-
Reaping the Benefits of Globalization
the Economic Impact of Offshoring
Business Breakfast
Sponsored by:
Friday, February 3, 2006
-
Program
09:00 Welcome and IntroductionsOve Hnel, Marketing Manager,
International Trade Promotion, Danske BankStephen Brugger,
Executive Director, AmCham Denmark
09:10 Perspectives on GlobalizationDiana Farrell, Director of
the McKinsey Global Institute
09:45 Offshoring in a Danish Perspective Facts, Fiction, and
Future IssuesProfessor Bent Petersen, Center for Strategic
Management & Globalization
10:05 Panel Discussion / Q & A
10:25 Wrap-up and ThanksStephen Brugger
10:30 Meeting Adjourned
-
Upcoming Events
-
March 15 AmCham Denmark Meet the Leaders Power Lunch: The Danish
Welfare System Challenges and SolutionsHelle Thorning-Schmidt,
Danish Social Democratic Party Chair11:30 to 13:30 (Radisson SAS
Scandinavian Hotel)
April 6 Annual General MeetingKeynote Speaker: Lars Lkke
Rasmussen, Danish Minister for the Interior and Health14:30 to
17:30 (Deloitte)
May 23 Partner Event w/ Baltic AmChamsU.S. Business Investment
and Trade Mission to the Baltic States10:00 to 17:00 (Riga,
Latvia)
-
Perspectives on Globalization
Diana FarrellDirector, McKinsey Global Institute
-
Perspectives on Globalization
GLOBALISERINGSRDET
Diana Farrell, McKinsey Global Institute
February 2, 2006
McKinsey Global Institute
-
Globalization is a hot topic
Fearful Fortress France French protectionism
- October 2005
Will global economic growth come at the expense of jobs in my
country or yours?
- December 2005
Offshoring is also a bogeyman of the French anti-globalization
movement
- December 2005
Up to 20 percent of jobs in financial services could be moved to
low income countries by 2010
- November 2005
Denmark is ready for globalization
- April 2005
Globalization is ethical and useful
- June 2005
Outsourcing strengthens Denmark
- July 2005
Low income countries create new jobs in Denmark
- November 2005
Thousands of office jobs are moving abroad
- May 2005
Globalization creates more Danish jobs than it destroys
- October 2005
-
8and few topics are more intensely debated
-
Enter new countries to expand consumer base; use production
model similar to the one used at home
Market entry
Product specialization
Value chain disaggregation
Value chain re-engineering
Industries are restructuring and operating globally
Source: McKinsey Global Institute
1
2
3
4
Entire production process completed in a single location and
trading finished goods
Different components manufactured in different locations and are
assembled into final product
Processes redesigned to capture further efficiencies/cost
savings
New marketcreation
Firms offer new products at significantly lower price points and
penetrate new markets
5
-
Companies are entering new markets and specializing
production
New market entry Product specialization
Chevrolet TrailBlazer(Dayton, OH)
Pontiac AztekRamos Arizpe, Mexico
Retail Auto
Trade
Wal-Mart
Mexico
Wal-Mart Brazil
Source: McKinsey Global Institute
1 2
-
Value chains are disaggregating
Source: McKinsey Global Institute
Demand market productionSystems integration
Border zones productionDesktop final assembly
Specialist productionMPU design fabrication
Specialist productionDRAM production
Specialist productionMouses and key board
Specialist productionSemiconductor design/production
Consumer Electronics: PC Example3
-
Source: McKinsey Global Institute
Reengineered processes are improving performance
4555% saving
Task/process migration Task level improve-ments
3040% savings on offshore cost base
Process level improvements
100
Original base
6065
Factor cost savings
510
Additional telecom cost
5
Additional manage-ment cost
4555
Offshore location cost
57
Task reenginee-ring
1015
Process reenginee-ring
3035
New cost base
4
Services example
-
New markets are being created
Supply current
Supply global opportunity
Demand
Price
Quantity
Significant market growth opportunity if global cost
opportunities captured
Source: Interviews; McKinsey analysis; McKinsey Global
Institute
5
-
Offshoring: a growing trend
* The import of services as IT development, call centers, back
office to Denmark during the period Jan. 2005 Oct. 2005 used as a
proxy for off-shored services market size
** CIS (Commonwealth of Independent States) includes Russia,
Ukraine, Belarus, Kazakhstan, Kyrgyzstan and Moldova*** Includes
Poland, Romania, Hungary, Ukraine, and Czech Republic
Source: McKinsey Global Institute; The Emerging Global Labor
Market; Denmark Statistic; McKinsey analysis
Recipients of Danish offshoring100%= USD 72 million, 2005*,
services
Offshored services market size 2003, USD billion
Thailand3
South Korea6China
7Baltics 10
CIS**15
India24
Eastern Europe35
Canada
3.8
Mexico
0.5
Ireland
8.6
Eastern Europe***
0.6
Russia
0.3
Israel
3.6
South Africa
0.1 India
12.2
Australia
0.4
Thailand
0.1
Philippines
0.3
China
3.4
-
Like other forms of trade, offshoringcreates global wealth
Source: McKinsey analysis
Value retained in Denmark from offshoring
Total value created in the global economy
Perceived loss to Denmark from DKK 1 of spend offshored
Value created in supply country
Distribution of value from DKK 1 of spend offshored, service
jobs
0.52
0.45
0.93
-1.00
-
But European countries are not benefiting fully
Cost savings for customers and investors
Indirect benefits, e.g., Increased exports Repatriated
profits
Re-employed workers
USADenmark France Germany
Note: Earlier McKinsey studies put Germany at 0.80 cent per Euro
(company savings of 0.49 and value of reemployment at 0.29)*
Reemployment rate: T. Eriksson, R. Ibsen, J.Li og
N.Westergrd-Nielsen: Globalisering og beskftigelse
Source: How Offshoring of Services Could Benefit France, June
2005, McKinsey Global Institute; McKinsey analysis
Total
Economic impact of offshoring DKK 1, service jobs
0.30
0.05
0.58*
0.93
1.00
0.50
0.07
0.57
1.14
1.00
0.36
0.05
0.44
0.85
1.00
0.36
0.03
0.34
0.73
1.00
-
Investment in labor market programs varies by country and has
mixed results
Source: OECD (2005)
Expenditure for labor market policies, 2003Percent of GDP
1.81.10.9
0.5
2.02.52.93.53.94.4Denmark
NetherlandsGermanyFranceSwedenAustriaSwitzerlandCanadaUKUS
Not-in-labor force rates, 2004Percent
19.021.823.824.6
29.821.3
30.527.3
24.419.8
Unemployment rates, 2004Percent
4.47.2
4.65.5
4.56.4
9.79.5
4.65.4
1.02.8
2.43.0
2.22.02.0
1.72.3
2.0
GDP growth, 19902004CAGR, percent
-
Many EU countries have not fulfilled GDP growth potential
GDP growth, 19902004CAGR, percent
GDP per capita, 2004USD thousand, prices and PPP 2000
3.0
2.8
2.4
2.2
2.0
2.0
2.0
2.0
2.0
1.7Germany
France
Belgium
Sweden
Finland
Denmark
Austria
UK
Spain
US 36.4
22.5
27.7
29.8
29.6
27.9
28.8
27.4
27.0
26.2
Source: OECD Annual National Accounts; McKinsey analysis
-
Economic growth and wealth are driven by productivity
0102030405060708090
100110
0 20 40 60 80 100 120
GDP per capita
Labor productivity*
GermanyGermanyFranceFranceJapanJapan
PolandPoland
Korea Korea
* Defined as GDP per employeeSource: The Conference Board,
Performance 2005: Productivity, Employment and Income in the Worlds
Economies
Indexed to the US= 100, 2003 figures at PPP in 1990
DenmarkDenmark
IndiaIndiaBrazilBrazil
RussiaRussia
UK UK
USUS
-
Sector
Company
The productivity process is fueled by competition
Innovation (business and IT)
Improve operations performance Deliver new high value-added
products and services
Diffusion
Close gap to best practice operations
Shift to higher value added goods in portfolio
Competition drives innovation and diffusion
Investments in IT and R&D are useful but not sufficient to
drive innovation
Scaling
Consolidate and standardize to achieve scale
Sell more goods to increase capacity utilization
Increased productivity
-
Export driven sectors*
Other sectors
Public sector consumption 27%
62%
11%
DKK 1,460 billion
GDP, 2004
69%
31%
1.6%
Productivity gain, CAGR
100%=
In Denmark, sectors competing globally experience the highest
productivity growthLabor productivity growth, 19902002
Export sectors comprise ~10% of the economy and contribute with
more than 30% of the overall productivity growth
~30% of the economy is not exposed to competition (public
sector)
* Defined as sectors with ~50%+ export share: agriculture;
chemicals, plastic & rubber; food & drink; metal products
and textile Source: Groeningen Productivity Database, Feb 2005;
McKinsey analysis
-
Japans dual economy means domestic services under-contribute to
growthJapans labor productivity index relative to the US= 100
Source: OECD; McKinsey analysis
0
20
40
60
80
100
120
140
Share of Japanese employment
Export-driven manufacturing
Domestic manufacturing and services
63
120
0 10 20 30 40 50 60 8070 90 100%
Average Japanese
productivity= 69
-
6.2
4.2
2.4
-1.62.2
1.2
1.0
0.3
Vibrant dynamics more prevalent in the US than in Europe
Quartile**
Most productive
2nd
3rd
Least productive
Annual growth in employment, 19952000Percent
Top US companies grow faster than top European companies
Least productive companies in the US are eliminated; those in
Europe are not
* Weighted average of European countries for which data were
available; Finland, France, Netherlands, Sweden, and UK**
Aggregated data for manufacturing sector
Source: Economic and Social Institute (ESI); Vrije Universite it
Amsterdam; McKinsey Global Institute
Manufacturing sectors in the US and Europe* USEurope*
-
24
Productivity is best understood at the sector level
FranceGermany
* Automotive and utilities 19921999; banking 19942000, retail
19932000** 1999 for automotive and utilities
Source: MGI analysis
Productivity growth 19922000* relative to the US
Higher
Shooting ahead
Losing ground
Mobile telecom
Mobile telecom
Food retail
14
12
45 106
Electricity distribution
Productivity level 2000** relative to the US
Higher
Lower
Lower
Catching up
Falling behind
Automotive
Fixed telecom
Road freightBanking
Banking
Electricity generation
Automotive Apparel retail
Apparel retailFood retail
Electricity generation
+6
+4
+2
-2
-4
-6
-30 -20 -10 +100
Electricity distribution
+20
Fixed telecom
French and German sector performance relative to the US
-
Improving public sector productivity is important for the
overall economy
27%
73%
3027%
73%
45
2004 2015
= US level
GDP per capita, 2000 prices and PPPThousand, USD
7.1%
Required productivity growth
Public sector share of total employment
31% 48%
Public sector
Private sector
Public sector productivity improvement is required to close the
wealth gap with US
27Denmark
25Netherlands
24France
18Japan
16Ireland
16US
22Finland
21UK
19Germany
18Poland
CountryPublic consumption Percent of GDP, 2003
Denmarks public sector is one of the largest in the world
-
Europe should focus on removing barriers to competition
Examples of competition impediments Europe Denmark
3 = applicable2 = not applicable
Improve public sector productivity
Due to the size of European public sectors, improving their
productivity is critical to economic growth
Strengthen competition enforcement mechanisms
Lack of leniency Mild sentences for breach of competition laws
Lack of personal liability
223
333
Finish liberalizing the service sector
Legal and administrative barriers to cross-border trade in
services
Sector specific regulations (e.g., hours constraints in
retail)
3
3
3
3
Encourage economies of scale where productive
Simplify/harmonize regulations Local planning regulations for
retailers
3
3
3
3
Increase work incentives & labor-market flexibility
Restrictive laws on lay-offs High income taxes reducing work
incentives and
increasing informal economy
23
33
-
WWW.MCKINSEY.COM/MGI
-
Productivity performance levers and examples
ExamplesProductivity levers
Emergence of on-line banking and brokerage in retail banking and
securities
Warehouse automation in wholesale
1. Find innovative processes to improve operations
Consolidation of clerical/administrative functions in retail
banking
Consolidation of road freight industry Consolidation of US
wholesale pharmaceutical industry
5. Consolidate to better leverage scale
Emergence of mobile telephony New generations of semiconductors
Assembly and sales of higher value components in US PCs
2. Create innovative, high value-added products and services
Adoption of lean production methods by French auto OEMs
Operational improvements in French/German fixed telecom Increased
load factors in European road freight Operational improvements in
German utility industry
3. Close gap to best-practice operations
Substitution to higher value goods in US apparel retail
Increased sales of high-value SUVs in US auto sector Shift to more
convenient service formats in retail banking ISDN in German fixed
telecom
4. Shift to higher-value goods within existing product
portfolio
6. Sell more goods to increase capacity utilization
Increased transaction processing in retail banking Reduced
stockouts in retail
InnovationDevelopment
Diffusion
Scaling
-
A number of levers can be applied to improve public sector
productivity
Source: Danish Statitstics; McKinsey
Cost areas Typical improvement leversTypical cost share
Elimination of duplicated and/or unnecessary processes
Prioritization of end products by estimating costs per end
product
Overhead 1520%
Application of lean principles to reduce lead times, raise
quality and lower costs
Optimization of processesService operations 4055%
Consolidation of buying power Value engineering/redesign to
reduce costs Demand management Assessment of total cost of
ownership
Procurement 3040%
100%
-
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
-0.20 -0.10 0.00 0.10 0.20 0.30 0.400.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0.0 0.2 0.4 0.6 0.8
GAGR in GDP, 1991-2003, PPP adjustedPercent
Average government spend in R&Din percent of GDP,
19912003
Data does not support idea of invest-ment in R&D and IT
being a silver bullet for growth and productivity
Jump in productivity growth rateCAGR, 19952000, percent
"New Economy"
"Paradox""No story"
Jump in IT capital intensity growth CAGR, 19952000
OECD Countries US industry sectors
Source: OECD; McKinsey analyses
Non IT story
-
Overview of Danish productivity growth per sector
Source: Groeningen Productivity Database 2005; McKinsey
analysis
0
20
40
60
80
100
120
140
0 10 20 30 40 50 60 70 80 90 100
Wholesale & retail
Agriculture
Transport servicesTelecom
Mining Chemicals, Plastics & Rubber
Real estate High Tech & Components
Finance & Insurance Electrical machinery excl. High Tech
IT ServicesFood & Drink
Utilities Renting & LeasingMetal productsMechanical
engineeringTextilesMineral productsOther manufacturingPulp &
PaperOther transportWoodFuelsAutomotive Auto-related retail
Private households
Printing & Publishing
Other non-business services
ConstructionHotels & Restaurants
Legal, technical & advertising services
Other business services
Contribution to aggregated productivity growth 19902002,
percent
Average size of sector 19902002, percent of total value
added
-
Questions
-
Offshoring in a Danish Perspective Facts, Fiction, and Future
Issues
Bent PetersenProfessor, Center for Strategic Management and
Globalization, CBS
-
February 3rd, 2006:Reaping the Benefits of Globalization- The
Economic Impact of Offshoring
Offshoring in a Danish Perspective -Facts, Fiction, and Future
Issues
Bent Petersen [email protected] of Strategic Management and
Globalization at INT
-
Initial words of wisdom :- also applicable to companies
offshoring
A pessimist sees the difficulty in every opportunity; an
optimist sees the opportunity in every
difficulty.
- Sir Winston Churchill
-
Agenda
1. What is the evidence of offshoring effects on the Danish
economy?
2. What are the new business models of offshoring?
3. Future issues: Will Danish MNCs - and the Danish economy in
general - benefit from offshoring in the long run?
-
What is the evidence of offshoring effects on the
Danish economy?
-
Offshoring terms.
Re-location to Operator
Home country Foreign country
Ourselves Onshore sourcing
Captive offshoring
Strategic supplier(Insourcer)
Onshore outsourcing
Offshoreoutsourcing
-
Positive effects on the Danish economyEffects of offshoring are
presumably very similar to those for the US economy - and
dissimilar to e.g. the German economy (characterized by a rigid
labor market with high unemployment rates)
Example of service offshoring effects per DKK 1 offshored to
India:
Cost savings for Danish investors or consumers DKK 0.58
(0.30)Increased export to Indian suppliers DDK 0.02Repatriated
earnings by Danish investors/owners DDK 0.03Direct benefits to
Danes of offshoring to India DKK 0.63
Value of workers re-employed (indirect benefit) DKK 0.48
(0.58)Total recapturing of offshoring to India DKK 1.11 (0.93)
Sources: McKinsey (2003), Tnketanken Fremtidens Vkst (2005), Own
calculations
-
although modest so far
Over the last years the overall job destruction (and job
creation) in Denmark has been in the range of 270,000 jobs
annually.
Of these jobs, only 2% - approx. 5,000 jobs- are lost due to
offshoring (Goldman-Sachs 2003, Confederation of Danish
Industries/DI 2003).
The bulk of job destruction is due to technological change,
including increased automation (Goldman-Sachs 2003).
-
More on offshoring job effects The number of jobs offshored to
Denmark
(2002-2005) seems to exceed jobs offshored from Denmark almost
by a factor of 2:1 (Rambll Management 2005)
though, a net loss of blue collar jobs and net gain in terms of
high-skill, specialized jobs (i.e. crowding-out effect).
Mixed results concerning job creation by offshoring firms
vis--vis Danish firms in general (Rambll Mgt 2005, Muusmann
Consulting /IDA 2005, DI/CBS 2003).
-
What are the new business models of offshoring?
-
A value chain approach
With I&CT advances MNC managers consider offshoring in
relation to individual value added activities.
Michael Porters value chain includes distinct business
activities that may differ significantly in terms of scale and
scope economies, transaction costs/risks, resource requirements,
and strategic importance.
-
A value chain (Porter, 1985):
SUPPORT ACTIVITIES(Back-office activities)
PRIMARY ACTIVITIES
MARGIN
-
Re-configuring the Value Chain
I&CT is likely to lead to a globally distributed value chain
within firms, with higher specialization in specific locations and
higher coordination across locations as well.
- Saheer and Manrakhan (2000)
-
Re-Configuring the Value Chain
MNCs are in the process of a dual transformation of their value
chains:
1. A surge from dispersed to concentratedconfiguration
strategies in which offshoring plays a vital role.
2. A surge in the direction of a more disaggregated and
modularized value chain in which offshoring also plays a prominent
role.
-
Dispersed value chain configuration
HQ, sales units, and mini-replica Requires modest
coordination
Norway
SalesSales
Germany
US SubsidiaryDenmark (HQ)
-
Concentrated value chain configuration
Integrated network of specialized activities Requires a lot of
coordination and a global
mindset among managers
China
ManufacturingIT
India
USADenmark
R&D
HRMM&S
Norway
-
Some Danish company examples
of dispersed value chain configuration Carlsberg Rockwool Maersk
Sealand (upstream activities) of concentrated configuration GN
Resound Ecco Shoes (upstream activities) Maersk Sealand
(downstream/marketing
activities)
-
Typical Re-configuration Pattern
0. Point Zero: Dispersed, un-coordinated MNC units.
1. Establishment of (regional) Captive Shared Services Centers
Consolidation in terms of scale economies and transparent cost
structures.
2. Fragmentation and modularization of value chain
activities.
3. Decision about location (on/near/off-shore?) and ownership
(captive/JV/outsourced?).
-
Will the Danish MNCs and the Danish economy as a
whole benefit from offshoring in the long run?
-
Employment of Danish MNCs
Source: Confederation of Danish Industries and CBS
50
100
150
200
250
300
1986 1990 1996 2002
Ansatte i DanmarkAnsatte i udlandet
Index 1986 = 100
-
.Ecco Shoes: Composition of employees by geography(Source:
Various annual reports of Ecco)
Composition of employees in ECCO by geography
0
2000
4000
6000
8000
10000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
2004
Employees in Denmark Employees outside Denmark
-
Higher EducationPercentage in age group 45-54 years
0 10 20 30 4Pct.
Kilde: OECD - Education at a glance 2003
0 50
ChinaMalaysia
Poland
Hungary
GermanyDENMARK
UKSwedenBelgium
NorwayFinland
USAKorea
JapanIreland
-
Higher EducationPercentage in age group 35-44 years
0 10 20 30 4Pct.
Kilde: OECD - Education at a glance 2003
0 50
China
MalaysiaPoland
HungaryGermany
DENMARKUK
SwedenBelgium
NorwayFinlandUSAKoreaJapan
Ireland
-
Higher educationPercentage in age group 25-34 years
0 10 20 30 40 50
ChinaMalaysia
Poland
HungaryGermany
DENMARKUK
SwedenBelgiumNorwayFinland
USAKoreaJapan
Ireland
Pct.Kilde: OECD - Education at a glance 2003
.
-
Conclusions1. So far, offshoring has had a modest, but
positive (income) effect on the Danish economy also in terms of
job creation if offshoring to Denmark is included.
2. The new business model of offshoring is global value chain
configuration requiring new, global mindsets of managers and
employees (the champions are to be found outside DK).
-
Conclusions (cond)
3. The Danish MNCs are likely to benefit from offshoring also in
the long run - but the national Danish economy as a whole will
probably not - because human capital in Denmark is relatively
expensive (subject to high taxation) and is becoming relatively
scarce (the proportion of the Danish population with higher
education is not increasing)
-
End of AmCham presentation February 3rd, 2006
Ladies and gentlemen I thank you for your attention!
-
Panel Discussion
Pete GeorgeNordic President, Computer Sciences Corporation
(CSC)
Ragnar G. NorddahlArtech-TCS (Tata Group)
-
Thank You!
Perspectives on GlobalizationGlobalization is a hot topicand few
topics are more intensely debated Industries are restructuring and
operating globallyCompanies are entering new markets and
specializing productionValue chains are disaggregatingReengineered
processes are improving performanceNew markets are being
createdOffshoring: a growing trendLike other forms of trade,
offshoring creates global wealth But European countries are not
benefiting fullyInvestment in labor market programs varies by
country and has mixed resultsMany EU countries have not fulfilled
GDP growth potentialEconomic growth and wealth are driven by
productivity The productivity process is fueled by competitionIn
Denmark, sectors competing globally experience the highest
productivity growthJapans dual economy means domestic services
under-contribute to growthVibrant dynamics more prevalent in the US
than in EuropeProductivity is best understood at the sector
levelImproving public sector productivity is important for the
overall economyEurope should focus on removing barriers to
competitionWWW.MCKINSEY.COM/MGIProductivity performance levers and
examplesA number of levers can be applied to improve public sector
productivityData does not support idea of invest- ment in R&D
and IT being a silver bullet for growth and productivity Overview
of Danish productivity growth per sectorFebruary 3rd, 2006:Reaping
the Benefits of Globalization- The Economic Impact of
OffshoringInitial words of wisdom :- also applicable to companies
offshoringAgendaOffshoring termsPositive effects on the Danish
economyEffects of offshoring are presumably very similar to those
for the US economy - and dialthough modest so far More on
offshoring job effectsA value chain approach A value chain (Porter,
1985): Re-configuring the Value ChainRe-Configuring the Value Chain
Dispersed value chain configurationConcentrated value chain
configurationSome Danish company examplesTypical Re-configuration
PatternEmployment of Danish MNCsSource: Confederation of Danish
Industries and CBS..ConclusionsConclusions (cond)End of AmCham
presentation February 3rd, 2006
