medicinal equipment) to $25.0 billion.

The goods deficit with Canada increased from $5.7 billion in October to $7.3 billion in November. Exports decreased $1.6 billion (primarily natural gas and trucks, buses, and special purpose vehicles) to $15.4 billion, while imports were virtually unchanged at $22.7 billion.

Trade Deficit

Interest payments on US external debt add to burden

Further deficits reduce confidence in US assets

Flight away from US assets would weaken stock market and force interest rate hikes

But US assets would become cheaper for foreign investors

http://www.census.gov/foreign-trade/www/http://www.iie.com/publications/papers/mann0899.htmhttp://www.cato.org/research/articles/reynolds-041203.html

Dollar still too high?

High dollar• Makes US goods more expensive abroad • US products therefore less competitive• Imports become cheaper

Dollar still high compared to 1995 level• Global financial crises around 1997 led to flight to $• Strong US internal growth

Problems• Other countries like China still not on open exchange

system – hold their currency artificially low.

http://www.iie.com/publications/papers/mann0899.htmhttp://www.imf.org/external/pubs/ft/fandd/2000/03/mann.htm

US Dollar Global Exchange Rate

US Dollar Global Exchange Rate 1973 - 2005

0

20

40

60

80

100

120

140

Jan-

73

Jan-

75

Jan-

77

Jan-

79

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Dateline

Exchange Rate

http://www.federalreserve.gov/releases/H10/Summary/

Declining Dollar – Good or Bad?

US Dollar Global Exchange Rate 1993 - 2005

60

70

80

90

100

110

120

130

140

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Dateline

Exchange Rate

http://www.federalreserve.gov/releases/H10/Summary/

Labor Productivity

US workers are highly productive• Highly trained• Excellent general infrastructure• Highly automated• Extensive use of software tools

US workers also work longer hours than anybody else

These two factors explain the recent productivity gains in the US while employment levels did not rise

Productivity and and unit labour cost comparisons http://www.ilo.org/public/english/employment/strat/publ/ep00-5.htm

Unit Labor Cost

1970 1980 1996

United States 100 100 100

Canada 99.05 91.41 90.95

Mexico 77.24 66.15 40.64

Austria 80.86 98.34 108.87

Finland 83.33 82.99 88.69

France 82.85 91.64 94.13

Germany 82.64 93.00 109.95

Greece 39.69 57.93 89.24

Italy 76.99 76.59 82.72

Portugal 56.27 69.67 67.54

Spain 82.49 71.60 80.55

UK 105.23 109.47 110.92

Norway 92.76 100.32 116.78

Japan 55.55 67.86 93.50

Korea 44.18 53.77 63.92

Australia 82.76 85.60 88.04

What’s best - you pay someone $1 an hour and they have to work 10 hours to create x,or you pay someone $10 an hour and it takes them 1 hour to create the same thing …?

Outsourcing Trends

US Companies forced to outsource to stay competitive against worldwide competition

Current service providers move higher up food chain• India has very sophisticated BP management

– Now doing design work– Microsoft, SUN, IBM, investing in infrastructure– Labor costs rising

Countries such as China and India are producing high number of IT graduates• India: 75,000• China: 50,000

Former East Bloc countries now entering EU• Russian generates good math graduates• IP protection enforceability

Life Sciences also a good sector for outsourcing

Some outsourcing profiles

The rapidly-expanding Shanghai Jinqiao High-Tech Park is one of the fastest-growing sites for foreign investment in China.

Some outsourcing profiles

Country Population IT wage English Skills

China 1.3 billion $3 - 8k Poor Transaction processing, low-end software development and maintenance

India Over 1 billion $5 - 12K Good Application development, maintenance, call centers, financial processing

Philippines 77 mil $5 - 10K Medium Accounting, finance, call centers, animation, human resources.

Russia 155 m $6 - 10K Poor Web design, complex software development, aerospace engineering

Canada 107 million $25 - 50K Good Software development and maintenance, call center, tech support.

Mexico 107 million Spanish a plus

Spanish-language call centers, software development, data center outsourcing

Ireland 5.5 million $25 - 35K Good European shared-services centers, software development, call center

What the US needs to do …

US needs to continue the pace of innovation Become design, marketing and sales force for the world? Government and private corporations needs to educate

workforce continually Must increase number of technical graduates US companies must invest internally in the US Government needs to encourage US employment – tax

breaks - American Jobs Creation Act of 2004 Reduce trade deficit, exchange rate?

• Should not impose protectionist trade barriers• Should not impose penalties on US companies outsourcing