Skip to comments.(Vanity) A Falling Tide Grounds All Boats
Posted on 03/05/2006 1:08:08 AM PST by grey_whiskers
NOTE: In a recent vanity, I considered one of the real reasons for outsourcing, namely, demographics. This article first recaps that vanity, and then explores some of the changing rationales given by proponents of outsourcing.
. As the United States population ages, large corporations have been realizing that a major profit center for their goods and services will be drying up or diminishing. Since the clarion call of Wall Street is for ever increasing short-term profits, without a requirement to consider the long-term ramifications of actions, the obvious solution has been to try at all costs to bring up the rest of the world as customers of US companies products. But selling to Europe and Japan is unsustainable since their populations are aging too. The solution? Find a way to sell to the third world: but in order to do that, the third world must be given sufficient funds to buy the goods. And the way chosen to do that was by outsourcing: directly taking away jobs from US citizens and relocate the plants, relocate the positions, relocate (well, part of) the money to the country offshore.
From the point of view of the company performing the outsourcing, the advantages are obvious:
1) Wage arbitrage.
2) Opening of pools of new markets (e.g. one argument made for sending programming work to India was that if, say, a programmer is in India, why, theres a new customer for Coke right there never mind that the person now unemployed in the United States will now decrease their purchasing.) President Bush made a speech during his recent visit to India in March 2006, in which he nearly let the cat out of the bag: And the class opportunity for our American farmers and entrepreneurs and small businesses to understand, there's a 300-million-person market of middle-class citizens here in India, and that if we can make a product they want, then it becomes -- at a reasonable price -- and then all of a sudden, people will be able to have a market here. Thats all very well, but when people in India are making maybe $15,000 per year and there are 300 or 400 million people in India who make $1 or so per day--then most goods and services provided by Americans just arent going to sell in India at all. The primary beneficiaries will be the larger corporations.
3) Lack of regulation, requirements for pension funds, and lower risk of lawsuits (say for EEOC or OSHA violations, or just from ambulance-chaser lawyers). In the best case, this is an argument for a more reasonable business stance from the US government; in the worst case, it looks like a return to the Bad Old Days of robber barons, writ large over the third world. (See for example this article on an environmental catastrophe in China. Can you imagine a company surviving anything like that in the United States?)
However, from the point of view of the displaced worker, things arent so rosy. How appealing is it to spend years working to master a trade, only to be told to train in your replacement: and then have business leaders trumpeting the lie that there are no qualified workers in the United States? (Gee, if the American was the one who was so unqualified, why wasnt the imported H-1B worker training the American, instead of the other way around? And if India and China have been so full of world-class workers, why have they been economic basket cases since before the United States was established? Im glad that to some extent they have developed their economic systems to at least the level of crony capitalism: but I digress )
There are a number of reasons which have been given in the past for the desirability and the inevitability of offshoring. First, it was the wages:
But now it has changed; see the Jan. 30, 2006 Business Week on The Future of Outsourcing :
Up to now, the primary motivation of corporate bean-counters has been to take advantage of the huge wage gap between industrialized and developing nations. Big layoffs at home were usually the result.
But now, a more strategic view of global sourcing is starting to emerge. The new buzzword is "transformational outsourcing". Many companies are discovering that off shoring is really about growth - making better use of skilled US staff, and even creating new types of jobs in the US. The labor savings from global sourcing can still be substantial. But it's small compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.
NOW it's making sense. The shift from short-sighted, narrow-minded local-job protection, to true business use of global resources, stimulating innovative talents, partnering of complementary knowledge resources. Ubiquitous broadband communications makes this possible.
In other words, they are admitting the the cost savings werent really the reason?
Or from the February 17, 2006 Business week interview with the CEO of Indias Cognizant Technologies:
Outsourcing started as a way for companies to realize the benefits of lower costs. Later, they realized they could improve the quality of much of their work by taking advantage of excellent workforces. Now they are coming to understand that companies like Cognizant can help them assemble teams and projects much faster than they could in the U.S. That's the real value, time to market. It can take six months to assemble a team in the U.S. We can have a problem solved in six months.
Read that again. Now they are coming to understand, thats the real value, time to market. So were they lying before, about low costs, and they have to come up with a new rationale? Or have wages in the Third World suddenly risen to match those in the States, but the Americans are now just too slow?
So if the reasons for outsourcing cannot be consistently articulated, even by the CEOs of the outsourcing firms themselves, what is going on here? I came across the following article, again from Business Week, Feb. 28, 2006:
While there are no numbers, anecdotal evidence suggests that scores, perhaps hundreds, of former GE and McKinsey executives and consultants play key roles as both suppliers of outsourced services and customers for them. ``Every time we have an outsourcing forum, it's like a GE and McKinsey alumni association meeting,'' says Sunil Mehta, vice-president of NASSCOM, India's software industry association.
In other words, there is a large element of the old boys network here. Read the Feb. 28 article, theres a lot to it.
So, in the meantime, what is the future of outsourcing? It apparently has a lot of backers in the C-level suite, as the rush for presentand futurecustomers in new markets continues. C.K. Prahalad of the University of Michigan has been significant in promoting the idea that theres lots of money at the bottom. (See for example this review: and note the mention of a special advisor to Kofi Annan. So this sounds like another case of what P.J. ORourke called In other words, give me a dollar.)
The only problem is, how much money is there to go around? If the idea behind outsourcing is, send work to the Third World, save some cash, so you can afford to hire American workers at higher wages, the cynical question is, why not send the new higher wage jobs offshore, too?
And what happens if China and India are playing US corporations for suckers, and decide to borrow US technology to sell US goods back to the US at a cheaper price? (Think of the new Chinese autos which are said to be spitting images of some of GMs models which have been built in China )
Footnote: One other way to consider the effect of third-world labor on US wages is by analogy to cooling off a drink with ice cubes. If the American worker is displaced, at (say) $45,000 per year, then three Indian workers can be hired at $15, 000 per year to replace him. Thats fine, as far as it goes. But according to the articles above, there are 300 million workers in the middle class of India, as noted by President Bush. That alone is more than the entire population of the United States. So every last job in the United States could be outsourced to India, without even employing all of Indias middle class: and that does nothing for the 400 million Indians living on $1 a day or less. To say nothing of outsourced US workers. (Or the hundreds of millions of rural poor in China: President Bush has also recently noted that China has to create 25 million new jobs a year just to keep up.) So it looks like a sweet deal for the corporations: new cheap workers, and new markets to sell to. But for US workers, what is the attraction?
Second Footnote: Recently there has been some minor scandal about bloggers being paid for their work, as well as the possibility of opinion pieces being co-opted. Given the fact that (as I mentioned in my previous outsourcing vanity) McKinsey was being paid by one of the local Indian governments to promote outsourcingis there any chance that Business Weeks articles on outsourcing are in fact advertisements meant to keep the foreign investment money flowing?
Come and get it while it's hot [...and steaming :-) ]
Hip boots for wading available for a nominal fee.
The Learning Resource Center at the Indian School of Business in Hyderabad holds an overflow crowd as President George W. Bush meets with young entrepreneurs during his visit to India. White House photo by Eric Draper
President Meets with Young Entrepreneurs at Indian School of Business
Indian School of Business
President's Visit to India and Pakistan
12:38 P.M. (Local)
THE PRESIDENT: Thank you for the warm welcome. You know I was a Harvard Business School graduate. This isn't exactly how I went to class when I was there, but I am honored to be here at ISB.
Yesterday I had the honor of standing on the stage with your Prime Minister, talking about a new relationship between the United States and India. I am excited about our strategic partnership. I'm equally excited about the future of India. It is in the interest of the United States to be friends with India; it's in the interest of the United States to work for free and fair trade with India; it's in the interest of the United States that an entrepreneurial class grow in this great country. It's in the interest of India that an entrepreneurial class grow in this great country, so that people can realize dreams and find good jobs.
You know, I said something really interesting, I thought interesting -- otherwise, I wouldn't have said it -- the other day in a speech I gave in Washington. There are -- the middle class of India is 300 million people large. That's larger than the entire United States. And when America looks at India, America ought to look at India as a strategic partner in keeping the peace, a great democracy which is capable of having people from different religions live side-by-side in peace and harmony, and a wonderful opportunity to -- with whom to trade.
One of the things that you can judge a country by is the vitality of the youth, and one of the reasons I really wanted to come to ISB was because I understand it's the center of excellence in education. It's a new school that is using innovative techniques to give people the tools necessary to succeed.
Yesterday I met with some Indian CEOs and American CEOs, kind of the old folks. Today I'm meeting with the CEOs of tomorrow, the people that are going to help drive this great engine of economic prosperity for India -- for the good of the world, is how I view it.
And so, thanks for letting me and the Ambassador come. Ambassador, thanks for setting this up. I want to thank Chairman Gupta, a fellow Harvard Business School graduate who helped form this school. I want to thank the Dean of this school, as well as the professors and faculty, for being here, as well, and the rest of the students -- thanks for letting me come by to say hello. I think it would be interesting for you to tell me what's on your mind, or ask me questions, the whole purpose of which is to help kind of foster this partnership that is developing on the political level so that people in my own country can see that there's folks just like themselves here in India working to realize dreams and create opportunities.
So whoever would like to begin, we can start. And if not, I'm just going to call on somebody -- like you. (Laughter.)
Q I guess I'll do the honors. Thank you for being here. I didn't graduate from ISB, but it seems like a great place. I graduated from Carnegie Melon, in Pittsburgh --
THE PRESIDENT: That's also a good place. (Laughter.) I will tell you something -- she's really smart -- to go there. (Laughter.) You don't go there unless you're smart. (Laughter.)
Q Anyways, so I'm from the IT industry, so let me ask a question relating to that -- not just IT, I guess generally outsourcing. So India and China have experienced a lot of growth because of globalization and outsourcing, in general -- IT outsourcing, in particular. And I live in the U.S. so I know that there is a lot of resistance in the media and also in the industry about outsourcing. But as entrepreneurs and as people who believe in capitalism, we feel that there's no other way to go but capitalism and globalization and outsourcing, et cetera. So does the government or -- does it have a political strategy on how to manage, do a balancing act?
THE PRESIDENT: I appreciate it. First of all, what do you do?
Q I have a IT consulting company.
THE PRESIDENT: Okay. One of the -- the future of any country is to make sure women have got opportunity, and so I congratulate you for being a CEO. By the way, I've got a strong woman who travels with me in the Secretary of State. (Laughter.) I'm not trying to avoid your question, by the way. (Laughter.)
People do lose jobs as a result of globalization, and it's painful for those who lose jobs. But the fundamental question is, how does a government or society react to that. And it's basically one of two ways. One is to say, losing jobs is painful, therefore, let's throw up protectionist walls. And the other is to say, losing jobs is painful, so let's make sure people are educated so they can find -- fill the jobs of the 21st century. And let's make sure that there's pro-growth economic policies in place. What does that mean? That means low taxes; it means less regulation; it means fewer lawsuits; it means wise energy policy.
So I've taken the position -- I've taken it as recently as my State of the Union, where I said, the United States of America will reject protectionism. We won't fear competition, we welcome competition, but we won't fear the future, either, because we intend to shape it through good policies.
And that's how you deal in a global economy. You don't retrench and pull back. You welcome competition and you understand globalization provides great opportunities. And the class opportunity for our American farmers and entrepreneurs and small businesses to understand, there's a 300-million-person market of middle-class citizens here in India, and that if we can make a product they want, then it becomes -- at a reasonable price -- and then all of a sudden, people will be able to have a market here. And so -- and people in America should, I hope, maintain their confidence about the future.
Thanks for the question. Good luck to you.
Q I actually went to Wellesley College and I'm actually a student at the ISB.
THE PRESIDENT: Let me say something before you ask the question. One of the most important things for America is to make sure our universities and colleges are accessible to Indian students, because I find it really interesting the first two questioners have gone to school in the United States. There can be sometimes perceptions about our country that simply aren't the truth, but nevertheless, become stuck in people's minds. And one way to defeat those perceptions is to welcome people to the United States so you can see firsthand our good side and our bad side, and you can draw your own conclusions without being told what to think.
Sorry to interrupt.
Q No problem. This is actually related to the point you just made about the market with the 300 million people. I actually run the non-profit club and social enterprise club here at the ISB, with a lot of help from the faculty from the Center of Entrepreneurship and the student body. And we're a fairly active group who are very -- who believe in what we call compassionate capitalism, through providing for venture capital funding for the small businesses and social entrepreneurs so that they can innovate and actually sustain themselves by providing affordable goods, and using a market-based model, rather than the traditional aid-based model.
So my question to you, Mr. President, is what do you feel and how do you feel that your government will support India in this sort of bilateral partnership whereby your investors can get a financial return, as well as create social impact in a developing country such as India?
THE PRESIDENT: Well, there's two types of investments. One is private capital, which goes to places where people think they can get a reasonable return relative to risk. And government can help assuage some concerns about risk by having transparency in policy, consistent law. One of the things you don't want to do is invest in a country, and then all of a sudden, laws change, or transparency into why people make decisions, or less bureaucratic hurdles in order to invest.
People look around at places to invest. In my country, for example, there's competition between the states. And if they see there's a lot of bureaucratic hurdles you have to get over in order to invest in one state versus another, people tend to mitigate risk in order to maximize return.
There's also public investment, and through USAID and other aspects of our State Department, we do provide micro-financing -- small loans to entrepreneurs.
Today, I went over to the Agricultural Center and saw some of the benefits of not only good agricultural research, but the concept of micro loans to encourage entrepreneurship, particularly amongst women in rural India. And it's an effective program. And micro loans have worked around the world.
And so one of the things we do through our State Department, ably led by Secretary Rice, I want you to know, is to encourage micro loan financing.
Q Yes, Mr. President. My company is based in the U.S., and we deal mostly with electronic components, exports to India. My question is, after this nuclear deal, do you think the same thing will come in the electronics field? Like there are a lot of sanctions, export restrictions on shipping components to India. That same product they can buy at -- they pay more, but they get it from Europe where there's no export restrictions.
THE PRESIDENT: We're constantly reviewing what's called the Export Control List. And I thank you for bringing that up. And obviously, as this relationship changes, as a strategic partner, the folks involved with the Export Control List will be taking that into account.
Yesterday's energy agreement was an important agreement. It's important for the United States, and it's important for India. It's important for the United States because -- in that we live in a global energy market when a fast-growing country like India consumes more fossil fuels, it causes the price of fossil fuels to go up not only in India, but around the world, including the United States. And therefore, the extent to which we can help nations develop civilian nuclear power is in the nation's interest.
Secondly, India has been an excellent partner in nonproliferation over the past decades, and therefore, I can tell the American people that this is an important agreement to help deal with the proliferation issue.
For India, it makes sense because it will enable India to be able to meet electricity needs in a way that doesn't pollute the air. The United States and India and China must use technologies to do our duty to not only make sure our economies expand, but also to be good stewards of the environment. And nuclear energy is a -- is a renewable source of energy in which there is zero greenhouse gases.
Yesterday was a -- as I mentioned to you in our private meeting, yesterday was a way to put the Cold War behind us and to move forward as strategic partners. And I want to congratulate your Prime Minister and the Indian government for its -- for working with me and our government to show the world what's possible when people can come together and think strategically.
Q Mr. President, I did my MBA -- from Johnson and Wales, Rhode Island, and I loved every bit of it. I saw your speech on the Asia Society, and I thought it was very spectacular.
THE PRESIDENT: Thank you. You can leave it right there. (Laughter.) No, go ahead.
Q My question is, India was never this important. Why has it become so important now?
THE PRESIDENT: That's a really good question. I think India has always been an important country, but the problem is, international politics made it very difficult for previous Presidents and previous Prime Ministers to reach common agreement. As I said, we're getting rid of the Cold War, and the truth of the matter is, the Cold War caused the world to become pretty well divided. And if you're on one side of the divide, it was politically difficult to work with people on the other side of the divide.
That began to change, of course. And so I wouldn't say that India was not an important country up to now, because it was.
(End of public portion of event.)
END 1:00 p.m. (LOCAL)
And by the way, Australia has a trade surplus with India. Australia exports a lot of agricultural, processed and manufactured goods to India.
Excellent post. It is my personal opinion that part of this reason is because the segment of the USA that is having lots of children are not embued with the work ethic of past generations. You really cant blame a company for wanting to just get work done, when in America it would become a major issue just to get everyone agreed on the definition of what work means. Also, America is dying as we know it, the people who stocked America in the past with such ethics are not reproducing. Large companies have figured this out and are searching other pastures. America today is producing people who dont want to work at all, its the entitlement syndrome. We can thank the democrats for this turn of events.
All those questioners went to college in the U.S. I thought India had the better schools? Isn't that why we are hiring more Indians? Because they are better engineers?
You might consider websearching "big emerging market"
also, "mature market"
My beef is the suddenness, and the dishonesty with which the goals of opening the new markets have been persued; and the risk that China and India are persuing nationalistic mercantilism to supplant the United States, and that we are playing right into their hands.
I know C.J. Prahalad (Michigan) and Columbia's Baghwati are very influential in this area, as was Jack (Neutron your employees and leave your wife) Welch of GE infamy. I would like to know Esther Dyson's take on this. . .
I'm moved to paraphrase the Kuan-Tzu:
If you sell a country products that it needs, it will use those products and continue to buy them from you; if you teach a country how to make products that it needs, it will no longer need your products and you're pretty much screwed.
What Bush told young entrepreneurs
George Iype | March 06, 2006
The Indian School of Business in Hyderabad had a rare honour last week. It became the first B-school in India to host an American President. And the sprawling campus on the outskirts of Hyderabad was also where President George Bush met with a group of young entrepreneurs.
President Bush saw reason for coming to the ISB. "It is a new school using innovative techniques to help people succeed," he said.
The students and entrepreneurs who had the rare honour of meeting and interacting with President Bush are ecstatic.
The entrepreneurs came from various backgrounds, ranging from technology to pharmaceuticals to textiles to media, and they all had different questions on various topics for the President.
Complete Coverage: The Bush Visit
Madhavi Vuppalapati, Satish Reddy, Prachi Patodia, Shankar Prasad, and Amar Ohri were some of these entrepreneurs who sought responses from President Bush with regard to various business- and trade-related aspects.
Anjali Patel, a student from the ISB Class of 2006, was an active participant and she drew the President's attention to 'compassionate capitalism' as represented by the funding of sustainable social venture projects.
Ruchi Bansal who had the honour of greeting President Bush on his arrival at the ISB, says, "The President's interest in the ISB students and young entrepreneurs here can be seen as a furthering of the knowledge partnership between the two countries."
"The ISB represents the future business leaders of India. We see President Bush's visit to the ISB as a recognition of India's growing importance in global business," says Bharath Aiyar.
Concurs Surendra Ruhela: "The visit of the US President to India and to the ISB is an acknowledgement of the growing importance of India on the global scale as an emerging economy. ISB is a global B-school in India. We feel fortunate to be a part of the occasion."
The participants of executive education programmes at the ISB were also equally delighted to be present at the ISB on the occasion. Munish Sapra, vice president & country head, The Bank of Nova Scotia (Scotiabank), said: "I came to attend an executive education programme -- 'Leading High Impact Teams' -- at the ISB. Getting the opportunity to be a part of this event is an absolute bonus. This is a fantastic occasion."
Shyam Penumaka, who had worked in the US for 11 years before coming to India to pursue his post-graduate programme in business management from the ISB, said: "As an American of Indian origin, I am delighted to be here on this occasion. I did not have the opportunity to meet the President of the US during my 11 year stay in the US, but have managed to do so during the course of my 11-month stay here in India, at the ISB."
For students from various foreign universities who are here on their exchange programme with the ISB, it is an equally exciting opportunity. Edward Odumodo from the Duke University in the US, says, "I think it is quite exciting for me as an American to meet our President here in India!"
Angus Moon, an exchange student from the University of Cape Town, South Africa, had the good fortune of shaking hands with both President Mandela and President Clinton on their respective visits to South Africa.
He says: "I was in Botswana when President Clinton visited there, and also there in Cape Town when President Mandela came to visit at my University. And I am here in Hyderabad now when President Bush is visiting!"
Finally, what did some of the entrepreneurs ask the US President? And what did he tell them?
Madhavi Vuppalapati, an IT consultant: Does the US government have a political strategy to balance the backlash against outsourcing?
President Bush: One response to the situation is to indulge in protectionism and not allow outsourcing. I feel a better way of dealing with the situation would be to educate people so that they could fill jobs in the future. It is in the interest of the US to build better economic policies, welcome competition, and reject protectionism.
Globalisation is an opportunity that should be utilised to the fullest by all countries.
Satish Reddy, an entrepreneur from the pharmaceutical industry: Sir, what are your views on the pace of globalisation? Is isn't too fast for developing countries?
President Bush: Free trade is very important to develop markets and countries. There is scope for the US markets to open up further in terms of agriculture. The WTO can play an important role in such situations. Developing countries need to have a policy in terms of trade, which encourages farmers, invests in the health, education and welfare of people. Foreign aid provided to countries should encourage the right kind of behavior.
Prachi Patodia: Commenting on Mittal Steel's takeover bid of Acelor, Patodia wanted to know President Bush's take on the 'economic patriotism.'
President Bush: Initially, terminal ports in the US were managed largely by British companies. However, there was resistance when the management of these ports was being sold to Saudi Arabian individuals. Industries should not be subjected to ownership restrictions. . . in some cases it was an issue of national security and the government had to put its foot down.
Prachi Patodia: Patodia's follow up question was on the fact that initially consignments were cleared by the US ports in 2-3 days but now it was taking anywhere between 7-10 days.
President Bush: This was a problem with labour and inefficiency. Open these ports. Yes, I got the message.
Finally, President Bush had the best news for India.
"This is a good time for India and the US to come together on issues like research. The US government is planning to increase the number of H-1B visas. The US schools have very little accountability at this stage and he was of the opinion that the education left scope for a lot of improvement. It is also very important to measure the progress of education."
9 years on, what do you think? Have we played this out?
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