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Friday, June 08, 2007

Offshoring, Phantom GDP & Dark Matter

BusinessWeek's analysis of the US import price data reveals offshoring to low-cost countries is in fact creating "phantom GDP"--reported gains in GDP that don't correspond to any actual domestic production. The only question is the magnitude of the disconnect. The strong earnings growth of U.S.-based corporations is still real, but it may be that fewer of the gains are coming from improvements in domestic productivity. In fact, holding down costs by moving key tasks overseas could be having a greater impact on corporate earnings than anyone guessed-or measured.

By BusinessWeek's admittedly rough estimate, offshoring may have created about $66 billion in phantom GDP gains in the last three –four years. That would lower real GDP today by about half of 1%, which is substantial but not huge. But put another way, $66 billion would wipe out as much as 40% of the gains in manufacturing output over the same period

Dark matter and phantom GDP are related to each other. U.S. corporations help bring their foreign suppliers up to speed ("dark matter"), who then can ship low-cost goods back to the U.S. ("phantom GDP") This supply-chain loop is one of the realities of today's world but it's completely missed in the government data. Depending on your attitude toward offshoring, the existence of phantom GDP is either testimony to the power of globalization or confirmation of long-held fears.

My View :I hope that Michael Mandel has got his facts right and has used acceptable means in computing the data. The fact of the matter is that more than 50% of the profits on the S&P now come from overseas, this has gone up from 1/3 in 2002. Clearly international production outside of the US is the part that is growing. The reality is that the high profits as a result of low cost overseas capacity utilization has come in handy to cover up inefficiencies in planning, management, execution, personnel development. As this appears to be a relatively easy option( it’s deceptive to think that offshoring is easy), I think all these areas have deteriorated, because low cost labor is where the profit margin is, and the companies are chasing that over a cliff, sacrificing ignoring their latent strengths. That’s the key thing that the US enterprises need to focus on to create better quality growth for its stakeholders. A recently released Hackett study shows that the Fortune 500 could generate over $91 billion annually, or about $182 million on average per company, by strategically combining "Lift & Shift" efforts, which move back office processes overseas without first improving them, with "Transform & Shift" initiatives, where processes are optimized and then taken offshore. This way, the companies can potentially increase these savings by over 50 percent by selectively integrating transformation and process improvement efforts into their globalization initiatives Clearly, the U.S. economy no longer stops at the water's edge. Global corporations often provide their foreign suppliers and overseas subsidiaries with business knowledge, management practices, training, and all sorts of other intangible exports not picked up in the government data. In return, they get back cheap products. Generally speaking, part of the productivity enhancing effects from material offshore outsourcing is driven by firm-specific strategic elements such as increasing the focus on core competences.Its clearly time to think of the US ecocnomy as a global enterprise.This clearly takes precedence over every other point on this topic and any attendant issue need to be examined from this perspective.

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