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The American Outsourcing Case is a compilation of factual information for the purpose of provoking debates. The authors present both the pros and cons of outsourcing, and avoid inserting their personal bias. The case clearly defines outsourcing and then focuses on outlining its existence in China, Mexico, and India. The evolution and U.S. involvement in the Maquiladoras of Mexico is described first. The implementation of NAFTA and the creation of Maquiladoras were major catalysts in the growth of free trade between the U.S. and Mexico. China, in an attempt to attract foreign investors, created Special Economic Areas, which designated geographic zones that were enabled to operate under their own laws. With great tax benefits and low utility costs, outsourcing to the Special Economic Areas became very popular. Outsourcing of white collar jobs to India was also a great investment, with their inexpensive and technologically skilled laborers. General Electric Inc. is known as the largest market capitalization in the world. They have established themselves in more than 100 countries, three of those being China, Mexico, and India. The case closes with comparisons of the advantages and disadvantages of outsourcing to the three countries, and leaves the reader with thought provoking questions about the future of outsourcing from the U.S.
Companies that Outsource
GE has outsourced to Mexico for the past 108 years, and has employed around 30,000 citizens. The majority of the thirty plants they operated in Mexico were maquiladoras. GE’s Mexican based operations are primarily targeted at the blue collar workers, with the production of anything from motors to lighting products. Mexico’s close proximity to the U.S. enables cheap shipping costs and short travel time. This is a distinct advantage when in comparison to outsourcing to China.
Even so, GE has invested around $1.5 billion in outsourcing to China, while providing around 12,000 jobs. China was even identified as GE’s major target for international growth in 2002. Outsourcing to China was and is slightly more sophisticated than that of Mexico. GE strategized to further develop distributional channels for selling purposes, build up product related services, and eventually start delegating financial services. They sell, purchase, and produce goods in China. GE has outsourced to China for electronics, telecommunications advancements, jet engine services, and even medical equipment.
GE found India to be useful in the area of human capital, where they employed more than 22,000. The came upon very intelligent, college-educated Indians willing to work for a small portion of what Americans would expect.
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GE’s investments were beneficial to the other two countries to a certain degree, because free trade and open economies are necessities to a country’s survival. I think the main downside is the morality issue of the exploitations that occurred. Of the two, I think that U.S. should cease using Mexico as an outsource destination. The types of jobs delegated to Mexico are not as sophisticated as the other two, and typically entail hard labor, long work days, and low wages. Mexico is way too dependent on the U.S. economy, and even suffers through the ups and downs of our business cycle.
Large appliances are often outsourced to Mexico from the U.S., because the close proximity offers cheap shipping costs. The responsibility of manufacturing of automobiles, washers, and dryers is often delegated to Mexico for this reason. Seventy five percent of Mexican outsourcing production is apparel, transportation, equipment, electronics, and other electrical machinery. Some companies might be deterred from outsourcing here, since the Mexican government has some strict regulations. "They require paid vacation premium, eight paid holidays each year, medical care coverage, employee training, Mexican social security, overtime, premiums, Christmas bonus of 15 days salary, and profit sharing of 10 percent of total profits" (Schniederjans). Mexico is also notorious for economic volatility and instability. Their dependence on the U.S. economy is unhealthy, they often experience our negative economic fluctuations to a magnified degree. Lots of companies prefer to invest their money in countries that offer a little more stable.
"Today, Indian outsourcing is one of the best ways for CIOs to cut application development and maintenance costs, and deal effectively with the peaks and valleys of software demands." (Yeo). Outsourcing to India is still focused primarily on highly technological aspects, but is not limited there. They are known for creative development in the pharmaceutical field, and have recently developed an unsurpassed medication for adult ADHD. Their superior IT assistance is not limited to companies, they offer many websites for individuals seeking help with programming. In mid 2007, U.S. outsourcing to India reached $4.9 billion. Although technologically advanced, they still lag in economic prosperity and therefore still don’t expect the type of compensation that Americans do. “They are attractive due to existing infrastructure, large quantity of skilled workers as well as competitive pricing” (Yeo). The eagerness of Indians to be outsourced to is essentially why they are so appealing. While they continue to develop their economy on the base of outsourcing profits, they become more dependent on those revenues and need us to outsource to them as much as we need their inexpensive labor. They have to keep their expected wage rates from foreign entities at a competitive level, because they need our investments.
The types of jobs currently outsourced to China are extremely broad and range from toy manufacturing, medical equipment manufacturing, financial services, marketing positions, to even the software sector. In fact, China now almost rivals India as far as International IT outsourcing.. One problem that I discovered that has occurred in the past year involves lead poisoning found in their products. Millions of toys made in China were recalled this past year after the discovery of high levels of lead. The amount of lead found was excessive enough to potentially cause brain and kidney damage, and even death. There were suggestions to block all toys exported from China, but it was quickly realized how ridiculous that would be considering China supplies 80% of U.S. toys. Unfortunately the lead poisoning was not limited to toys, but affected many other products such as makeup, pottery, and jewelry. “About 103,000 multicolored necklaces, bracelets, earrings and charms were affected. Toys drums were also found to contain excessive levels of lead, and 4,500 were recalled. 3,000 action figures infected with lead were also recalled. Children’s gardening gloves were found to have a stamp painted logo containing high levels of lead. Children’s rings imported by Baltimore had massive amounts of lead, and 300,000 of them were recalled” (worldnetdaily.com).
Outsourcing to the Philippines
The Philippines is also a highly targeted area for outsourcing. Higher education is a Filipino priority, and that is evident as they just obtained a literacy rate of 94.6%. Every year there are around 350,000 college graduates seeking professional careers, and most of them are interested in outsourcing (Biedov). Last year their outsourcing revenues totaled $4.88 billion, and that figure is predicted to increase 43% to about $7 billion in the next year. This would not be a stretch, considering outsourcing revenues increased 35% in 2006, and 50% in 2007 (All). Outsourcing to the Philippines most commonly consists of, but is not limited to customer service positions, and destinations for call centers. “They also offer higher-end services such as web development, software development, legal services, medical transcription, animation and other services” (Biedov). The compensation that workers expect is below that of Indian workers. The Philippine Outsource website is very interesting and lists hundreds of thousands of listings for outsourcing opportunities. They offer outsourcing assistance such as web design, call center services, programming, business processing outsourcing, and web support agents. “Call Center Agents costs a company $1,499 a month for 40 hour weeks, a Web Support Agent will cost $1,299 per month and can be used for information gathering, sales, up-sales, customer services, ect.” (pioutsource.com). The Philippines offer low prices, a wide variety of services, and are attempting to make themselves as marketable to other countries as possible. There are lots of advantages to outsourcing here, such as "a talented workforce with strong English proficiency, a selection of suppliers with significant process maturity, a cultural affinity with the US, good physical and telecommunications infrastructure, and-most importantly- an attractive cost structure that promises tremendous savings for outsourcing organizations"(Gidwani). These advantages were created by the hard work put in by the Philippine government, in order to achieve their goal of being a dominant force in the global industry. The government has dedicated 200 billion pesos to the investment of improving infrastructures, and 350 million pesos to industry training initiatives for the sole purpose of making themselves more appealing as an outsource destination (ALL).
Relating the Case to the Course
Infrastructure is defined as the interconnection of various structural elements to support an overall entity, such as an organization, city, or country. This word is used 8 times throughout the case, mostly referring to the elements making up a country. It is used once in the context as business infrastructure, then defined as the collaboration of information systems, security systems, and telecommunications networks.
The term Multinational Corporations was used three times in the case to describe corporations headquartered in two or more countries. In our textbook it is more strictly defined as corporations using decentralized systems, used to support the decentralized nature of the decision making; typically employed by companies pursuing an international business strategy.
Competitive advantage is a firm's ability to do something better, faster, cheaper, or uniquely when compared with rival firms in the market. This term is seemingly fit for the discussion throughout the case, but was surprisingly used only once. It was used to refer to the superiority in certain areas that our country has as a whole over other countries.
The word software has already appeared frequently throughout this course, we defined it in the first chapter and from there it has been used in several other definitions. Software is a program or application that tells the hardware how to perform certain processing functions. This term was used 16 times in the case, 14 of those times relating to India and their ability to produce high quality software.
The American Outsourcing case was a great complement to what we are learning in class. It frequently used terms and subjects we have discussed relating to modern Information Systems. I understand why the case focused on outlining Mexico, India, and China as they all three bring something different to the global market. I can see how much outsourcing has enhanced the process of globalization, and now actually understand why it was one of Friedman’s Flatteners.
All, Ann. "Philippines Expects Outsourcing Growth to Accelerate in 2008." www.itbusinessedge.com. 11 Feb. 2008. 17 July 2008
Bergin, Paul. "Outsourcing and Volatility ." National Bureau of Economic Research. 13 Aug. 2006. 16 July 2008 < www.igier.uni-bocconi.it/files/documents/seminars/Feenstra_251006.pdf>.
Biedov, Liam. "Business Process Outsourcing in the Philippines." www.outsourceit2philippines.com. 16 July 2008
"China Exports Lead Poisoning ." worldnetdaily.com. 7 Aug. 2007. 16 July 2008
Gidwani, Juliana. "Outsourcing to the Philippines: Metro Manila and Beyond." Offshore Insights Market Report Series 3.9 (2005): 1-18. 16 July 2008
"Offshore Outsourcing Philippines." www.pioutsource.com. 16 July 2008
Schniederjans, Marc. "A Quantitative Approach to the Outsourcing-Insourcing Decision in an International Context." Management Decision 42.8 (2004): 1-15.
Yeo, Vivian. "India Still Top Choice for Offshoring." businessweek.com. 27 June 2008. 16 July 2008