Saturday, December 1, 2007

Globalization: Offshoring: Too Late for Labor Arbitrage?

Offshoring: too late for labor arbitrage? The recent near panic in the American media over the loss of jobs overseas, reminiscent of the dot-com hysteria about tearing down all the buildings and all of us working from home, overlooks the simple fact that original conditions change and change quickly.
The original assumption behind offshoring was reduced expenses arising from exploiting lower wage societies and when English was a first or strong second language, so much the better. Early starts were in Ireland, India, and China. Initially, manufacturing processes went and then services began with the advent of improved technologies. However, what happens when everyone goes the same route, and not only in the US, but Europe and Japan begin to follow? And, then let’s not forget the developing economies in India and China with their own needs.
Labor rates have been increasing in countries such as India that have led to significant staff turnover there. The old joke about nobody quits their job for a nickel more an hour isn’t true in Mumbai. Ireland, once notorious in Europe for high, persistent unemployment, now has full employment. Furthermore, as businesses continue to chase labor arbitrage across the globe, what happens then? Firms moving across Europe are moving into eastern Europe and Russia. From the East, it’s the Philippines, China, and India. Where will these movements come together, Kyrgyzstan? And, then what? There’s no place left to go. Putting aside the political/security considerations for a moment, when the labor arbitrage game is played out, how will potential offshore centers differentiate themselves?
Here’s where we go back to those annoying political/security considerations. The recent political emergency in Pakistan, no wait, let’s be accurate, the latest manifestation of the political emergency in Pakistan potentially destabilizes a nuclear armed military dictatorship which borders America’s favorite offshore location. Other potential offshore locations, the Philippines and Brazil, have chronic security problems. Even China has significant internal problems in its interior away from the prosperous coastal regions. Other factors are different time zones, language and cultural differences. Anyone who has tried to fly in and out of the Mumbai international airport lately knows what I’m talking about. Other factors such as real estate costs are still relatively expensive.
What I’m suggesting here is that, shortly, labor arbitrage, while remaining a consideration in the future, will no longer take precedence. Like all other fads, whether they are the Internet or tulip bulbs, it will run its course and burn out. Offshoring for pure labor arbitrage, especially places far, far away will run its course too. While it will always be a component in business strategy, it will no longer have precedence over other more traditional business drivers. The restructuring that has been underway in American business will ultimately make its wage base more competitive when other factors are taken into consideration. Future outsourcing arrangements should take this point into consideration when being negotiated. Regional offshoring will make sense for multinationals with a truly global presence. However, simply sweeping all US based operations offshore in the hopes of saving money doesn’t seem to make much sense for much longer.

Contributed by Guy de Lastin

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