American Outsourcing

Helene Bergeman

Libor Cech

Gary Franklin

Introduction

American jobs are being lost to overseas workers US wages are being beaten down due to the competition.

– Services jobs paying $35/hr in the US can be replaced with $10/hr by workers in India

– Manufacturing jobs paying $11-$20/hr can be replaced for $1-$2.50/hr in China

Some US workers are willing to take less pay and less benefits to keep a job

Some proponents believe the US is benefiting from lower cost goods and services and are able to create jobs in the US export sector.

Destination: Mexico

Labor-intensive assembly operations– Electronics

Hewlett-Packard, IBM, Phillips, GE

– Pharmaceuticals Merck

– Apparel– Business Services

Destination: Mexico

Advantages Close regional proximity to

the U.S.– Inexpensive shipping– Reduced transit times

Ease of communication– Spanish / English– Time Zones

Intellectual property & patents enforced by the gov’t

Disadvantages Higher Wages

– Sunday holiday pay– Limited working hours– Mandatory social benefits

Lower overall productivity compared to China

Higher utility costs Vulnerable currency rate

Destination: India

TransportationCustomer Service, Baggage tracking

Information TechnologyPC Technical Support (HP, Compaq….)

FinancialCredit Card, Billing, Tax Preparations

HealthcareX-Ray after-hours assessments

EducationOn-line and VOIP tutoring, On-line small business consulting…

Service-oriented outsourcing

Destination: India

Favorable governmental laws– Intellectual property rights– Foreign ownership of stock

English widely spoken Literate workforce with higher education

SOURCES: Robert Kennedy is the author of The Services Shift, a new book on off-shoring. http://www.fte.org/hottopics/archive/outsourcing.htm

Destination: China

Manufacturing jobs are a good fit for outsourcing to China.

Low wages. Fully loaded salaries for Chinese workers were below $1/hr.

The average Chinese worker spent 2,930 hours per year at the Special Economic Area.– 25% more hours than the average Mexican

committed to maquilas.

Product Failures: Made in China

Pet food Toothpaste Seafood Blood thinner Heparin Infant formula tainted with melamine.

– 54,000 children injured; 4 dead

Sources:http://www.latimes.com/news/opinion/la-ed-melamine1-2008oct01,0,3593047.storyhttp://www.usnews.com/articles/news/world/2008/10/09/the-story-behind-chinas-tainted-milk-scandal.htmlhttp://www.time.com/time/world/article/0,8599,1844750,00.html

General Electric: Globally

Mexico – Manufacturing: Capacitors, electric motors, control devices,

lighting– Real Estate– Financing

China – High-technology: medical systems, plastics, light, aeronautics– Research & Development– Leasing

India – Capital Services: transaction processing, finance & accounting

services, Call Centers, Data Modeling– Manufacturing: Engines, plastics, power systems

What if GE had to choose?

Get out of China…– Less overall investment in capital to-date– Difficult barriers to entry in the local market– R&D discoveries could result in corporate theft

India provides more quality opportunities for growth; low cost manufacturing for Asian markets; educated employee base

Mexico provides lower cost manufacturing in close proximity to US; largest int’l GE operations; friendly economic ties; gov’t investment in education

Outsourcing Elsewhere

Pharmaceuticals– Czech Republic – Poland

Source: http://www.polishmarket.com/index.php?item=free_articles&id_form=407

Czech Republic & Poland

Low Barriers to Entry– English commonly spoken

Well developed chemical research facilities Favorable Gov’t regulations

– Lower level of corruption– Counterfeiting discouraged

Centrally located in Europe– Ease of travel, distribution hub

GE Financial

Located in 47 countries worldwide Offering

– Banking– Loans– Leasing Solutions– Insurance

Doing business in India since 1994– 4500 outlets in 60 locations

Sources:http://www.cwalocal4250.org/outsourcing/binarydata/GE%20India.pdfhttp://www.enterblog.com/200411090747.phphttp://genpact.com/Genpact/section.aspx?menu=about&section=1

GE Financial: the best locale

Advantage India– Linguistic edge over China & Mexico– GE’s financial operation is primary resource in

India

But – GE’s long term plan for growth includes focusing on Chinese market & current economic environment meant big losses for GE India in 2008

GE Consumer Electronics

2nd largest appliance maker in U.S. Televisions Home Appliances Telephones Small Electrics Electrical Products

http://www.appliance.net/2008/haier-still-considering-ge-893

Where should the CE division of GE end up?

China “…Fine Silicones were in Shenzhen, Shenjang and Shanghai…”

“China exhibited a synergy…the areas of electronics, telecommunications…” p14

Infrastructure is in place to support manufacturing on the shop floor as well as component acquisition from the silicon chip needed for complex computer interfaces to the distribution network for outsourced assembly.

Exclusive GE licensee, Jasco, “develops, markets, and distributes more than 2,000 GE branded consumer electronic accessories, computer accessories, home electric products, and home security/surveillance products.”

– Based in Oklahoma City, Jasco currently has offices in Shenzhen, China.

Sources:

http://www.appliance.net/2008/ge-delays-sale-of-appliance-division-945

http://www.associatedcontent.com/article/1106358/the_consumer_electronics_division_of.html?cat=55

http://www.jascoproducts.com/

http://www.answers.com/topic/general-electric-company

GE Healthcare - $17B industry

Diagnostic equipment manufacturers Deployment of (GE’s) medical imaging and

diagnostics equipment Patient monitoring systems Biopharmaceutical manufacturing

technologies.

GE’s Best Choice - India

Higher hygienic standards than China or Mexico

English-speaking

GE outsourced its first fully digital latest X-Ray system…. Manufactured in India, expected to cost 40 % less than imported digital machines

Source: http://in.reuters.com/article/indiaDeals/idINIndia-37310520090106

Relation to Coursework

Offshore outsourcing – Use of vendors in other countries, usually where labor is inexpensive, to do programming or other system development tasks.

Information systems – A physical process that supports an organization by collecting, processing, storing, and analyzing data, and disseminating information to achieve organizational goals.

Transaction processing system – An information system that processes an organization’s basic business transactions such as purchasing, billing, and payroll.

Data modeling – Defines a way data are conceptually structured. Examples of model forms include the hierarchical, network, relational, object oriented, object relational, hypermedia, and multidimensional models.

Outsourcing – Benefit or Detriment?

FDI incentives coupled with a low-cost labor market drain jobs from U.S.

Companies choose to outsource labor-intensive jobs to Mexico & China.

An educated, low-cost employee pool in India siphons away high-paying IT jobs from the U.S.

Stable and/or falling prices of consumer goods in U.S. as lower cost production is passed to the consumer.

Rising standard of living for emerging industrial societies.

New opportunities for U.S. leadership on the Global Stage.

In Conclusion – this case was used in the course to highlight the futility of your IT education and coursework, since it will be outsourced to India within 5 years.

...but still…