Impact of Offshoring
on American Economy
How can small and medium-sized
business meet the new challenges?
As we finally see the arrival of
the "New Economy" (remember this widely hyped and then derided term all within a matter of 5 years or so?), it has fundamentally changed the underlying economics of business in the United States. So, are the old business models under serious threat? (Related
of the knowledge economy means that America has to move to the
next higher level)
Yes. A trip to the Wal-Mart is all it takes to find the answer. No matter what the political considerations are and how much it hurts American workers (insofar as jobs are concerned), the reality is that a product (or increasingly services,
particularly in IT, looking at the trend in most recent
migration of jobs
to India, The Philippines, and Ireland) will be produced where it is produced most cost-effectively. (Related
link: e-Procurement strategies for small businesses)
Here is a list of questions that I have heard
recently from my business contacts:
- So what shall we do if products we
use our already made all over the world and now services are being provided from offshore locations?
- If even hardcore research and development can be done in India or China, is there anything left for Americans to do?
(Related link: Innovation strategies for small businesses)
- Is American competitiveness in the 21st century under threat? All the information that only we could access is now available to almost anyone who has an Internet connection. You no longer have to be in America to access knowledge. With webcasts and streaming video you can participate in almost any conference or seminar from anywhere in the world?
- If we have no jobs left for us to do and our incomes continue to drop, what will be left of America? And all these American corporations that are aggressively
outsourcing and shipping jobs offshore, who will they sell to?
With our lower standard of living, we won't be able
to consume much.
I lived in Japan from 1992 to 1997. During this period, I saw
literally a revolution (of a different kind) taking place there. The bubble had essentially burst, and signs of recession were setting in. During the bubble economy, the wages had reached such high levels that the cost of doing business went through the roof. However, during the recession when demand dropped, such high cost of doing business made the Japanese uncompetitive in the market.
The Japanese companies reacted fast (relatively speaking) and started
shutting down their Japanese manufacturing base. I do not recall
the terms 'outsourcing' or 'offshoring' or 'offshore
outsourcing' but the attributes were similar to what we are
doing in the US now (I remember the first thing that my company
outsourced to an offshore location was mass mailing. All
new product literature or holiday greetings or anything else
that was more than a hundred letters in bulk would be shipped in
bulk to Hong Kong, where a company would mail them back to Japan
as individual letters by putting Hong Kong stamps. It was
much cheaper to do this than to use Japanese domestic postal
service). They established plants in several parts of the world and kept only the value-added operations in Japan.
Japanese companies realized that they should focus on what they
did best, that is, product design and marketing. Manufacturing could be accomplished by building skill sets and infrastructure overseas. Today, Japan that used to be a world leader in manufacturing, is gradually shifting
its manufacturing primarily to China and Japanese employees are focusing on value-added work. Has it been painful to the Japanese? Oh yes. Many of my friends from Japan make much less than they did 10-15 years ago, they no longer travel for vacations to exotic places all over the world, and have significantly cut back on their consumption of designer goods. But is Japan a second-grade country in any way? No, it still is the world's second largest economy working on cutting-edge technologies.
So what will happen to America?
Having lived in Japan and seen the transition, I am convinced that we will simply become like Japan. Yes, our living standards will go down, we will consume less (we consume too much in the first place), and luxuries will be luxuries (not a way of life as we saw during the nineties). Will our competitiveness be affected? Somewhat; but overall we will still retain our superiority in many areas.
Some companies in India and China will do some great work in science and technology, a few Indian companies will
even become quite powerful, but overall we will be the one working on some really cool stuff.
I don't think India will directly compete with us in most areas
but they will definitely give us a run for our money in many
areas. We will face strong competition in IT but once we
ship low-end, back office type business processes overseas,
Americans can then focus on bigger and better things. And no, we will not have full employment,
or outrageous signing bonuses, or be able to quit our jobs at a moment's notice.
We will actually be competing with folks in India for jobs and
while it will be painful for some, in the long run, we will
learn to do what creates the highest value for our businesses. (Related
link: Benchmarking to
understand global competition)
We are on our way to
becoming a more mature economy in that respect, along the lines of Japan, France, Germany, Switzerland, etc. America
has traditionally attracted the best and the brightest but that is not the case anymore. As we make our immigration laws tough, as American corporations resort to offshoring versus bringing immigrants here, we will see that exciting companies will be created all over the world and not just in the Silicon Valley
(yeah, the one in California).
How will it impact American businesses?
In many ways, actually. If living standards decline, you have to watch out for demographic changes and change your offering accordingly. Secondly, if your competitor is already offshoring, you either follow suit or change your business model.
(Related link: Framework
to determine what can be outsourced) And finally, prepare yourself for an onslaught of foreign competitors. If whatever your business does can be done by someone else cheaper (and not necessarily, better), your business is under threat. And believe me,
while some simple business will easily survive (e.g. the bagel shop in my town that I really love) but some of the giants will be driven out of business by competition from overseas.
Below is a framework that I have been using to help companies
think about what their options and how they should select what
to do next:
The hard reality of business is that while we invested enormous resources in developing our capabilities and strengths in IT, sometimes the environment changes faster than you can anticipate. This is exactly what is happening now. Don't try to beat the marketplace; you never win anyway. Instead, adapt your business model to the marketplace.
economic prosperity to America
to globalize your business?
to develop an India strategy?
business allows you to compete globally
to market outsourcing solutions to mid-sized businesses?
consumers hurt but stay positive
continue to become poorer as average incomes decline
biotech save American economy?
growth period creates new business opportunities
Future of manufacturing
offshoring expected to grow
Outsourcing in mid sized companies
How to screen an outsourcing opportunity
Questions, comments or