Off Shoring For Dummies

By Stormy

In 2003, IBM laid out its strategy for globalization. Before the 1970’s IBM rarely fired anyone. People who worked for IBM had a lifetime job. By the 1990’s, all that had changed. Trade barriers were falling; NAFTA opened a wide door for off shoring.

I have written repeatedly on this subject, but economists simply ignore what American business is doing. In one of my pieces, “A Question for the Council on Foreign Relations: Globalization at any Cost,” I quoted Tom Lynch, then IBM Director for Global Relations, as he laid out the case for off shoring. All the hoop-la that we are losing just sewing jobs is nonsense. I will let Tom speak again.

How can we operationally define the phrase “trade barrier”? Normally, we think of trade barriers as tariffs between countries or a government subsidy of goods produced, a subsidy that unfairly disadvantages a foreign firm. But a trade barrier can also be defined as: An obstacle to a company in finding cheaper labor to create products or services elsewhere. Those products—or services—will be sent back to the country the company left. The resulting trade imbalance, the resulting shift of wealth to the top of the food chain, and the resulting debt if credit is made cheap all certainly should be self-evident, even if those goods are now less expensive. In short, a trade barrier can be a barrier to off shoring.

A few posts ago, I put up some U.S. trade data regarding Advanced Technology, computers, computer parts, etc. It seems the U.S. has a growing and healthy deficit in these areas. The companies have not changed; just their locations. Advanced Technology is not sewing shirts. (Nike likes to make its expensive sneakers in purported sweatshops—and then sell them back here.)

In 2007, I wrote a post on Sam Palmisano’s remarks in Foreign Relations, “What about U.S. Investment Abroad?” Sam knew what was happening, even if most economists do not. (Sam is CEO of IBM.) Did any economist pick up Sam’s remarks? Nope. Sam obviously did not know anything about trade or globalization. Here are Sam’s remarks:

By one estimate, between 2000 and 2003 alone, foreign firms built 60,000 manufacturing plants in China. Some of these factories target the local Chinese market, but others target the global market. European chemical companies, Japanese carmakers, and U.S. industrial conglomerates are all building (or have declared their intention to build) factories in China to supply export markets around the world. Similarly, banks, insurance companies, professional-service firms, and it companies are building R & D and service centers in India to support employees, customers, and production worldwide.
[Italics mine.]

Regardless, I thought that I would post Tom Lynch’s remarks once again, even though those 2003 remarks are a bit dated.

If you turn to the chart that begins “off-shoring” then I have next: global sourcing with a question mark. What we’re talking about here is universally known as off shoring throughout business communities. There are people in IBM who are saying that off shoring is in fact a US-centric term. If you’re sitting in Bangalore India, work going to India is hardly going offshore. In any event, the external world uses the term but you may hear it called some different things as the subject evolves. I know that a lot of you as HR partners that have been supporting your customers have been involved in the 1990s with a lot of manufacturing that we moved offshore.
As we saw commoditization of a lot of our products, as we saw trade barriers come down through things like NAFTA, we moved from the US to other countries a whole lot of manufacturing and from generally high cost labor areas to lower cost labor areas. In 1990 that focus was primarily in manufacturing.

Off shoring in manufacturing moved rapidly in the 1990’s. NAFTA was one golden goose of a trade agreement. Shortly thereafter Mexico had a growing trade surplus with the U.S. Mexico was not getting richer; illegal immigration became a flood. We are not living during the time of Ricardo. Trade agreements now are often not used to allow a country to market its wares elsewhere; often, they are simply avenues for foreign corporations to set up shop.

As we saw commoditization of a lot of our products, as we saw trade barriers come down through things like NAFTA, we moved from the US to other countries a whole lot of manufacturing and from generally high cost labor areas to lower cost labor areas. In 1990 that focus was primarily in manufacturing. In looking at the current decade, the decade that has no easy name for it, like the 90s did but from now until the year 2010 and beyond; looking at an emerging trend now to move services offshore, in addition to manufacturing operations, some functions that would be included in those services would be engineering, software development, certainly chip development as well.

Well, 2010 is a bit closer than it was in 2003. And, yes, we are watching multinationals tap cheap foreign labor in software development, engineering, and chip development. This aint sewing, baby.

Services like accounting and financial services. There are companies that realize that there are lots of skills in places like India to do accounting for a fraction of the costs in theUS. Call centers; once we realize that we could have calls handled at a central location in the US and a central location in Europe. The next question is why should only be content by continent by continent, why not go further there? IT-supported services similarly. Why do you have to talk to someone in your own country? Call centers have such an interesting market – focus groups research going on and the like as to why US customers prefer in terms of accent and what they don’t like and what countries are good places to put call centers and which ones are not.

There has been a bit of a backlash with foreign call centers, but R&D and real hi-tech off shoring continues apace.

Then there is Microsoft and Hewlitt Packard. One-third of HP’s employees are off shore. HP is one of the largest IT employers in the world.

Microsoft actually had a road show that one of their senior vice presidents told their managers go ahead and pick a project and move it offshore today. I’ll tell you in a minute where you can actually access on the web that Microsoft presentation. HP, another big competitor, obviously, told the press and analysts that one of the ways it hoped to gain competitive advantage over rivals like IBM was to move stuff offshore

And, as I pointed in an earlier post, HP thinks it is among the crown jewels of American business, and, as such, should receive government support. I had to chuckle. Haven’t the trade agreements and China’s entry into the WTO been enough of a handout to HP? It’s worse than the banks.

I have to ask: Do economists ever listen to CEO shoptalk? Will they ever do a close study of some of these multinationals?

The government, I believe you’re going to find is fairly limited to what they can do and unionizing becomes an attractive option for a lot of reasons, there are indications that union organizing will become more aggressive over the coming months.

Unions have become helpless. And of course the government cannot do much. Any government that pours billions into banks while the banks declare dividends and bonuses is just laughable. Besides, there are crowds of economists all ready to join in any chorus that mindlessly promotes another free trade agreement. Cheek to cheek they chant; jowl to jowl. They know their Ricardo. They think they know how trade works. What they know is a fairy tale spun in a tower, buttressed with equations that are never predictive, not even descriptive.

Are they surprised at the latest fiasco? I think they are.

In the past, when the local witch doctor failed, the tribe sent him into the desert for a refresher course. Today, he should be forced to sit in an IBM or Microsoft or HP global strategy session.

Naw….won’t work. He will sit there, humming Ricardian tunes, not paying attention, wondering if IBM will give him tenure…or whether he can get on a talk show…. Some dummies are just dumb.