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Globalisation and trade Globalisation and trade Class 5 Lecture notes Outsourcing Jože P. Damijan University of Ljubljana.

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Presentation on theme: "Globalisation and trade Globalisation and trade Class 5 Lecture notes Outsourcing Jože P. Damijan University of Ljubljana."— Presentation transcript:

1 Globalisation and trade Globalisation and trade Class 5 Lecture notes Outsourcing Jože P. Damijan University of Ljubljana

2 Jože P. Damijan2 Outsourcing at work Manufacturing Example of Airbus consortium jointly owned by companies from 4 countries: France, German, Britain, and Spain. jointly owned by companies from 4 countries: France, German, Britain, and Spain. jointly owned by companies from 4 countries jointly owned by companies from 4 countries wings from Britain, fuselage and tail from Germany, doors from Spain, cockpit and final assembly in France. wings from Britain, fuselage and tail from Germany, doors from Spain, cockpit and final assembly in France. 1,500 suppliers in 27 countries 1,500 suppliers in 27 countries More than 35 percent of components for the consortium's aircraft are supplied from over 500 American companies. More than 35 percent of components for the consortium's aircraft are supplied from over 500 American companies. Numerous suppliers also are located in the Asia-Pacific. Numerous suppliers also are located in the Asia-Pacific. Singapore Technologies Aerospace produces wing ribs and passenger doors for the A320, and engine mounts and thrust reverser doors for the A340. Singapore Technologies Aerospace produces wing ribs and passenger doors for the A320, and engine mounts and thrust reverser doors for the A340. India's Hindustan Aeronautics Limited also builds A320 passenger doors. India's Hindustan Aeronautics Limited also builds A320 passenger doors.

3 Jože P. Damijan3 Outsourcing at work Services Outsourcing of IT services Outsourcing of IT services Outsourcing of help lines, Call centers, accountancy services (to India, e.g.) Outsourcing of help lines, Call centers, accountancy services (to India, e.g.)

4 Jože P. Damijan4Outline Definitions of outsourcing Definitions of outsourcing Why outsourcing? Why outsourcing? Who are the major players? Who are the major players? Effects of outsourcing Effects of outsourcing How to prepare for not being outsourced? How to prepare for not being outsourced?

5 Jože P. Damijan5 Definitions of outsourcing Offshoring : Transferring Activities to another country by hiring local subcontractors or by building a facility in an area where Offshoring : Transferring Activities to another country by hiring local subcontractors or by building a facility in an area where labor is cheap(er). labor is cheap(er). Outsourcing: Delegation of non-core operations from internal production to an external entity. Sharing organizational control. Outsourcing: Delegation of non-core operations from internal production to an external entity. Sharing organizational control. Offshore Outsourcing : When transferring an organizational function to a third party who is located in another country. Offshore Outsourcing : When transferring an organizational function to a third party who is located in another country. Nearsourcing : Similar to offshore (yet close distance). Example : BMW to Bulgaria Nearsourcing : Similar to offshore (yet close distance). Example : BMW to Bulgaria Insourcing : Domestic outsourcing/Increased FDI Insourcing : Domestic outsourcing/Increased FDI Best Sourcing : Associating with the best of the best (Tom Peters) Best Sourcing : Associating with the best of the best (Tom Peters) Reverse Outsourcing: Becoming an ex-pat by being hired by a country to Reverse Outsourcing: Becoming an ex-pat by being hired by a country to whom you outsource. Example: US pilots who once flew for US airlines now being hired by airlines in India.

6 Jože P. Damijan6

7 7 Why outsourcing? Productivity is the key: Productivity is now a global race between regions and nations. Productivity is now a global race between regions and nations. Those who can make things cheaper, faster, better – win! Those who can make things cheaper, faster, better – win! US and Europe losing technology advantage US and Europe losing technology advantage Factories & process plants moving Factories & process plants moving Closer to customers Closer to customers Closer to raw materials Closer to raw materials

8 Jože P. Damijan8 Knowledge work – anywhere Transportation and trade cost falling Transportation and trade cost falling Moving downstream production stages abroad Moving downstream production stages abroad Internet makes physical location irrelevant Internet makes physical location irrelevant Low-cost telephone Help lines, Call centers Low-cost telephone Help lines, Call centers Knowledge is power Knowledge is power US is losing the big advantage US is losing the big advantage Availability of trained people globally Availability of trained people globally

9 Jože P. Damijan9 Major players

10 Jože P. Damijan10 Major players - China China – Manufacturing China – Manufacturing Manufacturing expertise Manufacturing expertise Good, repetitive quality. Good, repetitive quality. Worldwide market-share - 50% of cameras, 30% of air conditioners and televisions, 25% of washing machines, 20% of refrigerators Worldwide market-share - 50% of cameras, 30% of air conditioners and televisions, 25% of washing machines, 20% of refrigerators One private Chinese company - 40% of all microwave ovens sold in Europe One private Chinese company - 40% of all microwave ovens sold in Europe City of Wenzhou, Eastern China - 70% of the world's metal cigarette lighters City of Wenzhou, Eastern China - 70% of the world's metal cigarette lighters Wal-mart – Buys $ 12 billion from China Wal-mart – Buys $ 12 billion from China

11 Jože P. Damijan11 Major players - China Chinacosm – Hitech looms 700,000 engineers a year, 37% of all college graduates 700,000 engineers a year, 37% of all college graduates University system - growing in size and quality University system - growing in size and quality Engineer pay ranges - $4,000 to $8,000/yr. Engineer pay ranges - $4,000 to $8,000/yr. New CISCO competitor New CISCO competitor Biotech advances – genome sequencing Biotech advances – genome sequencing Space technology advances Space technology advances

12 Jože P. Damijan12 Major players - India India - Services World's most populous country (mid-century) World's most populous country (mid-century) Advantage - English-speaking Advantage - English-speaking China's pop. growth is under control; India's is not China's pop. growth is under control; India's is not Already the world's largest democracy Already the world's largest democracy US Software – $6-8 billion, 60% growth US Software – $6-8 billion, 60% growth Infosys - 2003 revenue $750m, profit 25%, growth 38%, Nasdaq market-cap $11.5 billion Infosys - 2003 revenue $750m, profit 25%, growth 38%, Nasdaq market-cap $11.5 billion Wipro - 2003 revenue $ 900m, profit 18%, growth 29%, NY stock exchange market-cap $9 billion Wipro - 2003 revenue $ 900m, profit 18%, growth 29%, NY stock exchange market-cap $9 billion

13 Jože P. Damijan13 Emerging players Global HiTech Other regions/countries are competing strongly Other regions/countries are competing strongly Central & Eastern Europe Central & Eastern Europe Ireland Ireland Russia Russia Brazil Brazil Mexico Mexico US steadily losing advantage in many key technologies US steadily losing advantage in many key technologies

14 Jože P. Damijan14 World competition brews Third-world - HIC: Third-world - HIC: Hungry Hungry Innovative Innovative Competitive Competitive Fundamental problem - you cannot simulate hunger Fundamental problem - you cannot simulate hunger Big offshore tax-holidays to attract shifts Big offshore tax-holidays to attract shifts

15 Jože P. Damijan15 Do we have to worry? Job losses Job losses Prices Prices Productivity Productivity Overall effects Overall effects

16 Jože P. Damijan16 Effects of outsourcing Employment Note: Major effects is on job destruction due to relocation of production / services to cheaper countries Note: Major effects is on job destruction due to relocation of production / services to cheaper countries Jobs to be affected by outsourcing (OECD, 2004): Jobs to be affected by outsourcing (OECD, 2004): EU-15:19,2% EU-15:19,2% US:18.1% US:18.1% Korea:13.1% Korea:13.1%

17 Jože P. Damijan17 Effects of outsourcing Employment US US For comparison: US employment turnover, annual amount of job destruction alone is estimated to 7 and 8 million jobs For comparison: US employment turnover, annual amount of job destruction alone is estimated to 7 and 8 million jobs In US only around 1-2% of the annual job turnover is attributable to relocation of jobs outside the US (Mann, 2003; Forrester, 2002). In US only around 1-2% of the annual job turnover is attributable to relocation of jobs outside the US (Mann, 2003; Forrester, 2002). Altogether, by the year 2015, approximately 3.3 million jobs would be lost due to offshoring (Forrester, 2002) Altogether, by the year 2015, approximately 3.3 million jobs would be lost due to offshoring (Forrester, 2002) Increase in US employment due to international insourcing from foreign countries which grew from 2.6 million jobs in 1987 to 5.4 million in 2002. Increase in US employment due to international insourcing from foreign countries which grew from 2.6 million jobs in 1987 to 5.4 million in 2002. Unemployment caused by increased productivity much bigger Unemployment caused by increased productivity much bigger Automation has reduced headcount Automation has reduced headcount Computers & Internet Computers & Internet

18 Jože P. Damijan18 Effects of outsourcing Employment EU EU Small to negligible effects, altogether 1.2% jobs lost in manufacturing over 1979-1991 Small to negligible effects, altogether 1.2% jobs lost in manufacturing over 1979-1991 Clothing and textiles, leather and footwear, shipbuilding and basic metals have lost the largest number of jobs over the past two decades Clothing and textiles, leather and footwear, shipbuilding and basic metals have lost the largest number of jobs over the past two decades Hence, despite not being cause for concern at the macro level the costs of delocalisation, resulting from job losses, may be strongly felt (at least in the short-term) in certain sectors and in the regions where these sectors are concentrated. Hence, despite not being cause for concern at the macro level the costs of delocalisation, resulting from job losses, may be strongly felt (at least in the short-term) in certain sectors and in the regions where these sectors are concentrated. In the long term, if delocalisation allows firms to improve their competitiveness the impact on the aggregate level of employment can be positive. In the long term, if delocalisation allows firms to improve their competitiveness the impact on the aggregate level of employment can be positive.

19 Jože P. Damijan19 Evolution of employment in manufacturing sectors in the EU due to outsourcing from 1979 to 2001 (Source : M.OMahony, B. Van Ark (2003))

20 Jože P. Damijan20 Effects of outsourcing Employment Kirkegaard (2003) notes that between 1999 and 2002 the majority of job losses in the category occupations at risk of offshoring did not happen in services but in the manufacturing industries. Kirkegaard (2003) notes that between 1999 and 2002 the majority of job losses in the category occupations at risk of offshoring did not happen in services but in the manufacturing industries. Moreover, these were generally low-wage jobs, with services employment in the same occupational category increasing. Moreover, these were generally low-wage jobs, with services employment in the same occupational category increasing.

21 Jože P. Damijan21 Effects of outsourcing Productivity and prices over 1995 to 2002, the international fragmentation of IT hardware manufacturing led to a price decrease between 10% and 30% of IT hardware. over 1995 to 2002, the international fragmentation of IT hardware manufacturing led to a price decrease between 10% and 30% of IT hardware. this translated into a higher productivity growth of 0.3 percentage points per year corresponding to an accumulated USD 230 billion in additional GDP (Mann, 2003) this translated into a higher productivity growth of 0.3 percentage points per year corresponding to an accumulated USD 230 billion in additional GDP (Mann, 2003)

22 Jože P. Damijan22 Effects of outsourcing Overall effects MGI (McKinsey Global Institute) estimates: MGI (McKinsey Global Institute) estimates: US: $1.14 per corporate dollar spent on offshoring, of which US: $1.14 per corporate dollar spent on offshoring, of which a base saving of $0.58 per corporate dollar invested in offshoring, a base saving of $0.58 per corporate dollar invested in offshoring, a directly related benefit to the US economy of $0.09 per dollar due to additional exports to India and profits transfers by India- based US providers a directly related benefit to the US economy of $0.09 per dollar due to additional exports to India and profits transfers by India- based US providers additional benefits of $0.47 stemming from re-employment of workers who lost their job in the process additional benefits of $0.47 stemming from re-employment of workers who lost their job in the process Germany: $0.80 per dollar Germany: $0.80 per dollar due the fact that the major German offshore location is Eastern Europe, and not India where wages are much lower due the fact that the major German offshore location is Eastern Europe, and not India where wages are much lower India: $0.33 per dollar India: $0.33 per dollar Global benefits: $1.47 per dollar invested in offshoring Global benefits: $1.47 per dollar invested in offshoring

23 Jože P. Damijan23 Effects of outsourcing Re-employment effects questioned by the BLS study: Re-employment effects questioned by the BLS study: in the period 1979-1999 31% of those who lost a job due to trade were not fully re-employed. in the period 1979-1999 31% of those who lost a job due to trade were not fully re-employed. only 36% of the displaced workers were able to find a new job with matching or higher wages, only 36% of the displaced workers were able to find a new job with matching or higher wages, 55% were at best working for 85% of their former wages, 55% were at best working for 85% of their former wages, and 25% were working for 70% or less of their former wage. and 25% were working for 70% or less of their former wage.

24 Jože P. Damijan24 Empirical evidence on outsourcing and productivity

25 Jože P. Damijan25 How to prepare for not being outsourced? Companies Proprietary products Proprietary products Customer productivity important Customer productivity important Continuous upgrade to maintain leadership Continuous upgrade to maintain leadership Outsourcing is irrelevant – productivity is the key Outsourcing is irrelevant – productivity is the key High-value-added High-value-added Proprietary knowledge Proprietary knowledge Tailored to specific customer needs Tailored to specific customer needs Go global – think local Go global – think local Special needs, custom requirements must be handled locally Special needs, custom requirements must be handled locally Partnership and proximity Partnership and proximity

26 Jože P. Damijan26 How to prepare for not being outsourced? IndividualsBe: Special (ex-Bill Gates)Special (ex-Bill Gates) Have a global market for your services Have a global market for your services SpecializedSpecialized Your work cannot be easily digitized (ex-Surgeons technique) Your work cannot be easily digitized (ex-Surgeons technique) AnchoredAnchored Location specific requiring face-to-face contact. BUT even Location specific requiring face-to-face contact. BUT even Parts here can be fungible. Parts here can be fungible. Really AdaptableReally Adaptable Grow your skillsyou may have to move horizontally but growth creates new specialties Grow your skillsyou may have to move horizontally but growth creates new specialties Friedman, The World Is Flat Friedman, The World Is Flat

27 Jože P. Damijan27Sources DG EcFin (2005). Delocalisation: Which challenges for the EU economy? DG EcFin (2005). Delocalisation: Which challenges for the EU economy? OECD (2006). Productivity Impacts of Offshoring and Outsourcing: A Review. STI Working Paper 2006/1 OECD (2006). Productivity Impacts of Offshoring and Outsourcing: A Review. STI Working Paper 2006/1 Michael Pitts (2006). Outsourcing, Lecture Slides Michael Pitts (2006). Outsourcing, Lecture Slides Jim Pinto (2004). Automation – A global shift. Jim Pinto (2004). Automation – A global shift.


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