[ppi] [ppiindia] Division of labour: Outsourcing

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A world of work

Nov 11th 2004 
From The Economist print edition


The global deployment of work has its critics, but it
holds huge opportunities for rich and poor countries
alike, says Ben Edwards

ON A technology campus off the bustle of the Hosur
Road in Electronics City, Bangalore, engineers are
fiddling with the innards of a 65-inch television,
destined for American shops in 2006. The boffins in
the white lab coats work for Wipro, an Indian
technology company. Wipro has a
research-and-development contract with a firm called
Brillian, an American company based half a world away
in Tempe, Arizona. Brillian's expertise is in display
technology. Wipro's job is to put together the bits
that will turn Brillian's technology into a top-end
TV.

Wipro is sourcing the television's bits and pieces
from companies in America, Japan, Taiwan and South
Korea. After design and testing, assembly will pass to
a specialist contract manufacturer, such as
Flextronics or Solectron. The buyer of the finished
television might use a credit card administered from
Kuala Lumpur, Malaysia. After-sales service might be
provided by a polite young Indian call-centre agent,
trained in stress management and taught how to
aspirate her Ps the American way.


A few years ago, the combination of technology and
management know-how that makes this global network of
relationships possible would have been celebrated as a
wonder of the new economy. Today, the reaction tends
to be less exuberant. The same forces of globalisation
that pushed Flextronics into China and its share price
into the stratosphere in the 1990s are now blamed for
the relentless export of manufacturing jobs from rich
to poorer countries. Brillian's use of Indian
engineers is no longer seen as a sign of the admirable
flexibility of a fast-growing tech firm, but as a
depressing commentary on the West's declining
competitiveness in engineering skills. 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. Politicians decry outsourcing and the
bosses they blame forperpetrating it. The same media
that greeted the rise of the new economy in the 1990s
now mourn the jobs that supposedly migrate from rich
countries to less developed ones.

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.?

Amid all this clamour, some of the vocabulary has
become mixed up. Properly speaking, 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. 

 
 
 

 
What agitates worriers in the West is the movement of
work abroad, regardless of whether it is then
outsourced or performed in-house. But the reality is
more complicated than they acknowledge.



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 at Dearborn, Michigan, 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.

Brillian obtains both the goods and the services it
needs to put together its televisions from outsiders
all over the world, which means each bit of work goes
to whatever company or country is best suited to it.
This opens up huge opportunities. Diana Farrell, the
head of McKinsey's Global Institute, thinks that by
reorganising production intelligently, a multinational
firm can hope to lower its costs by as much as 50-70%.


Such reorganisation takes two main forms. First,
thanks to the spread of the internet, along with cheap
and abundant telecommunications bandwidth, businesses
are able to hand over more white-collar work to
specialist outside suppliers, in the same way as
manufacturers are doing already. A growing number of
specialists offer, say, corporate human-resources
services, credit-card processing, debt collection or
information-technology work.

Second, as transport costs fall, globalisation is
beginning to separate the geography of production and
consumption, with firms producing goods and services
in one country and shipping them to their customers in
another. Over the past ten years, countries such as
Mexico, Brazil, the Czech Republic and, most notably,
China have emerged as important manufacturing hubs for
televisions, cars, computers and other goods which are
then consumed in America, Japan and Europe. Such
offshore production is central to the strategies of
some of the world's most powerful businesses,
including Wal-Mart and Dell.

Over the next ten years, Russia, China and
particularly India will emerge as important hubs for
producing services such as software engineering,
insurance underwriting and market research. These
services will be consumed at the other end of a
fibre-optic cable in America, Japan and Europe. Just
as Dell and Wal-Mart are obtaining manufactured goods
from low-cost countries, companies such as Wipro, TCS
and Infosys, for instance, are already providing IT
services from low-cost India.

As businesses take advantage of declining shipping
costs, abundant and cheap telecommunications bandwidth
and the open standards of the internet, the
reorganisation of work in each of these areas is
likely to advance rapidly. IBM's figures suggest that
companies have so far outsourced less than 8% of their
administrative office work. Privately, some big
companies say that they could outsource half or more
of all the work they currently do in-house.

Rich-country manufacturers have already invested
hundreds of billions of dollars in building factories
in China to make clothes, toys, computers and consumer
goods. In the next few years, they may invest hundreds
of billions more to shift the production of cars,
chemicals, plastics, medical equipment and industrial
goods. Yet the globalisation of white-collar work has
only just begun. 

A forthcoming study by McKinsey looks at possible
shifts in global employment patterns in various
service industries, including software engineering,
banking and IT services. Between them, these three
industries employ more than 20m workers worldwide. The
supply of IT services is the most global. Already, 16%
of all the work done by the world's IT-services
industry is carried out remotely, away from where
these services are consumed, says McKinsey. In the
software industry the proportion is 6%. The supply of
banking services is the least global, with less than
1% delivered remotely. 

McKinsey reckons that in each of these industries,
perhaps as much as half of the work could be moved
abroad. But even a much smaller volume would represent
a huge shift in the way that work in these industries
is organised. There may be just as much potential in
insurance, market research, legal services and other
industries.

Outsourcing inspires more fear about jobs than hope
about growth. But the agents of change are the same as
those that brought about the 1990s boom. New-economy
communications and computer technologies are combining
with globalisation to bring down costs, lift profits
and boost growth. This survey will try to restore some
of the hope. 



 
 
(The Economist)


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