06-12-05, 07:27 PM #1
The Art Of Outsourcing
My comments are in blue. Let us discuss - agree, disagree
The Art of Outsourcing
By C.K. PRAHALAD
June 8, 2005; Page A14
THE WALL STREET JOURNAL
In the very partisan political climate in Washington, what is the one issue that is likely to bring Democrats and Republicans together? The fact that Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) will co-sponsor a China Currency Act is quite extraordinary. Their concerns and their solutions to the growth of imports from China -- be it textiles or consumer electronics -- are leading the U.S. to a more protectionist posture.
Export of service jobs to India is also a cause for politicians’ concern, and the "Exporting of America" theme is never short of congressional attention. The assumption behind this fearful perspective is simple: Greedy managers in global firms are exporting jobs to cheaper locations without regard to the harm this causes to displaced U.S. workers.
I suggest that we look at this phenomenon with a different set of lenses, highlighting the emerging pattern of globalization and the new demands it imposes on global firms. If American firms are to maintain their competitive
edge now and in the future, they need to get in front of these changes and
direct them, not become isolationists.
The outsourcing of lucrative information technology and high-end manufacturing work is not new, at least between U.S. companies. EDS, IBM, CSC and Accenture built their businesses on outsourcing. Kodak outsourced all IT work to IBM in 1989. (At the time, same Americans got pay check from IBM!). Xerox outsourced it to EDS in 1994. The government has been outsourcing work to CSC from the early 1980s. (Again, it was American workers who changed their employer!) The motivation for outsourcers was always the same -- reducing capital expenditures and operating costs, accessing competence, and focusing on their core activities. Off-shoring of work to an overseas manufacturing facility is also not new. For over 30 years, U.S. multinationals have "off-shored" their manufacturing and R&D facilities in semiconductors, computing, chemicals and pharmaceuticals to the U.K., Germany, France, Ireland and, more recently, to China and India. Flextronics and Solectron built their business on outsourcing of high-volume electronics manufacturing by U.S. firms. So outsourcing to specialized vendors and off-shoring (internally or to an outside vendor) is accepted practice. Why then, is this debate happening now?
* * *
(The question comes - what are the core activities of any person or organization? For a doctor, engineer or a football player, can you outsource your wife and children? Why not, if you consider your core activity is doctoring or engineering?As a society, why can not we outsource or off-shore our government to say Britain? Is that the best solution in the name of globalization - everything goes....
Should there be no difference between internal outsource and off-shore outsource?)
The current outsourcing of knowledge work is a new variant of the long history of outsourcing. Traditionally, EDS took over the entire IT work of a firm including most of the employees. In the current variation of outsourcing,
driven by digitization and inexpensive telecommunications and ubiquitous
connectivity, parts of work can be parceled out for remote delivery to a
vendor. Key management processes can be fragmented. For example,
sales-transaction processing and call centers can be separated from the entire sales and customer service activity and outsourced. Investment bankers can isolate routine analysis of a firm’s performance from their overall investment recommendation. So, too, can patent search from patent application, making of slides from a customer presentation, developing CAD drawings from purchasing decisions, or market research from product development.
It is this ability to fragment complex processes into their components -- as
well as the search for the best and lowest-cost talent to perform it -- that is
changing the nature of competitiveness. Also new is the fact that the work can be done almost in "real time" remotely. While work is done 10,000 miles away, Office Tiger, an investments analysis firm in Chennai, India, claims that it can deliver a routine performance analysis of a firm in less than three hours. It is the granularity of the effort that can be outsourced that allows
customers to be more willing to experiment. Today, outsourcing is not a
complex, board-level decision, unlike the outsourcing of all IT work during the
’80s and early ’90s.
(That is true. Today, you can outsource all the component of a company - heck you can outsource the whole thing, that is called a foreign company doing business in USA or in any country you prefer, since you defined that foreigners can do a better job than you can. )
The current phase of outsourcing will lead to multiple streams of competitive
advantage for U.S. companies. Cost is one of them, and will remain at the core of the phenomenon. (If cost is a concern, all the retired folks should move to India. With their CMM level 5 service, you will be in heaven) Quality is another. India has more than 40 software houses
with a quality ranking of CMM 4 or 5. (With that type of service, why American Express which has a major service center in India, is raising their interest rates?) There are other benefits to outsourcing, too. Because remote development and delivery demands clear documentation, the process capabilities of both the customer and the vendor improve. Most often, for outsourcing to work, the U.S. customers have to get their legacy processes cleaned up. Many firms have found that outsourcing helps in better documentation of internal processes. (That may be so, but outsourcing to within the country does the same.) Speed of reaction is yet another source of advantage. As vendors and customers work in time zones with a nine- to 12-hour difference, rapid response is possible. Finally, outsourcing allows firms to access a higher quality of skilled people for developing analytics. (Skilled people? you must be kidding...if that is true, why India can not do the same for their own country?) In just two years (2002-2003), U.S. firms conducting R&D in India have filed for over 900 patents. (And what about India? How the same so called skilled people benefitting India? Why can not they solve the AIDS problem or the transportation problem?)* * *
The real debate ought to center around the best way for U.S. firms to import
competitiveness -- not "export jobs." Firms compete across the globe -- Motorola against Nokia and Samsung, GE against Siemens, GM against Toyota, and Intel against AMD and TI. Global competition is primarily about inter-firm, not inter-country, rivalry.
(Should we not talk about "exporting jobs"? Is he nuts? What happens when all the jobs are gone? Where the tax dollars are going to come from? Or should we tax the workers in India to compensate for the lost tax dollars? And talk about competitiveness - are we going to compete for the ever shrinking pie? Who can afford to buy your product, now that all the jobs are exported. Remember, we can export the government jobs, the motor vehicle department jobs and even soldiers! Who is going to pay for the education, police, war, the roads (offcourse you may not need the roads after all the jobs gone) $1.3 trillion dollars of healthcare, social security, welfare, soup kitchen for the unemployed, rising prison population from unintended consequences etc....)
Global firms are not just looking for the next source of competitiveness. They
are also looking for new markets to grow.The largest markets for cellphones
today are in China and India. (Looking for new market? You bet they will - because with all the high paying jobs are gone, they will be looking to other pastures to sell their crap). India is adding nearly two million phones per month. China is one of the largest markets for Caterpillar and is emerging as a large market for cars. Yes, India can be a source of competition for "well-paying jobs." (That is well and good, but let us not do it at the back of the American and British people) But it is also a growing market for Dell computers, Microsoft software, Motorola cellphones, Whirlpool appliances, and Oracle databases. For example, while technicians work at these remote call centers and other "outsourced" operations, the hardware and software tools they use are made by U.S. firms.(No, according to the outsourcing argument, the hardware and software is made by China and India that benefits those countries not Americans, the American shareholders do share some profit, but they could do the same, holding shares in Toyota or Samsung. It does not benefit the American company. In fact, the American and British middle class will fast disappear to grow the middle class of China and India) Globalization is creating a new form of interdependence. To focus on "independence" and "self-sufficiency" in this era is foolhardy. (This type of "interdependence" is not only foolhardy, it is downright dangerous. A small amount of salt in food is good for you, too much can kill you. If we continue at this "exporting jobs", there will come a point in time where a civil war will break out in both USA (first) and Britain (later) that will create a major backlash that will be started by the minorities in each country who will feel the most damaging result. Historians and social scientists will be scratching their head as to what happened. This will happen in a very few short years. It is like killing an elephant by slashing one leg - the elephant bleeds to death but takes a few days)
The crux of the debate needs to be reframed. If global firms have to compete
effectively for global markets as well as retain their position in established
markets, they must have the ability to improve their cost, quality,
time-to-market and capacity to innovate. This requires a continual search for
talent and a willingness to change the internal processes of managing to keep
ahead of competition. The current wave of outsourcing is motivated by this
desire to innovate ahead of competition.
(Who says, the global firms have to compete without regards to social consequences? What this should require is a constant search for cause and effect and looking at the big picture that benefits the planet as a whole. May be the writer should go back to school at MIT and study "system dynamics" and learn how certain innocent looking local domain
logical processes can create disasters in a global scale.)
The longer-term prognosis for the developed world demands that global firms
learn to source talent from developing countries such as China and India. Given the demographics, it is estimated that the U.S. will be unable to fill more than a million jobs by 2010. Aging populations and worker shortage are likely to be major problems in Germany, France, the U.K. and Japan. Either one allows for more immigration to fill jobs or rapidly learns to outsource work and have it done remotely in India, China, Eastern Europe, Russia or the Philippines, The firms that learn to innovate quickly by managing differently -- with granular partitioning of workflow and efficient coordination of the fragmented parts -- will retain competitive advantage.
(No, the longer-term prognosis for the developed world should demand to be creative in managing and utilizing its own human resources first rather than throwing them as social outcasts in search for younger techno-prostitutes. There is no worker shortage in America. General Motors is going to lay-off 25,000 jobs. There will be a surplus of 5 to 7 million people in U.S. by 2010 that would be unemployed, under employed and people who did not go to college because of no job prospects. All my friends are sending their kids to college to study Finance, Healthcare, Law rather than Computer Science and Engineering and sure enough 4 years from now, there will be a shortage of Computer jobs and another round of job exporting!)
There was a time in the 1980s when Americans fretted about Japanese competitors and how they would take over all the key industries in the U.S. As we look back, the firms and industries which were willing to adapt and innovate have done very well: IBM, Intel, H-P, GE, Dell and Motorola have not disappeared. They are still leaders in their fields. All of them access global talent to retain their competitiveness. Consequently, the key question for U.S. firms should be: How are we going to leverage the talent and markets in China and India to enhance our competitive advantage world-wide?
(A really bad example and a smoke screen. The truth is, Americans fretted about Japanese Competitors mostly in Cars, some computers and consumer electronics. And now Toyota is declaring that they have to raise thier car price to save General Motors. Chrysler and AMC is gone. GM is not far behind.
In consumer electronics, everything is now built in Korea, China and a little in Japan. Yes, some of the companies have not disappeared but they are exporting more jobs to the point, soon they will be considered American Companies in the name only. By the way, NEC and Hitachi could have dominated the computer industry if they had hired good American talent. Even then, they have already bought bits and pieces of American technology - Hitachi from IBM and NEC from Packard-Bell. The new generation optical drive technology is coming from Japan and soon the movies too! Today Americans are fretting for their very survival!)
The current outsourcing phenomenon is the start of a new pattern of innovation in the way we manage. The ability to fragment complex management processes and reintegrate them into the whole is a new capability. It allows us, in the short term, to take advantage of the talent outside the U.S. In the longer term, it allows us to cope creatively with the emerging labor shortage caused by an aging population in developed markets. The time to learn to manage with a global system of knowledge, products, services and component vendors is now. We should celebrate the process that imports competitiveness and creates new jobs. Fear is for losers -- and for Lou Dobbs.
(Outsourcing and exporting jobs is not "innovation". Innovation is, rather than dinking around Africa for 30 years promising to eradicate poverty, one goes about making Africa another America in 10 years. Innovation is to help the world Muslim population see the light and attain the prestige and prosperity they once had in economy, social stability, science and technology rather than developing insurgency. Innovation is to develop new technology to solve our dependence in oil which breeds war and suffering. Innovation is to eradicate the AIDS virus that affects so many Indians. Innovation is for Indians to work on a cure for AIDS. Innovation is to develop a process that integrates the global system of knowledge to predict economic collapse and human suffering and prevent the coming nightmare. Innovation is to learn from the mistakes of the collapse of previous civilizations and not create one.)
Mr. Prahalad is the Harvey C. Fruehauf professor of Corporate Strategy at the Ross School of Business at the University of Michigan. He is also chairman of The Next Practice, and the author, most recently, of "The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits" (Wharton, 2004).
KMGuru is a lowly American citizen whose seed idea (in 1980s), is still being used to develop the Chinese economy. Today, he is trying to use the same idea to develop the African economy.
06-13-05, 12:35 AM #2
I agree with you KMGuru and so does Warren Buffett. Warren Buffett has a solution to the outsourcing puzzle that lets America keep the benefits of "comparative advantage" without destroying America by sending all of our jobs away.
By Warren E. Buffett, FORTUNE from a fortune magazine article.
I'm about to deliver a warning regarding the U.S. trade deficit and also suggest a remedy for the problem. But first I need to mention two reasons you might want to be skeptical about what I say. To begin, my forecasting record with respect to macroeconomics is far from inspiring. For example, over the past two decades I was excessively fearful of inflation. More to the point at hand, I started way back in 1987 to publicly worry about our mounting trade deficits -- and, as you know, we've not only survived but also thrived. So on the trade front, score at least one "wolf" for me. Nevertheless, I am crying wolf again and this time backing it with Berkshire Hathaway's money. Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in -- and today holds -- several currencies. I won't give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline.
Both as an American and as an investor, I actually hope these commitments prove to be a mistake. Any profits Berkshire might make from currency trading would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar.
But as head of Berkshire Hathaway, I am in charge of investing its money in ways that make sense. And my reason for finally putting my money where my mouth has been so long is that our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate.
A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.
Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.
The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo -- but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).
Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off -- or simply service -- the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.
Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.
At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat -- they have nothing left to trade -- but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.
It can be argued, of course, that the present value of the future production that Squanderville must forever ship to Thriftville only equates to the production Thriftville initially gave up and that therefore both have received a fair deal. But since one generation of Squanders gets the free ride and future generations pay in perpetuity for it, there are -- in economist talk -- some pretty dramatic "intergenerational inequities."
Let's think of it in terms of a family: Imagine that I, Warren Buffett, can get the suppliers of all that I consume in my lifetime to take Buffett family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffett family unit and its creditors. But the generations of Buffetts following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welsh on it).
Think again about those islands: Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies -- that is, issue more Squanderbucks to dilute the value of each. After all, the government would reason, those irritating Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value. In short, making Squanderbucks less valuable would ease the island's fiscal pain.
That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land rather than bonds of the island's government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force.
So what does all this island hopping have to do with the U.S.? Simply put, after World War II and up until the early 1970s we operated in the industrious Thriftville style, regularly selling more abroad than we purchased. We concurrently invested our surplus abroad, with the result that our net investment -- that is, our holdings of foreign assets less foreign holdings of U.S. assets -- increased (under methodology, since revised, that the government was then using) from $37 billion in 1950 to $68 billion in 1970. In those days, to sum up, our country's "net worth," viewed in totality, consisted of all the wealth within our borders plus a modest portion of the wealth in the rest of the world.
Additionally, because the U.S. was in a net ownership position with respect to the rest of the world, we realized net investment income that, piled on top of our trade surplus, became a second source of investable funds. Our fiscal situation was thus similar to that of an individual who was both saving some of his salary and reinvesting the dividends from his existing nest egg.
In the late 1970s the trade situation reversed, producing deficits that initially ran about 1 percent of GDP. That was hardly serious, particularly because net investment income remained positive. Indeed, with the power of compound interest working for us, our net ownership balance hit its high in 1980 at $360 billion.
Since then, however, it's been all downhill, with the pace of decline rapidly accelerating in the past five years. Our annual trade deficit now exceeds 4 percent of GDP. Equally ominous, the rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. Some of this $2.5 trillion is invested in claim checks -- U.S. bonds, both governmental and private -- and some in such assets as property and equity securities.
In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce -- that's the trade deficit -- we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.
To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth. Those comparisons show that what's already been transferred abroad is meaningful -- in the area, for example, of 5 percent of our national wealth.
More important, however, is that foreign ownership of our assets will grow at about $500 billion per year at the present trade-deficit level, which means that the deficit will be adding about one percentage point annually to foreigners' net ownership of our national wealth. As that ownership grows, so will the annual net investment income flowing out of this country. That will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them, as in the past. We have entered the world of negative compounding -- goodbye pleasure, hello pain.
We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that's the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades.
The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary -- and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card's credit line is not limitless.
The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.
We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties -- either exporters abroad or importers here -- wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.
Because our exports total about $80 billion a month, ICs would be issued in huge, equivalent quantities -- that is, 80 billion certificates a month -- and would surely trade in an exceptionally liquid market. Competition would then determine who among those parties wanting to sell to us would buy the certificates and how much they would pay. (I visualize that the certificates would be issued with a short life, possibly of six months, so that speculators would be discouraged from accumulating them.)
For illustrative purposes, let's postulate that each IC would sell for 10 cents -- that is, 10 cents per dollar of exports behind them. Other things being equal, this amount would mean a U.S. producer could realize 10 percent more by selling his goods in the export market than by selling them domestically, with the extra 10 percent coming from his sales of ICs.
In my opinion, many exporters would view this as a reduction in cost, one that would let them cut the prices of their products in international markets. Commodity-type products would particularly encourage this kind of behavior. If aluminum, for example, was selling for 66 cents per pound domestically and ICs were worth 10 percent, domestic aluminum producers could sell for about 60 cents per pound (plus transportation costs) in foreign markets and still earn normal margins. In this scenario, the output of the U.S. would become significantly more competitive and exports would expand. Along the way, the number of jobs would grow.
Foreigners selling to us, of course, would face tougher economics. But that's a problem they're up against no matter what trade "solution" is adopted -- and make no mistake, a solution must come. (As Herb Stein said, "If something cannot go on forever, it will stop.") In one way the IC approach would give countries selling to us great flexibility, since the plan does not penalize any specific industry or product. In the end, the free market would determine what would be sold in the U.S. and who would sell it. The ICs would determine only the aggregate dollar volume of what was sold.
To see what would happen to imports, let's look at a car now entering the U.S. at a cost to the importer of $20,000. Under the new plan and the assumption that ICs sell for 10 percent, the importer's cost would rise to $22,000. If demand for the car was exceptionally strong, the importer might manage to pass all of this on to the American consumer. In the usual case, however, competitive forces would take hold, requiring the foreign manufacturer to absorb some, if not all, of the $2,000 IC cost.
There is no free lunch in the IC plan: It would have certain serious negative consequences for U.S. citizens. Prices of most imported products would increase, and so would the prices of certain competitive products manufactured domestically. The cost of the ICs, either in whole or in part, would therefore typically act as a tax on consumers.
That is a serious drawback. But there would be drawbacks also to the dollar continuing to lose value or to our increasing tariffs on specific products or instituting quotas on them -- courses of action that in my opinion offer a smaller chance of success. Above all, the pain of higher prices on goods imported today dims beside the pain we will eventually suffer if we drift along and trade away ever larger portions of our country's net worth.
I believe that ICs would produce, rather promptly, a U.S. trade equilibrium well above present export levels but below present import levels. The certificates would moderately aid all our industries in world competition, even as the free market determined which of them ultimately met the test of "comparative advantage."
This plan would not be copied by nations that are net exporters, because their ICs would be valueless. Would major exporting countries retaliate in other ways? Would this start another Smoot-Hawley tariff war? Hardly. At the time of Smoot-Hawley we ran an unreasonable trade surplus that we wished to maintain. We now run a damaging deficit that the whole world knows we must correct.
For decades the world has struggled with a shifting maze of punitive tariffs, export subsidies, quotas, dollar-locked currencies, and the like. Many of these import-inhibiting and export-encouraging devices have long been employed by major exporting countries trying to amass ever larger surpluses -- yet significant trade wars have not erupted. Surely one will not be precipitated by a proposal that simply aims at balancing the books of the world's largest trade debtor. Major exporting countries have behaved quite rationally in the past and they will continue to do so -- though, as always, it may be in their interest to attempt to convince us that they will behave otherwise.
The likely outcome of an IC plan is that the exporting nations -- after some initial posturing -- will turn their ingenuity to encouraging imports from us. Take the position of China, which today sells us about $140 billion of goods and services annually while purchasing only $25 billion. Were ICs to exist, one course for China would be simply to fill the gap by buying 115 billion certificates annually. But it could alternatively reduce its need for ICs by cutting its exports to the U.S. or by increasing its purchases from us. This last choice would probably be the most palatable for China, and we should wish it to be so.
If our exports were to increase and the supply of ICs were therefore to be enlarged, their market price would be driven down. Indeed, if our exports expanded sufficiently, ICs would be rendered valueless and the entire plan made moot. Presented with the power to make this happen, important exporting countries might quickly eliminate the mechanisms they now use to inhibit exports from us.
Were we to install an IC plan, we might opt for some transition years in which we deliberately ran a relatively small deficit, a step that would enable the world to adjust as we gradually got where we need to be. Carrying this plan out, our government could either auction "bonus" ICs every month or simply give them, say, to less-developed countries needing to increase their exports. The latter course would deliver a form of foreign aid likely to be particularly effective and appreciated.
I will close by reminding you again that I cried wolf once before. In general, the batting average of doomsayers in the U.S. is terrible. Our country has consistently made fools of those who were skeptical about either our economic potential or our resiliency. Many pessimistic seers simply underestimated the dynamism that has allowed us to overcome problems that once seemed ominous. We still have a truly remarkable country and economy.
But I believe that in the trade deficit we also have a problem that is going to test all of our abilities to find a solution. A gently declining dollar will not provide the answer. True, it would reduce our trade deficit to a degree, but not by enough to halt the outflow of our country's net worth and the resulting growth in our investment-income deficit.
Perhaps there are other solutions that make more sense than mine. However, wishful thinking -- and its usual companion, thumb sucking -- is not among them. From what I now see, action to halt the rapid outflow of our national wealth is called for, and ICs seem the least painful and most certain way to get the job done. Just keep remembering that this is not a small problem: For example, at the rate at which the rest of the world is now making net investments in the U.S., it could annually buy and sock away nearly 4 percent of our publicly traded stocks.
In evaluating business options at Berkshire, my partner, Charles Munger, suggests that we pay close attention to his jocular wish: "All I want to know is where I'm going to die, so I'll never go there." Framers of our trade policy should heed this caution -- and steer clear of Squanderville.
FORTUNE editor at large Carol Loomis, who is a Berkshire Hathaway shareholder, worked with Warren Buffett on this article.
Last edited by nirakar; 06-13-05 at 12:47 AM.
06-16-05, 09:14 PM #3
Here is a good book on the subject:
What’s Behind Our National Crisis and How We Can Reclaim American Jobs
By Ron Hira, Anil Hira
Where have so many good jobs gone? And how can we get them back?
Foreword by Lou Dobbs
One of the hottest, most controversial topics in the news is the outsourcing of American jobs to other countries. Outsourced jobs are extending well beyond the manufacturing sector to include white-collar professionals, particularly in information technology, financial services, and customer service. Outsourcing America reveals just how much outsourcing is taking place, what its impact is and will be, and what can be done about the loss of jobs.
More than an exposč, the book shows how outsourcing is part of the historical economic shifts toward globalism and free trade, and demonstrates the impact of outsourcing on individual lives and communities. The authors discuss policies that countries like India and China use to attract U.S. industries, and they offer frank recommendations that business and political leaders must consider in order to confront this snowballing crisis —and bring more high-paying jobs back to the U.S.
06-16-05, 09:34 PM #4
06-17-05, 05:06 PM #5
Outsourcing is a windfall for advanced western Economies , it gives western industry access to cheap labour and leaves the recipient country with all the problems of waste disposal . Outsourcing is a huge cost to the host country in the form that eventually turns it into a indebted economy to continue fuelling outsourcing . The prime example is China 90% of all exports from China are simply manufactured goods produced on order from Western firms . The Chinese economy must procure expensive materials from overseas to manufacture these goods . Inefficient industrial waste disposal is slowly poisoning the Chinese ecosystem beyond repair . China is at the mercy of outsourcing because at anytime the Western firms can outsource in other nations at a given notice .
06-17-05, 08:16 PM #6
The prime example is China 90% of all exports from China are simply manufactured goods produced on order from Western firms . The Chinese economy must procure expensive materials from overseas to manufacture these goods
whatever costs Chinese companies may have, they can add even a 400% profit margin ontop of full costs, and they'll still sell every single unit - because at 400% margin, the product is still less than 50% of the cost in overseas markets.
06-18-05, 07:07 PM #7
It usually runs at a third of the final cost , and China is now having to borrow money from Western Banks to procure materials in such large quantities as aluminium at inflated prices. Believe me the Chinese economy is sown up good and proper by the advanced Western and Japanese consumer economies .
06-18-05, 10:46 PM #8
China borrow money from western banks? China is a lending nation not a borrowing nation.
06-18-05, 11:36 PM #9China: the Biggest Debtor Nation of WB
By the end of June, China had received US$2.62 billion in World Bank loans , accounting for 9 percent of the bank's total for the 1998 fiscal year, and remained its biggest debtor nation.
So far, China received US$2.32 billion in hard loans from WB's International Bank of Reconstruction and Development and US$293 million of soft loans from the International Development Association, to finance 16 development projects.
China regained its representative rights in the World Bank in 1981, and became the bank's biggest debtor nation in 1993. Up to now, it has obtained US$30.36 billion in WB loans for 200 projects, with more than 50 percent of which going to transportation, energy, industry and urban construction, and the remaining to agriculture, education, public health, environmental protection and water supply.
06-19-05, 11:00 PM #10
I am here in NYC, i have 3 job offers in the bag even before i complete my Masters.Where are the jobs? looks like people want jobs in Arizona.... There are only two places you"ll find good jobs : west Coast (in NJ,NY,PA,MA etc) or east coast (CA)...rest ? Georgia may be...
08-14-05, 05:43 PM #11
That is great zion...I hope you are not replacing the people who have 15 years experience owing to cheap labor...
Saw on the net:
Watching the Economy Crumble
Paul Craig Roberts | August 10 2005
The US continues its descent into the Third World, but you would never know it from news reports of the Bureau of Labor Statistics’ July payroll jobs release.
The media gives a bare bones jobs report that is misleading. The public heard that 207,000 jobs were created in July. If not a reassuring figure, at least it is not a disturbing one. On the surface things look to be pretty much OK. It is when you look into the composition of these jobs that the concern arises.
Of the new jobs, 26,000 (about 13%) are tax-supported government jobs. That leaves 181,000 private sector jobs. Of these private sector jobs, 177,000, or 98%, are in the domestic service sector.
Here is the breakdown of the major categories:
• 30,000 food servers and bar tenders;
• 28,000 health care and social assistance:
• 12,000 real estate;
• 6,000 credit intermediation;
• 8,000 transit and ground passenger transportation;
• 50,000 retail trade; and
• 8,000 wholesale trade.
(There were 7,000 construction jobs, most of which were filled by Mexicans immigrants.)
Not a single one of these jobs produces a tradable good or service that can be exported or serve as an import substitute to help reduce the massive and growing US trade deficit. The US economy is employing people to sell things, to move people around, and to serve them fast food and alcoholic beverages. The items may have an American brand name, but they are mainly made off shore. For example, 70% of Wal-Mart’s goods are made in China.
Where are the jobs for the 65,000 engineers the US graduates each year? Where are the jobs for the physics, chemistry, and math majors? Who needs a university degree to wait tables and serve drinks, to build houses, to work as hospital orderlies, bus drivers, and sales clerks?
In the 21st century job growth in the US economy has consistently reflected that of a Third World country--low productivity domestic services jobs. This goes on month after month and no one catches on--least of all the economists and the policymakers.
Economists assume that every high productivity, high paying job that is shipped out of the country is a net gain for America. We are getting things cheaper, they say. Perhaps, for a while, until the dollar goes. What the cheaper goods argument overlooks are the reductions in the productivity and pay of employed Americans and in the manufacturing, technical, and scientific capability of the US economy.
What is the point of higher education when the job opportunities in the economy do not require it?
These questions are too difficult for economists, politicians, and newscasters. Instead, we hear that “last month the US economy created 207,000 jobs.”
Television has an inexhaustible supply of optimistic economists.
Last weekend CNN had John Rutledge (erroneously billed as the person who drafted President Reagan’s economic program) explaining that the strength of the US economy was “mom and pop businesses.” The college student with whom I was watching the program broke out laughing.
What mom and pop businesses? Everything that used to be mom and pop businesses has been replaced with chains and discount retailers. Auto parts stores are chains, pharmacies are chains, restaurants are chains. Wal-Mart, Home Depot, and Lowes, have destroyed hardware stores, clothing stores, appliance stores, building supply stores, gardening shops, whatever--you name it.
Just try starting a small business today. Most gasoline station/convenience stores seem to be the property of immigrant ethnic groups who acquired them with the aid of a taxpayer-financed US government loan.
Today a mom and pop business is a cleaning service that employs Mexicans, a pool service, a lawn service, or a limo service.
In recent years the US economy has been kept afloat by low interest rates. The low interest rates have fueled a real estate boom. As housing prices rise, people refinance their mortgages, take equity out of their homes and spend the money, thus keeping the consumer economy going.
The massive American trade and budget deficits are covered by the willingness of Asian countries, principally Japan and China, to hold US government bonds and to continue to acquire ownership of America’s real assets in exchange for their penetration of US markets.
This game will not go on forever. When it stops, what is left to drive the US economy?
09-09-05, 06:27 PM #12Originally Posted by otheadp
The truth however is that Fat Global companies get Fatter, People in the west get made redundant and in the East/Far East they get F**K*D up the ass, looking at there environments go to pieces and not getting paid enough to make any real advice for themselves or there nations.
The real truth is that only some 10% of the peoples of the world own some 95% of its wealth. The rest of us live on another planet altogether!
09-10-05, 08:25 AM #13west Coast (in NJ,NY,PA,MA etc) or east coast (CA)...rest ? Georgia may be...
09-28-05, 02:39 AM #14WildBlueYonderGuest
this just in, via email:
Subject: FW: Good News!! President's Job to be Outsourced
Date: Tue, 27 Sep 2005 11:22:44 -0700
Subject: President's Job to be Outsourced....
Congress today announced that the office of President of the United States of America will be outsourced to overseas interests as of December 31st. The move is being made to save not only a significant portion of the President's
$400,000.00 yearly salary, but also a record $521 billion in deficit expenditures and related overhead.
"We believe this is a wise move financially. The cost savings should be significant," stated Congressman Thomas Reynolds (R-Wash.). Reynolds, with the aid of the Government Accountability Office, has studied outsourcing of American jobs extensively.
"We cannot expect to remain competitive on the world stage with the current level of cash outlay," Reynolds noted.
Mr. Bush was informed by email this morning of his termination.
Preparations for the job move have been underway for some time.
Gurvinder Singh of Indus Teleservices, Mumbai, India will be assuming the office of President as of January 1st. Mr. Singh was born in the United States while his Indian parents were vacationing at Niagara Falls, thus making him eligible for the position. He will receive a salary of $320 (USD) a month but with no health coverage or other benefits.
It is believed that Mr. Singh will be able to handle his job responsibilities without support staff. Due to the time difference between the US and India, he will be working primarily at night, when few offices of the US Government will be open.
"Working nights will allow me to keep my day job at the American Express call center," stated Mr. Singh in an exclusive interview. "I am excited about this position. I always hoped I would be President some day."
A Congressional spokesperson noted that while Mr. Singh may not be fully aware of all the issues involved in the office of President, this should not be a problem. Mr. Singh will rely upon a script tree that will enable him to respond effectively to most topics of concern. Using this tree, he can address common concerns without having to understand the underlying issues at all.
"We know these scripting tools work," stated the spokesperson. "Mr. Bush has used them successfully for years."
Mr. Bush will receive health coverage, expenses, and salary until his final day of employment. Following a two week waiting period, he will be eligible for $240 dollars a week unemployment for 13 weeks. Unfortunately he will not be eligible for Medicaid as his unemployment benefits will exceed the allowed limit.
Mr. Bush has been provided the out placement services of Manpower, Inc. to help him write a resume and prepare for his upcoming job transition.
According to Manpower, Mr. Bush may have difficulties in securing a new position due to limited practical work experience. One possibility is re-enlistment in the Air National Guard. Should he choose this option, he would likely be stationed in Iraq, a country he has visited.
"I've been there, I know all about Iraq," stated Mr. Bush, who gained invaluable knowledge of the country in a visit to the Baghdad Airport's terminal and gift shop.
Sources in Baghdad and Falluja say Mr. Bush would receive a warm reception from local Iraqis. They have asked to be provided with details of his arrival so that they might arrange an appropriate welcome.
09-30-05, 05:28 PM #15
Half of Silicon Valley jobs moving to India: Survey
Friday, September 30, 2005
SILICON VALLEY: In a major endorsement of India?s IT capability, a survey by the Santa Clara University today said about half of the jobs being outsourced by Silicon Valley companies are going to India.
The survey said about 53 percent of all Silicon Valley companies outsource a portion of all of their jobs and half of it is landing in India.
"India has an educated work force, and its people speak English, so it makes it an attractive place for outsourcing," said Mario Belotti, an economics professor at the university.
After India, China was the second most preferred Asian nation accounting for 8 percent of the outsourced jobs.
However the survey, that has been tracking outsourcing for three years, said outsourcing has slightly fallen over the past three years. While outsourcing remains a large component business operation in the Valley, manufacturing has seen a notable decline, Belotti said.
Belotti said the percentage of companies reporting "no outsourcing done in the last quarter" has increased in the manufacturing, from 51.1 per cent in 2003 to 60.7 percent in this year's survey.
"Much of this drop was in the semiconductor and electronics area," Belotti said.