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.
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.
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