Globalisation and trade

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Globalisation and trade

• Class 5 Lecture notes
• Outsourcing
• Joe P. Damijan
• University of Ljubljana

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Outsourcing at work

• Manufacturing
• Example of Airbus consortium
• jointly owned by companies from 4 countries
  France, German, Britain, and Spain.
• wings from Britain, fuselage and tail from
  Germany, doors from Spain, cockpit and final
  assembly in France.
• 1,500 suppliers in 27 countries
• More than 35 percent of components for the
  consortium's aircraft are supplied from over 500
  American companies.
• Numerous suppliers also are located in the
  Asia-Pacific.
• Singapore Technologies Aerospace produces wing
  ribs and passenger doors for the A320, and engine
  mounts and thrust reverser doors for the A340.
• India's Hindustan Aeronautics Limited also builds
  A320 passenger doors.

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Outsourcing at work

• Services
• Outsourcing of IT services
• Outsourcing of help lines, Call centers,
  accountancy services (to India, e.g.)

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Outline

• Definitions of outsourcing
• Why outsourcing?
• Who are the major players?
• Effects of outsourcing
• How to prepare for not being outsourced?

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Definitions of outsourcing

• Offshoring Transferring Activities to
  another country by hiring local subcontractors
  or by building a facility in an area where
• labor is cheap(er).
• Outsourcing Delegation of non-core
  operations from internal production to an
  external entity. Sharing organizational
  control.
• Offshore Outsourcing When transferring an
  organizational function to a third
  party who is located in another country.
• Nearsourcing Similar to offshore (yet close
  distance). Example
  BMW to Bulgaria
• Insourcing Domestic outsourcing/Increased
  FDI
• Best Sourcing Associating with the best of
  the best (Tom Peters)
• Reverse Outsourcing Becoming an ex-pat by
  being hired by a country to
• whom you outsource . Example US pilots who
  once flew for US airlines now being hired by
  airlines in India.

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Why outsourcing?

• Productivity is the key
• Productivity is now a global race between regions
  and nations.
• Those who can make things cheaper, faster, better
  win!
• US and Europe losing technology advantage
• Factories process plants moving
• Closer to customers
• Closer to raw materials

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• Knowledge work anywhere
• Transportation and trade cost falling
• Moving downstream production stages abroad
• Internet makes physical location irrelevant
• Low-cost telephone Help lines, Call centers
• Knowledge is power
• US is losing the big advantage
• Availability of trained people globally

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Major players
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Major players - China

• China Manufacturing
• Manufacturing expertise
• Good, repetitive quality.
• Worldwide market-share - 50 of cameras, 30 of
  air conditioners and televisions, 25 of washing
  machines, 20 of refrigerators
• One private Chinese company - 40 of all
  microwave ovens sold in Europe
• City of Wenzhou, Eastern China - 70 of the
  world's metal cigarette lighters
• Wal-mart Buys 12 billion from China

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Major players - China

• Chinacosm Hitech looms
• 700,000 engineers a year, 37 of all college
  graduates
• University system - growing in size and quality
• Engineer pay ranges - 4,000 to 8,000/yr.
• New CISCO competitor
• Biotech advances genome sequencing
• Space technology advances

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Major players - India

• India - Services
• World's most populous country (mid-century)
• Advantage - English-speaking
• China's pop. growth is under control India's is
  not
• Already the world's largest democracy
• US Software 6-8 billion, 60 growth
• Infosys - 2003 revenue 750m, profit 25, growth
  38, Nasdaq market-cap 11.5 billion
• Wipro - 2003 revenue 900m, profit 18, growth
  29, NY stock exchange market-cap 9 billion

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Emerging players

• Global HiTech
• Other regions/countries are competing strongly
• Central Eastern Europe
• Ireland
• Russia
• Brazil
• Mexico
• US steadily losing advantage in many key
  technologies

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World competition brews

• Third-world - HIC
• Hungry
• Innovative
• Competitive
• Fundamental problem - you cannot simulate hunger
• Big offshore tax-holidays to attract shifts

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Do we have to worry?

• Job losses
• Prices
• Productivity
• Overall effects

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Effects of outsourcing

• Employment
• Note Major effects is on job destruction due to
  relocation of production / services to cheaper
  countries
• Jobs to be affected by outsourcing (OECD, 2004)
• EU-15 19,2
• US 18.1
• Korea 13.1

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Effects of outsourcing

• Employment
• US
• For comparison US employment turnover, annual
  amount of job destruction alone is estimated to 7
  and 8 million jobs
• In US only around 1-2 of the annual job turnover
  is attributable to relocation of jobs outside the
  US (Mann, 2003 Forrester, 2002).
• Altogether, by the year 2015, approximately 3.3
  million jobs would be lost due to offshoring
  (Forrester, 2002)
• Increase in US employment due to international
  insourcing from foreign countries which grew from
  2.6 million jobs in 1987 to 5.4 million in 2002.
• Unemployment caused by increased productivity
  much bigger
• Automation has reduced headcount
• Computers Internet

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Effects of outsourcing

• Employment
• EU
• Small to negligible effects, altogether 1.2 jobs
  lost in manufacturing over 1979-1991
• Clothing and textiles, leather and footwear,
  shipbuilding and basic metals have lost the
  largest number of jobs over the past two decades
• Hence, despite not being cause for concern at the
  macro level the costs of delocalisation,
  resulting from job losses, may be strongly felt
  (at least in the short-term) in certain sectors
  and in the regions where these sectors are
  concentrated.
• In the long term, if delocalisation allows firms
  to improve their competitiveness the impact on
  the aggregate level of employment can be positive.

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Evolution of employment in manufacturing sectors
in the EU due to outsourcing from 1979 to 2001
(Source M.OMahony, B. Van Ark (2003))
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Effects of outsourcing

• Employment
• Kirkegaard (2003) notes that between 1999 and
  2002 the majority of job losses in the category
  occupations at risk of offshoring did not
  happen in services but in the manufacturing
  industries.
• Moreover, these were generally low-wage jobs,
  with services employment in the same occupational
  category increasing.

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Effects of outsourcing

• Productivity and prices
• over 1995 to 2002, the international
  fragmentation of IT hardware manufacturing led to
  a price decrease between 10 and 30 of IT
  hardware.
• this translated into a higher productivity growth
  of 0.3 percentage points per year corresponding
  to an accumulated USD 230 billion in additional
  GDP (Mann, 2003)

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Effects of outsourcing

• Overall effects
• MGI (McKinsey Global Institute) estimates
• US 1.14 per corporate dollar spent on
  offshoring, of which
• a base saving of 0.58 per corporate dollar
  invested in offshoring,
• a directly related benefit to the US economy of
  0.09 per dollar due to additional exports to
  India and profits transfers by India-based US
  providers
• additional benefits of 0.47 stemming from
  re-employment of workers who lost their job in
  the process
• Germany 0.80 per dollar
• due the fact that the major German offshore
  location is Eastern Europe, and not India where
  wages are much lower
• India 0.33 per dollar
• Global benefits 1.47 per dollar invested in
  offshoring

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Effects of outsourcing

• Re-employment effects questioned by the BLS
  study
• in the period 1979-1999 31 of those who lost a
  job due to trade were not fully re-employed.
• only 36 of the displaced workers were able to
  find a new job with matching or higher wages,
• 55 were at best working for 85 of their former
  wages,
• and 25 were working for 70 or less of their
  former wage.

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Empirical evidence on outsourcing and productivity
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How to prepare for not being outsourced?

• Companies
• Proprietary products
• Customer productivity important
• Continuous upgrade to maintain leadership
• Outsourcing is irrelevant productivity is the
  key
• High-value-added
• Proprietary knowledge
• Tailored to specific customer needs
• Go global think local
• Special needs, custom requirements must be
  handled locally
• Partnership and proximity

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How to prepare for not being outsourced?

• Individuals
• Be
• Special (ex-Bill Gates)
• Have a global market for your services
• Specialized
• Your work cannot be easily digitized
  (ex-Surgeons technique)
• Anchored
• Location specific requiring face-to-face
  contact. BUT even
• Parts here can be fungible.
• Really Adaptable
• Grow your skillsyou may have to move
  horizontally but growth creates new specialties
• Friedman, The World Is Flat

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Sources

• DG EcFin (2005). Delocalisation Which challenges
  for the EU economy?
• OECD (2006). Productivity Impacts of Offshoring
  and Outsourcing A Review. STI Working Paper
  2006/1
• Michael Pitts (2006). Outsourcing, Lecture
  Slides
• Jim Pinto (2004). Automation A global shift.