American Outsourcing

1. American Outsourcing Helene Bergeman Libor Cech Gary Franklin

2. Introduction • American jobs are being lost to overseas workers • US wages are being beaten down due to the competition. • Services jobs paying $35/hr in the US can be replaced with $10/hr by workers in India • Manufacturing jobs paying $11-$20/hr can be replaced for $1-$2.50/hr in China • Some US workers are willing to take less pay and less benefits to keep a job • Some proponents believe the US is benefiting from lower cost goods and services and are able to create jobs in the US export sector.

3. Destination: Mexico • Labor-intensive assembly operations • Electronics • Hewlett-Packard, IBM, Phillips, GE • Pharmaceuticals • Merck • Apparel • Business Services

4. Advantages Close regional proximity to the U.S. Inexpensive shipping Reduced transit times Ease of communication Spanish / English Time Zones Intellectual property & patents enforced by the gov’t Disadvantages Higher Wages Sunday holiday pay Limited working hours Mandatory social benefits Lower overall productivity compared to China Higher utility costs Vulnerable currency rate Destination: Mexico

5. Transportation Customer Service, Baggage tracking Information Technology PC Technical Support (HP, Compaq….) Financial Credit Card, Billing, Tax Preparations Healthcare X-Ray after-hours assessments Education On-line and VOIP tutoring, On-line small business consulting… Destination: India Service-oriented outsourcing

6. Destination: India • Favorable governmental laws • Intellectual property rights • Foreign ownership of stock • English widely spoken • Literate workforce with higher education SOURCES: Robert Kennedy is the author of The Services Shift, a new book on off-shoring. http://www.fte.org/hottopics/archive/outsourcing.htm

7. Destination: China • Manufacturing jobs are a good fit for outsourcing to China. • Low wages. Fully loaded salaries for Chinese workers were below $1/hr. • The average Chinese worker spent 2,930 hours per year at the Special Economic Area. • 25% more hours than the average Mexican committed to maquilas.

8. Product Failures: Made in China • Pet food • Toothpaste • Seafood • Blood thinner Heparin • Infant formula tainted with melamine. • 54,000 children injured; 4 dead Sources: http://www.latimes.com/news/opinion/la-ed-melamine1-2008oct01,0,3593047.story http://www.usnews.com/articles/news/world/2008/10/09/the-story-behind-chinas-tainted-milk-scandal.html http://www.time.com/time/world/article/0,8599,1844750,00.html

9. General Electric: Globally • Mexico • Manufacturing: Capacitors, electric motors, control devices, lighting • Real Estate • Financing • China • High-technology: medical systems, plastics, light, aeronautics • Research & Development • Leasing • India • Capital Services: transaction processing, finance & accounting services, Call Centers, Data Modeling • Manufacturing: Engines, plastics, power systems

10. What if GE had to choose? • Get out of China… • Less overall investment in capital to-date • Difficult barriers to entry in the local market • R&D discoveries could result in corporate theft • India provides more quality opportunities for growth; low cost manufacturing for Asian markets; educated employee base • Mexico provides lower cost manufacturing in close proximity to US; largest int’l GE operations; friendly economic ties; gov’t investment in education

11. Outsourcing Elsewhere • Pharmaceuticals • Czech Republic • Poland Source: http://www.polishmarket.com/index.php?item=free_articles&id_form=407

12. Czech Republic & Poland • Low Barriers to Entry • English commonly spoken • Well developed chemical research facilities • Favorable Gov’t regulations • Lower level of corruption • Counterfeiting discouraged • Centrally located in Europe • Ease of travel, distribution hub

13. GE Financial • Located in 47 countries worldwide • Offering • Banking • Loans • Leasing Solutions • Insurance • Doing business in India since 1994 • 4500 outlets in 60 locations Sources: http://www.cwalocal4250.org/outsourcing/binarydata/GE%20India.pdf http://www.enterblog.com/200411090747.php http://genpact.com/Genpact/section.aspx?menu=about&section=1

14. GE Financial: the best locale • Advantage India • Linguistic edge over China & Mexico • GE’s financial operation is primary resource in India But – GE’s long term plan for growth includes focusing on Chinese market & current economic environment meant big losses for GE India in 2008

15. GE Consumer Electronics 2nd largest appliance maker in U.S. • Televisions • Home Appliances • Telephones • Small Electrics • Electrical Products http://www.appliance.net/2008/haier-still-considering-ge-893

16. Where should the CE division of GE end up? China “…Fine Silicones were in Shenzhen, Shenjang and Shanghai…” “China exhibited a synergy…the areas of electronics, telecommunications…” p14 • Infrastructure is in place to support manufacturing on the shop floor as well as component acquisition from the silicon chip needed for complex computer interfaces to the distribution network for outsourced assembly. • Exclusive GE licensee, Jasco, “develops, markets, and distributes more than 2,000 GE branded consumer electronic accessories, computer accessories, home electric products, and home security/surveillance products.” • Based in Oklahoma City, Jasco currently has offices in Shenzhen, China. Sources: http://www.appliance.net/2008/ge-delays-sale-of-appliance-division-945 http://www.associatedcontent.com/article/1106358/the_consumer_electronics_division_of.html?cat=55 http://www.jascoproducts.com/ http://www.answers.com/topic/general-electric-company

17. GE Healthcare - $17B industry • Diagnostic equipment manufacturers • Deployment of (GE’s) medical imaging and diagnostics equipment • Patient monitoring systems • Biopharmaceutical manufacturing technologies.

18. GE’s Best Choice - India • Higher hygienic standards than China or Mexico • English-speaking GE outsourced its first fully digital latest X-Ray system…. Manufactured in India, expected to cost 40 % less than imported digital machines Source:http://in.reuters.com/article/indiaDeals/idINIndia-37310520090106

19. Relation to Coursework • Offshore outsourcing – Use of vendors in other countries, usually where labor is inexpensive, to do programming or other system development tasks. • Information systems – A physical process that supports an organization by collecting, processing, storing, and analyzing data, and disseminating information to achieve organizational goals. • Transaction processing system – An information system that processes an organization’s basic business transactions such as purchasing, billing, and payroll. • Data modeling – Defines a way data are conceptually structured. Examples of model forms include the hierarchical, network, relational, object oriented, object relational, hypermedia, and multidimensional models.

20. FDI incentives coupled with a low-cost labor market drain jobs from U.S. Companies choose to outsource labor-intensive jobs to Mexico & China. An educated, low-cost employee pool in India siphons away high-paying IT jobs from the U.S. Stable and/or falling prices of consumer goods in U.S. as lower cost production is passed to the consumer. Rising standard of living for emerging industrial societies. New opportunities for U.S. leadership on the Global Stage. Outsourcing – Benefit or Detriment? In Conclusion – this case was used in the course to highlight the futility of your IT education and coursework, since it will be outsourced to India within 5 years.

21. ...but still…