International Business Relations Global Outsourcing Trends

Bay Area CITD Seminar Series Tuesday, January 18th, 2005

Kemarra Inc. - Key Marketing Resources & Associates San Francisco USA Unlocking Your Market Potential:

Globalization & Outsourcing What started it? What does it mean for the US? What does it mean for the developing countries? Mounting trade deficits Productivity and unit labor costs Country facts and figures What next? .

Globalization & Outsourcing Cheaper & faster data and voice telecommunications Easier global financial transactions Cheaper hardware Easy to use. standard software Lack of staff in the US Educated English speaking workforce abroad .

Benefits vs Drawbacks for the US Corporate benefits ‡ Lower costs ‡ greater efficiency without having to invest in people and technology ‡ Increased focus on core competences ‡ Increased corporate profits Corporate drawbacks ‡ Increased project management complexity ‡ Some loss of immediate control ‡ IP vulnerability For the US ‡ Increased corporate profits ‡ Higher US unemployment ‡ loss of industrial base ‡ High trade deficit ± Impact on interest rates? ± Impact on currency exchange rates? .

Benefits vs Drawbacks for Developing Countries Benefits for developing countries ‡ ‡ ‡ ‡ Cash generation Increased employment & training Infrastructure build-up Accumulation of business experience Drawbacks ‡ Lock into low-wage economy ‡ May become vulnerable to cheaper outsourcing .

Reciprocal or one-way? Reciprocal returns ‡ OK if cash earned by countries providing outsourcing services returns to the US via purchase of US goods ‡ One of the reasons for FTAs One-way loss ‡ China buys far less goods from the US ‡ Complete outflow of US funds without cash return to the US .

Detractors argue the trade deficit with NAFTA represents US jobs shipped abroad .000 new U. jobs. The Clinton administration estimated in the late 1990s that expanded trade in North America had created over 300.S.Reciprocal or one-way? Proponents of NAFTA point out that exports from the United States to Mexico have risen 150% and exports to Canada are up 66%.

S.bea.pdf . monthly goods and services deficit

In September 2004 the imbalance with China grew to $15. Exports decreased $0. buses. The goods deficit with Japan increased from $5.6 billion.9 billion in October to $7. Exports decreased $1. while imports increased $0. while imports increased $0. and special purpose vehicles) to $15.3 billion in October to $10.0 billion.5 billion. and medicinal equipment) to $25.3 billion in November.4 billion (primarily passenger cars) to $11.7 billion. as imports increased and exports decreased.3 billion in November. passenger cars.5 billion. .0 billion (primarily civilian aircraft) to $4. crude oil. and fuel oil) to $14.6 billion (primarily natural gas and trucks. beating the previous high. The goods deficit with the European Union (25) increased from $9.2 billion.4 billion. The goods deficit with Canada increased from $5.3 billion (primarily pharmaceutical preparations.3 billion in November 2004 from $56. Exports decreased $1.Trade Deficit The US international trade deficit increased to $60. (12 Jan 2005).7 billion in October to $7.0 billion in October.8 billion (primarily pharmaceutical preparations. while imports were virtually unchanged at $22.5 billion in November.

com/publications/papers/mann0899.html .iie.Trade Deficit Interest payments on US external debt add to burden Further deficits reduce confidence in US assets Flight away from US assets would weaken stock market and force interest rate hikes But US assets would become cheaper for foreign investors http://www.

Dollar still too high? High dollar ‡ Makes US goods more expensive abroad ‡ US products therefore less competitive ‡ Imports become cheaper Dollar still high compared to 1995 level ‡ Global financial crises around 1997 led to flight to $ ‡ Strong US internal growth Problems ‡ Other countries like China still not on open exchange system ± hold their currency artificially low. http://www.htm http://www.htm

2005 140 120 100 E xchange R ate 80 60 40 20 0 Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 D ne atel .US Dollar Global Exchange Rate US Dollar Global Exchange Rate 1973 .federalreserve.

2005 140 130 120 110 c ange a e 100 90 80 70 60 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Da eline p:// .Declining Dollar ± Good or Bad? US Dollar Global Exchange Rate 1993 .federalreserve.

ilo.Labor Productivity US workers are highly productive ‡ ‡ ‡ ‡ Highly trained Excellent general infrastructure Highly automated Extensive use of software tools US workers also work longer hours than anybody else These two factors explain the recent productivity gains in the US while employment levels did not rise Productivity and and unit labour cost comparisons http://www.htm .org/public/english/employment/strat/publ/ep00-5.

27 82.67 71.50 63.32 67.41 66.77 85.23 92.34 82.64 108.24 80.47 100.87 88.60 109.13 109.99 56.92 88.60 1996 100 90.24 82.Unit Labor Cost 1970 United States Canada Mexico Austria Finland France Germany Greece Italy Portugal Spain UK Norway Japan Korea Australia 100 99.95 40.76 1980 100 91.92 116. or you pay someone $10 an hour and it takes them 1 hour to create the same thing «? .86 83.72 67.04 What¶s best .69 94.95 89.00 57.64 39.93 76.55 110.59 69.86 53.78 93.85 82.76 pay someone $1 an hour and they have to work 10 hours to create x.69 76.99 91.54 80.15 98.33 82.49 105.64 93.55 44.18 82.05 77.

Outsourcing Trends US Companies forced to outsource to stay competitive against worldwide competition Current service providers move higher up food chain ‡ India has very sophisticated BP management ± Now doing design work ± Microsoft.000 ‡ China: 50. IBM. SUN.000 Former East Bloc countries now entering EU ‡ Russian generates good math graduates ‡ IP protection enforceability Life Sciences also a good sector for outsourcing . investing in infrastructure ± Labor costs rising Countries such as China and India are producing high number of IT graduates ‡ India: 75.

Some outsourcing profiles The rapidly-expanding Shanghai Jinqiao High-Tech Park is one of the fastest-growing sites for foreign investment in China. .

3 billion IT wage $3 . call centers. animation. finance. financial processing Accounting. Spanish-language call centers. complex software development. software development.8k English Poor Skills Transaction processing. human resources. Web design.Some outsourcing profiles Country Population 1. maintenance. aerospace engineering Software development and maintenance.35K Good Ireland 5.10K Poor Canada 107 million $25 . software development.12K Good Philippines 77 mil $5 . call centers.50K Good Mexico 107 million Spanish a plus $25 .5 million .10K Medium Russia 155 m $6 . call center. call center China India Over 1 billion $5 . low-end software development and maintenance Application development. tech support. data center outsourcing European shared-services centers.

What the US needs to do « US needs to continue the pace of innovation Become design. exchange rate? ‡ Should not impose protectionist trade barriers ‡ Should not impose penalties on US companies outsourcing . marketing and sales force for the world? Government and private corporations needs to educate workforce continually Must increase number of technical graduates US companies must invest internally in the US Government needs to encourage US employment ± tax breaks .American Jobs Creation Act of 2004 Reduce trade deficit.

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