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  • Pleasure reading

    Posted by In-Cog-Nito on January 22nd, 2004 (All posts by )

    I read a good article recently about Walmart and their part in the shift to offshoring US jobs.

    The article is skewed since the author seems to take the side of companies that went bust because of Walmart. And current Walmart vendors don’t want to talk about it understandably. The article has some good insights nonetheless.

    There was another good one about Wipro and offshoring white collar jobs.

    One underlying concern I have with wholesale shift of manufacturing offshore is that R&D usually follows manufacturing. You start with manufacturing, move to refining designs, and ultimately to complete R&D. Look at Japan and VCR’s. The national security implications have been debated endlessly so I won’t go into it unless someone wants to.

    Net net, there’s really no easy answer to the question since price is such a key determinant in the equation.

     

    11 Responses to “Pleasure reading”

    1. Lex Says:

      Neato, I finally got to read the Wipro article, while I am waiting for the baked potatoes to finally be done. Good essay, with good comments from many articulate readers. Thanks for the link.

    2. pedro Says:

      All the more reason to get back into space in a big way.

    3. In-Cog-Nito Says:

      Glad you liked it Lex. Great for India, but the social implications for the US will be tremendous. Certainly, the $120k a year IT consultant seems a bit extravagent when you can find a comparable if not more driven $21k a year Indian.

    4. Lex Says:

      Neato, I’m not so sure this will all work out to be so catastrophic. For one thing, it seems like the Indian firms are not charging their US customers 1/5 what their US competitors charge. So, the owners are temporarily reaping a huge profit from this. But as others get into the field these margins will fall, these huge profit opportunity will draw in Indian competitors. That will bid up wages for the best Indian programmers.

      Also, the comments on this post show what I have read elsewhere, which is that the Indians are frequently not “just as good”. It is worth digging into the comments. Much thoughtful analysis.

      I don’t think US workers in general are really paid six times what they are worth. That type of thing usually doesn’t happen even with all the friction and inefficiencies which beset international commerce. IT consultants may be an exception, to some extent. But my observation has been that if you pay a lot less for something, you usually get less, in one way or another.

      People have been predicting the collapse of the US economy to coolie labor for 150 years. It hasn’t happened and it is not going to happen. Whole industries have been wiped out by foreign competition or technological change. This country has been willing to tolerate a lot of pain to get the benefits of creative destruction. I don’t think that is going to change, nor should it. The social turmoil we have endured has been tremendous all along. But we carried on. We had 40% of our workforce in agriculture a century or so ago. Those jobs were destroyed. Was this disruptive? Yes. Are we better off? Yes.

      The best thing we could do is make it easy for the Indians to come here and work. They’d get paid more and you can drink the tap water.

      Not just “great for India”, either. Great for everyone who buys these services. And great for us if India develops from being a sinkhole of poverty into a middle-class country with lots of money to spend. What is good for other people is not bad for us. The world is not a zero-sum lifeboat scenario.

    5. In-Cog-Nito Says:

      Lex, you’re right. Free markets will work themselves out. The good India provides the market will shake a lot of people out of complacency. Compete or die has always been the case, and this is no exception.

      I have a habit of playing out the worst case scenarios in my head. Force of habit I guess. I usually have to remind myself to take the worst, take the best, and the average is usually what happens. Thanks for the voice of reason.

    6. freddie Says:

      Myproblem with work going overseas is that the labort costs are not shared with the cunsumer–the price of a pair of Nikes is still 50 bucks and on up0. Yet the costs of labor is signicantly reduced. The American worker gets screwed. So too then does the American consumer. This is the market you love so much at its best!Glad though that you too will pay more than you should so some compani[es can make even more.

    7. In-Cog-Nito Says:

      On some products the savings are passed on to consumers. Look at Walmart. Nike is different because they still have incredible branding power. Think of Nike more as a marketing company versus manufacturing. It’s like Starbucks. Is a cup of their crappacino really worth 5 bucks? It certainly doesn’t cost them 5 bucks in labor and material to sell you that cup. So they justify that 5 bucks by their brand and the marketing power behind that brand. If it makes you feel any better, the other $45 of what you pay for a pair of Nikes is probably going to Tiger Woods and the other endorsers on Nike’s payroll.

    8. Lex Says:

      Freddie, what Nito said. Nikes are a luxury good where you pay a premium for the brand. Steel rebar made in India is sold at the market price, for example.

      (An aside: There was a great article about the ship-breaking business in India. derelict ships are run up on the beach, and these guys swarm over them with cutting torches and chop them into bits. They melt the ships down bit by bit and make it into reinforcing rod which is sold in Africa. We westerners look at the working conditions and say, how awful. Fact is, by Indian standards it pays very well and people consider those to be choice jobs. I checked the Atlantic website, and it says the article is not available at the Author’s request.)

      Freddie, the cost-savings of many, many products are passed on to American consumers — cotton clothing, toys, plastic housewares, cookware, you name it, lots and lots of stuff. And as to the legendary “greedy company”, someone owns it and is profiting from it. Who? Probably American workers who are holding its shares in their 401(k) accounts.

      The search for a victim of the workings of the market is an endless one. It is simple though. The victims are the ones whose jobs become obsolete. Pretty much everyone else is better off. Job destruction is a price we as a society have always been willing to pay. A poignant depiction of this is Tom Geoghegan’s book Which Side Are You On?, which is about, in part, the destruction of old steel industry in Chicago in the early ’80s recession. Thousands of guys were put out of work. Those were dirty, hard, dangerous, health-destroying jobs, and now they’re gone. Was it hard on them? Yes. Was it the best thing for everybody else? Yes. Cheaper steel, more efficient and cleaner plants, higher returns for shareholders, etc. Did those guys crawl off somewhere and die? No, eventually, they got other jobs. Sometimes better, usually worse.

      The question is never, is the system we have perfect, or costless or even humane? The question is always, what are the realistic alternatives? Trying to protect jobs is a bad alternative. Assisting people who, through no fault of their own, end up out of work, is a possible alternative, and may be a political necessity from time to time.

    9. Sylvain Galineau Says:

      freddie, what Lex and Nito said. Nike can charge a premium for a reason. And if you were a shareholder – and many “American workers” are through their 401k accounts – you’d want them to charge what the market will bear. If cheap is what matters to you, you have that option.

      Finally, there comes a point where cost has to be compared to output. For manufactured products, it’s very easy to compare a sneaker made in America with the same one made in China, and decide whether the price difference is worth it.

      For some IT functions, it’s not so obvious. I have worked with foreign suppliers and while I’ll give them credit for the quantity of work they supply, the average quality has miles to go before I’m going to worry for the majority of western engineers. For every cost-effectiveness story, there is a horror story about late, shoddy work. Sure, you can get 500 Indian engineers for the price of 100 American of German ones, but will you get a proper car design in the end ? On time ? That will sell worldwide ?

      And let’s not forget that with high demand for these jobs, incomes will rise and make them less and less competitive over time. Sure, I know, there are 1 billion people there. But only a tiny minority qualify for higher education, let alone IT jobs. Of this minority, most strive to move to the US to make the real money. Paradoxically, granting them visas would be the best way to keep these jobs in America.

      In fact, I find it quite interesting to note that the outsourcing scare-mongering started shortly after the H-1B visa quota dropped back to its pre-bubble level. We can’t have it both ways, guys. If you keep them out to protect the “American worker”, you can’t then complain they can now underprice you. Well, duh…

    10. Sylvain Galineau Says:

      And one more comment. As countries like India and China grow, home demand for their IT skills will outpace foreign demand. Pretty soon, the prices of foreign labor will be less attractive.

      Of course, there’s going to be disruptions at home. But joining unions will only accelerate the process and is generally self-defeating. Trade unions, after all, are about increasing the cost of labor. And, eventually, everywhere they are involved, reduce the number of jobs.

    11. In-Cog-Nito Says:

      Sylvain, excellent point about home demand.