Thursday, July 26, 2007

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I'm very rarely right, so I'm going to savor this

Three years ago, I argued in Foreign Affairs that the growth projections about offshore outsourcing were wildly overstated. Others have suggested that growth projections about offshore outsourcing are wildly understated.

This Economist story provides a point for me and against the Blinder-Friedman hypothesis:

The latest quarterly report on the state of global outsourcing from TPI, a consultancy, was published earlier this month. It showed that both the number and value of contracts awarded during the first half of this year had declined in comparison with the same period in 2006. In 2007 the total value of contracts awarded in the first six months was the lowest since 2001....

As growth slows it is clear that making money is becoming more difficult for outsourcing firms. Competing on price is getting ever harder. Established vendors are hiring workers in the same low-cost locations as their offshore rivals—the likes of Accenture and IBM have been furiously ramping up their operations in India, for example. One response is to keep searching for ever-cheaper locations, both within India and outside it, but a race to the bottom on price threatens both the quality of service and profit margins. For the top-tier providers, the way to stand apart from the crowd is to deliver more valuable services....

Outsourcing firms are moving into more countries in order to deliver the right mix of cost, risk and quality. As Western providers concentrate on beefing up their presence in low-wage centres, Indian vendors are focusing on the markets where the buying decisions are made. Physical and cultural proximity is important for building closer client relationships, for delivering certain types of services (such as unscripted selling) and for soothing concerns about data security and confidentiality. Hiring locals also has the effect of cutting down on visa hassles.

Wipro, one of the big three Indian providers (along with Infosys and Tata Consultancy Services), is close to reaching an agreement with the authorities in Atlanta, Georgia, to set up its first software-development centre in America. The three other cities shortlisted during the selection process—Austin, Texas; Raleigh, North Carolina; and Richmond, Virginia—stand a good chance of hosting other centres. Azim Premji, Wipro's chairman, says that the proportion of local employees (as opposed to visiting Indians) in the company's overseas locations will rise from 10% to one-third over the next three years.

Few providers expect the topic of offshoring to lose its political sting—despite plenty of evidence, including a recent OECD report on the subject, showing that it is not a big cause of job losses and has an overall positive effect. But the maturing of the outsourcing industry ought to mean that scaremongering about jobs flowing from rich countries to poor ones will sound less and less convincing.

posted by Dan on 07.26.07 at 01:36 PM


So when Accenture and IBM open foreign subsidiaries, that is not considered offshoring? Isn't that making offshoring a meaningless term?

posted by: Lord on 07.26.07 at 01:36 PM [permalink]

Let's see if I understand... There is so much outsourcing to India (a country 3 times the size of the US!!!) that wages in India have risen to the point that it's less profitable. But on the other hand, Prof Drezner says that outsourcing is not and never has been a significant problem for US workers. Am I the only one that thinks these two statements are probably not consistent?

It would appear that US and Indian wages have found an equilibrium. I understand that it is a natural consequence of "free trade," but this can NOT be considered a good thing for US workers.

posted by: OpenBorderMan on 07.26.07 at 01:36 PM [permalink]

but this can NOT be considered a good thing for US workers.

Sure it can. Economics predicts that, in the presence of free trade, wages rise to meet productivity. India had massive productivity gains. This made India a prime spot for jobs, since the productivity gains preceeded the wage increases, as it generally does. Competition eventually leads to higher Indian wage rates, slowing the pace of offshoring as equilibrium is reached.

In the long term, economic theory very solidly predicts that rising Indian productivity does not lower US wage rates, but rather raises Indian wage rates in equilibrium. Wages follow productivity. However, in the short run there definitely can be pain in the US. Rising Indian wage rates are absolutely a good sign for US workers-- they indicate that the equilibrium is being reached, and hence the end of the temporary pain for some US workers.

Few people care about offshoring to Canada or the UK, for example. And note that the Indian firms are "onshoring" here.

posted by: John Thacker on 07.26.07 at 01:36 PM [permalink]

With the recent Chapter 11 settlements of Delphi and Dana there will be a mad rush to offshore tens or maybe hundreds of thousands of auto parts manufacturing jobs.

Delphi is committed to offshoring at least 80% of blue collar jobs with an eventual plan to offshore or sell off 100% of blue collar jobs. Delphi workers got a settlement only because GM was still on the hook and the UAW had enough leverage to hold GM hostage.

The competitors of Delphi and Dana will have to offshore to meet labor costs.

Maybe we have been in a lull. But not for long.

posted by: save_the-rustbelt on 07.26.07 at 01:36 PM [permalink]

And note that the Indian firms are "onshoring" here.

This is the worst of both worlds. As I read the Economist piece, most of the 'onshored' workers are actually Indians, with 10% t 30% local hires. So we get both displaced American workers and the externalities caused by population growth. Great deat.

And of course, how many of the 'local' hires are naturalized Indians, or legal permanent residents of Indian descent (i.e. first or maybe second generation). Somehow I don't think these 'onshoring' shops will be like a Toyota factory in Tennessee , providing large numbers of good paying jobs for the true locals.

posted by: Mitchell Young on 07.26.07 at 01:36 PM [permalink]

@ Mitchell Young
I didnot realize that Toyota provided a large nymber of good paying jobs to American Indians, the true locals.

posted by: Dileep Mehta on 07.26.07 at 01:36 PM [permalink]

@ Mitchell Young
I didnot realize that Toyota provided a large nymber of good paying jobs to American Indians, the true locals.

posted by: Dileep Mehta on 07.26.07 at 01:36 PM [permalink]

College students are no longer majoring in computer science - enrollement is down by 50%. Why? Take IBM: they hired 50,000 Indians in the last six years, while cutting American workers.

We're still not up to the high tech job count of 2000, and the reason is outsourcing.

posted by: dissent on 07.26.07 at 01:36 PM [permalink]

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