January 28, 2006
OutsourcingBy Brian Schwarz
During his re—election campaign in 2004, President Bush was often put on the defensive by Democratic rivals over slow job growth and the complex issue of outsourcing. Contrary to the claims made by his liberal rivals, outsourcing is not simply about cutting jobs and moving them to a developing country like China or India.
With improvements in digital technology, many experts say we are on the verge of a new outsourcing wave. In the so—called flat world, any work that can be digitized can be transferred around the globe via email in a matter of seconds. Many job categories, that do not require personalized contact with the customer, are at risk.
For example, say a team of Mayo Clinic doctors were to design a new medical device for heart patients but are unsure about how to commercialize the new device. Outsourcing can provide what used to be regarded as highly personalized professional services at a tiny fraction of the cost of American professionals providing the same package of services.
BusinessWeek, in a recent special report, explained how the New Delhi—based Evalueserve Inc. will, within a day, assemble a team of Indian patent attorneys, engineers, and business analysts, start mining global databases, and call dozens of American experts and wholesalers to provide an independent appraisal. And what is the total price tag? Around $5,000.
One could make the argument that new professional class victims are being generated, that the sinister effects of outsourcing are destroying high—paid jobs. But by dividing work processes and sending some of the simpler tasks to other locations around the globe, outsourcing is also about making the whole organization more efficient and profitable. In this case, it is an infant entrepreneurial venture, one developing a life—saving product that could generate many high—paying jobs in America.
The Mayo doctors can continue with their medical research and leave at least some stages of the communalization process to their Indian business partners. Market and patent research, and many other professional skills are becoming globally traded commodities, slowly but surely. Far from being a zero—sum game, where one side wins and the other loses, offshoring creates mutual economic benefit.
A 2003 study by the McKinsey Global Institute (MGI) showed that offshoring creates wealth for Americans as well as for China or India, the country receiving the jobs. According to their research, for every dollar of corporate spending outsourced to India, the American economy captures more than three—quarters of the benefit and gains as much as $1.14 in return.
True, some hardworking Americans will lose their jobs, but this painful reality doesn't weaken the case for open markets and free trade policies. Given the benefits of offshoring, the logical response is to make our labor force and economy more flexible and able to cope with change, and keeps our workers performing higher value—adding tasks. The worst thing we can do is use regulation and tax policy to trap Americans in jobs where overseas sources are more competitive.
But it is not a perfectly smooth process for either side. Even in a country with exploding university enrollment, worker shortages are popping up in the manufacturing strongholds in most prosperous southeast region. Rising rural incomes mean fewer people are migrating into the major southern cities of Shenzhen and Guangzhou in search of work.
After years of wage stagnation around Hong Kong in the Pearl River Delta, salaries are starting to creep up and some firms in the most labor—intensive industries are starting to consider moving their factories farther inland. For instance, in the city of Dongguan alone, there are an estimated 267,000 unfilled jobs. Of course, the underlying challenge is make sure more Chinese people have the right skills to fill these job openings.
As does India, China suffers from a serious shortage of skilled business managers and researchers with international experience. While the number of MBA programs in China has greatly increased, demand for talent greatly outstrips supply. To understand the depth of this problem, consider these estimates from another MGI study:
In the years ahead, India may face a similar talent shortage. While India has built up an international reputation for its dynamic information technology sector and call centers, the government has recently passed into law a controversial bill that critics charge will damage the very academic institutions that provide the most skilled employees that the Asian giant desperately needs to move up the economic ladder.
In an effort help millions of poor children, Newsweek recently reported that a new 'quota law' has many private universities worried that they will lose their financial viability and academic integrity.
Similar to the debate over affirmative action raging at many American universities, this sensitive issue involves questions of fairness, academic standards, and helping students from less privileged backgrounds.
India is a caste society where the Dalits (or untouchables) face a bleak future with limited opportunities. While these private institutions have a long tradition of basing their academic decisions on merit, they will be forced to lower their standards to admit students from less privileged families and lower their tuition fees.
Americans should welcome Asia's economic rise. While there are numerous cultural and legal hurdles to overcome in international business, greater cooperation would allow Mayo Clinic doctors and IBM engineers to concentrate on what they do best, creating products, services, and companies which do what Americans do best: innovate.
With many potential pitfalls, Asia's continued economic development is not assured. Instead of trying limit trade and investment with the developing world, it is in America's best long—term interest to promote more interdependence and keep China and India moving on a path toward greater prosperity.
Brian Schwarz publishes the website China Challenges, and is based in Shanghai.