1. 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: www.Kemarra.comwww.Kemarra.com

2. 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?

3. 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

4. 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?

5. 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

6. 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

7. 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%. ~The Clinton administration estimated in the late 1990s that expanded trade in North America had created over 300,000 new U.S. jobs. ~Detractors argue the trade deficit with NAFTA represents US jobs shipped abroad

8. U.S. monthly goods and services deficit http://www.bea.doc.gov/bea/newsrelarchive/2005/trad1104_fax.pdf

9. Trade Deficit ~The US international trade deficit increased to $60.3 billion in November 2004 from $56.0 billion in October, as imports increased and exports decreased. (12 Jan 2005). ~In September 2004 the imbalance with China grew to $15.5 billion, beating the previous high. ~The goods deficit with Japan increased from $5.9 billion in October to $7.3 billion in November. Exports decreased $1.0 billion (primarily civilian aircraft) to $4.2 billion, while imports increased $0.4 billion (primarily passenger cars) to $11.5 billion. ~The goods deficit with the European Union (25) increased from $9.3 billion in October to $10.5 billion in November. Exports decreased $0.8 billion (primarily pharmaceutical preparations, passenger cars, and fuel oil) to $14.6 billion, while imports increased $0.3 billion (primarily pharmaceutical preparations, crude oil, and medicinal equipment) to $25.0 billion. ~The goods deficit with Canada increased from $5.7 billion in October to $7.3 billion in November. Exports decreased $1.6 billion (primarily natural gas and trucks, buses, and special purpose vehicles) to $15.4 billion, while imports were virtually unchanged at $22.7 billion.

10. 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.census.gov/foreign-trade/www/ http://www.iie.com/publications/papers/mann0899.htm http://www.iie.com/publications/papers/mann0899.htm http://www.cato.org/research/articles/reynolds-041203.html

11. 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.iie.com/publications/papers/mann0899.htm http://www.imf.org/external/pubs/ft/fandd/2000/03/mann.htm

12. US Dollar Global Exchange Rate http://www.federalreserve.gov/releases/H10/Summary/

13. Declining Dollar – Good or Bad? http://www.federalreserve.gov/releases/H10/Summary/

14. 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.ilo.org/public/english/employment/strat/publ/ep00-5.htm

15. Unit Labor Cost 197019801996 United States100 Canada99.0591.4190.95 Mexico77.2466.1540.64 Austria80.8698.34108.87 Finland83.3382.9988.69 France82.8591.6494.13 Germany82.6493.00109.95 Greece39.6957.9389.24 Italy76.9976.5982.72 Portugal56.2769.6767.54 Spain82.4971.6080.55 UK105.23109.47110.92 Norway92.76100.32116.78 Japan55.5567.8693.50 Korea44.1853.7763.92 Australia82.7685.6088.04 What’s best - you pay someone $1 an hour and they have to work 10 hours to create x, or you pay someone $10 an hour and it takes them 1 hour to create the same thing …?

16. 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, SUN, IBM, investing in infrastructure –Labor costs rising ~Countries such as China and India are producing high number of IT graduates India: 75,000 China: 50,000 ~Former East Bloc countries now entering EU Russian generates good math graduates IP protection enforceability ~Life Sciences also a good sector for outsourcing

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

18. Some outsourcing profiles CountryPopulationIT wageEnglishSkills China 1.3 billion$3 - 8kPoorTransaction processing, low-end software development and maintenance India Over 1 billion$5 - 12KGoodApplication development, maintenance, call centers, financial processing Philippines 77 mil$5 - 10KMediumAccounting, finance, call centers, animation, human resources. Russia 155 m$6 - 10KPoorWeb design, complex software development, aerospace engineering Canada 107 million$25 - 50KGoodSoftware development and maintenance, call center, tech support. Mexico 107 millionSpanish a plus Spanish-language call centers, software development, data center outsourcing Ireland 5.5 million$25 - 35KGoodEuropean shared-services centers, software development, call center

19. What the US needs to do … ~US needs to continue the pace of innovation ~Become design, 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, exchange rate? Should not impose protectionist trade barriers Should not impose penalties on US companies outsourcing