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Saturday, November 13, 2004

The Economist On Outsourcing -Part I

Economist's survey on outsourcing says," The global deployment of work has its critics, but it holds huge opportunities for rich and poor countries alike ". Excerpts:

A few years ago, the combination of technology and management know-how that makes this global network of relationships connecting US,India, Mexico, Singapore, China, Malaysia etc.. would have been celebrated as a wonder of the new economy. Today, the reaction tends to be less exuberant.The fibre-optic cable running between America and India that used to be hailed as futuristic transport for the digital economy is now seen as a giant pipe down which jobs are disappearing as fast as America's greedy and unpatriotic bosses can shovel them.

These anxieties have crystallised into a perceived threat called “outsourcing”, a shorthand for the process by which good jobs in America, Britain or Germany become much lower-paying jobs in India, China or Mexico. Forrester, an American research firm, has estimated these future casualties down to the last poor soul. By 2015, America is expected to have lost 74,642 legal jobs to poorer countries, and Europe will have 118,712 fewer computer professionals. As Amar Bhide of Columbia University comments drily, “Graphs from a few years ago that used to predict explosive growth in e-commerce have apparently been re-labelled to show hyperbolic increases in the migration of professional jobs.”

outsourcing means that companies hand work they used to perform in-house to outside firms. For example, Brillian is outsourcing the manufacture of its televisions to Flextronics or Solectron. Where that work should be done involves a separate decision. Flextronics might assemble bits of its televisions in Asia but put together the final products close to its customers in America. If it does, it will have moved part of its manufacturing “offshore”. Not all offshore production is outsourced, however: Brillian might one day open its own “captive” research-and-development facility in Bangalore, for instance.

A well-established model :
The age of mass mechanisation began with the rise of large, integrated assembly lines, such as the one Henry Ford built in 1913 to make the Model T. Over the course of the 20th century, companies reorganised industrial production into ever more intricate layers of designers, subcontractors, assemblers and logistics specialists, but by and large companies have mostly continued to manufacture close to where their goods are consumed. They have then grown internationally by producing overseas, for new customers, the same goods they produce and sell to their customers at home: 87% of foreign direct investment is made in search of local markets, according to McKinsey, a consultancy. Products and brands have become global, but production has not.

Conversely, white-collar work continues to be produced in the same way that Ford produced the Model T: at home and in-house. Bruce Harreld, the head of strategy at IBM, reckons that the world's companies between them spend about $19 trillion each year on sales, general and administrative expenses. Only $1.4 trillion-worth of this, says Mr Harreld, has been outsourced to other firms.
(Part II shall be published shortly.)

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