American Outsourcing
February , 2009
Ted, Tiffany, Jordan
Question 1 – Case Introduction
• 2004-loss of more than 2.5 million jobs since 2001
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Outsourcing abroad begun hurting employment in such sectors as professional and business services, information
industries, textiles and apparel, computers and electronics, furniture, vehicles, and fabricated metals.
NAFTA (93)-driven outsourcing to Mexico (plus Asia and India)
Global Outsourcing…………good or bad for the US?
Transferred manufacturing or service jobs abroad
Outsourcing chief reason behind domestic employment problems?
14 million U.S. jobs, or 11% of total labor force vulnerable to outsourcing
Skilled professionals with university education – less incentive
Mexico’s maquiladoras / China’s Special Economic Areas (SEAs) / Software
outsourcing to India
• GE’s outsourcing / China’s advantages / Mexico’s advantages
• Competition between China and India
Question 2 – Types of Jobs
Outsourced to MEXICO
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High wage manufacturing positions
General Motors
Hershey
Textiles, apparel, fabricated metal, auto, and
aerospace (Boeing Corporation, General
Dynamics, Honeywell International, and GE
Aircraft Engines)
• Javid LLC http://www.manufacturing-in-mexico.com/
Question 2 – Disadvantages of
Outsourcing to MEXICO
• Loss of local jobs
• The company losses direct control over the
management
• Quality problems
• Slow response time
• Foreign agents sometimes have different accents
(causing slow resolution times, reduction of product sales because of frustrated
customers or people who boycott a company’s products because they outsource)
Question 2 – Types of Jobs
Outsourced to INDIA
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Call Centers
Computer programmers
Financial processing
Some of the companies which are outsourcing
their work to India or which has R&D centres
in India are:
• GE, Citigroup, Microsoft, Oracle, IBM, Google,
JP Morgan Chase, Morgan Stanley, Goldman
Sachs
Question 2 – Why is INDIA a
Good Location for These Jobs?
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Cost-effective services
High-quality services
Time Zone Advantages
India’s stable government
The Indian Advantage
Global organizations’ most preferred choice
Question 2 – Types of Jobs
Outsourced to CHINA
• Large, publicly held, highly profitable and well established
• Those companies who have benefited include:
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Microsoft, Dell, SAP, Nokia, General Electric, Alcatel-Lucent and Unilever (UL)
Accounting and consulting firms – Accenture, BearingPoint and Infosys Technologies
Wal-Mart Stores and other big box retailers
Newell Rubbermaid and other manufacturers
• Those companies that have not benefited include:
– Lockheed Martin, Raytheon Company are examples of prime defense contractors
which would have difficulty offshoring their support or technology functions overseas.
– Pfizer Pharmaceuticals
– IP dependent industries (Intel) would not likely outsource their most cutting edge R&D
– Companies dependent on Western language customer service workers like SBC, AOL,
Qwest are less likely to benefit from Chinese outsourcing
Question 2 – Product Issues
in CHINA
• Infant formula contaminated with melamine
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September 12, 2008
• Swimming pool ladders
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They break, resulting in 127 reports of injuries, including leg lacerations requiring up to 21
stitches, five reports of bone fractures, two back injuries, two reports of torn ligaments and
eight sprained ankles
• 74 miners die, 114 injured in China mine blast
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Sunday, February 22, 2009 7:46 AM EST
A gas explosion ripped through a coal mine in northern China on Sunday, killing at least 74
miners and trapping dozens, state media said. It was the deadliest Chinese coal mine accident
in more than a year. Government figures show that almost 80 percent of China's 16,000
mines are small, illegal operations.
Question 3 - GE's Outsourcing
by Country
• Mexico
– Aircraft Engines, capacitors, electric motors, control devices, lighting
products,
• China
– Medical systems, plastics, lighting products, locomotive repair,
aircraft engine maintenance facilities, training, component
manufacturing, metalwork, small appliances, and tooling.
• India
– Software design, software support, research/development, aircraft
engines, capital services, medical systems, industrial, systems,
plastics, power systems, broadcasting,
– Capital Services:
• Transaction processing, finance and accounting services, call center
services, customer fulfillment activities and processes, data modeling and
analytics support, managed IT services, software solutions, and e-learning
Question 3 - GE to Stop
Outsourcing in India
• Not as high growth potential as China 78% vs. 22%
(ref. exhibit 19b)
• India expected to lose competitive IT sourcing to China.
(ref. pg. 16)
• China has lower labor and energy cost (for now?)
(ref. pg. 16)
• China has a higher FDI confidence level than US or
India. (ref. exhibit 19a)
• Mexico has advantages of NAFTA plus proximity of
borders for lower transportation expenses and trade
convenience.
Question 4 – Outsourcing
Destination: Philippines
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“The new country that is becoming a major player is the Philippines and despite
the global economies crashing all around us outsourcing in the Philippines grew a
whopping twenty six percent.” (Outsourcing Blog Shots, Feb 9, 2009,
www.outsourcing.7dayshootout.com)
“According to the Philippine Software Industry Assn. (PSIA), the industry had $423
million in revenues from both outsourced and product software in 2007, up from
$200 million in 2005, and currently employs around 28,000 software developers.”
(Business Week, Jan 5, 2009
http://www.businessweek.com/globalbiz/content/jan2009/gb2009015_871284.htm )
• Labor Pool
• Costs
• Government
• Infrastructure
• Expertise
http://www.forbes.com/2003/08/21/cx_ld_bestcountrieslide_2.html
Question 4 – Outsourcing
Destination: Philippines
• Metro Manila - the nation’s capital-most popular outsourcing destination,
government spent money on their infrastructure first.
• The main advantages:
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Large scale technical training program
Improved telecom and office infrastructure
3rd largest English-speaking nation in the world
Well developed IT skill set
Costs of technology workers
Former American colony
• The main disadvantages:
– Low graduate turnout
– Not having a record of high quality
– Political instability –”Additionally, the Philippines has been plagued with serious longstanding economic and political unrest.” (Forbes)
– No disaster recovery facilities or multi-location facilities
– Issue of scaling up
http://www.news.cornell.edu/releases/Oct04/Bronf.outsourcing.rpt.lm.html, Oct 15, 2004
Question 5 - GE's Financial
Sector/Profitability/Outsourcing
• “The value coupled with the amount of assets held by GE Capital
contributed to more than 1/3 of the loss profits at the time of the
article. (bloggingstocks.com)
• GE’s financial-services business, GE Capital, made a profit of $383
million -- an 88% drop while its revenues fell 18%. Its CNBC cable
channel reported that it would cut 7,000 jobs and save $2 billion
(CNBC broadcast Jan. 23, 2009)
• GE is shrinking its GE Capital unit, which in 2007 accounted for
about 50% of its profit and sales. Next year GE plans to earn $9
billion from GE Capital, excluding a potential charge of $1 billion to
$1.4 billion to speed up cost cuts there.
• GE Capital - bad loans -- its provision is expected to rise from $7.2
billion in 2008 to $9 billion in 2009. (Bloomberg.com Dec. 2nd 2008)
Question 5 – Outsourcing of GE's
Financial Sector
• China:
– China recognizes that labor has brought them to world
dominance in growth of outsourcing opportunity but they
also know they are experiencing a rise in energy shortage
for their industrial growth and the income potential of
services is a low-overhead alternative to revenue
generation. “GE Capital Services said today that it had
been granted approval to open a representative office in
Beijing. The office will focus on developing a range of
financial services.” (The New York Times Oct. 19, 1993)
Question 6 – GE Consumer
Electronics
• GE has created and bettered the products we
use through new technologies for over 100
years (GE Consumer Electronics Website)
• Consumer Electronics provided by GE:
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Computer accessories and home electronics
Digital cameras
Generator systems
Holiday Lighting
Housewares
Telephones
Question 6 – GE Consumer
Electronics
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GE sells its consumer electronics through Thomsan S.A., a French company that
bought GE’s Consumer Electronics sector in 1987 since GE wanted to invest its
resources in other more profitable projects (Potts)
GE Consumer Electronics should outsource to India
– Why India?
• “The expertise of Indian designers in 3D modeling and plant engineering
in sectors like aerospace, automotive and industrial design has already
caught the attention of leading companies from both Europe and
America. “ (Now, India a hub for design outsourcing)
• Low cost, highly skilled workforce (Why Outsource to India)
• High Quality Services since India uses the latest software, technology, and
infrastructure to provide customers with high quality outsourcing services
(Why Outsource to India)
Question 7 – GE Healthcare
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Information about GE Healthcare (taken from GE Healthcare Website):
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What does GE Healthcare Do?
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Medical imaging, information technologies, medical diagnostics, patient monitoring systems,
performance improvement, drug discovery, and biopharmaceutical manufacturing technologies (GE
Healthcare Website)
What do GE Healthcare’s products do?
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Provide transformational medical technologies and services that are shaping a new age of patient
care (GE Healthcare Website)
What are GE Healthcare’s skills?
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Located in Chalfont St. Giles, United Kingdom
Is a $17 billion unit of General Electric Company
Enable medical professionals better diagnose and treat cancer, heart disease, neurological diseases,
and other conditions earlier (GE Healthcare Website)
What is GE Healthcare’s vision?
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“At GE Healthcare, we strive to see life more clearly. Our purpose is to help healthcare providers
predict, diagnose, inform and treat disease earlier so that every individual can live life to the fullest.
Our vision for the future is to enable a new "early health" model of care focused on earlier diagnosis,
pre-symptomatic disease detection and disease prevention.” (GE Healthcare Website)
Question 7 – GE Healthcare
• GE began outsourcing 10 years ago and thus already has experience in the
field (Carbone 1)
• GE Healthcare should outsource to India
• Why India?
• India is filled with inexpensive skilled labor
• Having people in India allows the company to sell its products there
(Singer 1)
• India plays a crucial role in clinical research program (GE Conducts Trials in
India 1)
• India would enable GE Healthcare to tap into the resources of the GE
global research facility located in Bangalore and the expertise of its global
medical diagnostics team located in India (GE Conducts Trials in India 2)
• “GE health care has chosen India for setting its first IDC as the country has rich
research and development capability, skilled medical professionals, and advanced
medical infrastructure.” (GE Conducts Trials in India 2)
Question 8 – Relavance
to this Course
• Outsourcing:
– Exporting labor and/or material to a foreign country to gain efficiency of
production. This is the focal issue of the case, specifically with GE utilizing
Mexico, China, and India for this purpose of gained efficiency.
• Technology:
– Combining advanced tools and processes to fill a need. GE assisted China in
high-technology industries by providing business for their embryonic hightech sector. (pg. 13)
• Infrastructure:
– The base support and use of IT equipment and methods to enhance
accuracy, speed, and relevance of data and information. It is an area of
outsourcing growth needed to support other avenues of outsourcing (pg.2)
• Diversification:
– Division of resources or material to build efficiency of effort as well as
reduction of risk. GE outsourced to meet various and diversified business
needs on a global platform. (pg. 13)
Question 9 - Conclusions
Outsourcing in America involved the transfer of manufacturing or service jobs
abroad, generally to attain lower costs for sales back to the U.S. The three primary outsourcing
markets include: Mexico, China, and India. The governments in all three countries created
favorable business environments in which companies could prosper by seizing sales growth or
cost-reduction opportunities not available in their home countries. Mexico’s maquiladora is a
labor-intensive assembly operation that imports inputs from a foreign country, processes these
inputs, and then ships them back to the country of origin. The implementation of NAFTA
further increased the number of companies outsourcing their jobs to Mexico. Like Mexico,
China’s Special Economic Areas (SEAs) offered tax advantages to companies setting up shop in
China. China’s SEAs attracted foreign investors since the labor wages were less costly than
Mexico and there were also less stipulations placed on foreign investors. After these two
markets were established, India’s conditions became ripe for foreign firms to focus on the
country’s manufacturing and intellectual markets. India offered companies, like General Electric
inexpensive skilled labor. GE has established itself in over 100 countries and is one of the major
firms outsourcing to these three popular destinations.
This case ties to the course because in order to outsource firms must utilize
Information Technology to connect country to country. Companies that outsource must
develop business infrastructures through intranets and corporate portals in order to
communicate with workers located all over the world.
Sources
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http://www.fda.gov/oc/opacom/hottopics/melamine.html
http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=56063
http://www.mondaq.com/article.asp?articleid=57594
http://www.outsource2india.com/why_india/why_india.asp
http://ezinearticles.com/?Outsourcing-Jobs-to-India&id=588135
http://www.epi.org/, December 10, 2003
http://www.epi.org/publications/entry/briefingpapers_bp147/, November 17, 2003
http://www.manufacturing-in-mexico.com/customers.htm
http://www.counterpunch.org/roberts04192005.html
http://www.xicom.biz/Services/Business-Process-Outsourcing-BPO/BPO-Research-Analysis.html
http://www.news.cornell.edu/releases/Oct04/Bronf.outsourcing.rpt.lm.html, Oct 15, 2004
http://www.forbes.com/2003/08/21/cx_ld_bestcountrieslide_2.html
http://www.embarqmail.com/news/read.php?ps=1018&rip_id=%3CD96GKI7O0%40news.ap.org%3E&_LT=HOME_LARSDCCI1_UNEWS
http://www.wikinvest.com/wiki/Outsourcing_to_India
Carbone, James. “Medical OEMS See Outsourcing as Lifesaver.” Purchasing. Com 15 November 2007:1.
GE Consumer Electronics Website. 2009. http://www.ge.com/products_services/consumer_electronics.html
“GE Healthcare to Conduct Clinical Trials in India.” Medindia.com. 29 June 2006: 1-2.
GE Healthcare Website. 2009. http://www.gehealthcare.com/usen/about/about.html
“Now, India a Hub for Design Outsourcing.” 24 July 2006. http://economictimes.indiatimes.com/articleshow/1798712.cms
Potts, Mark. “GE Sells Consumer Electronics Unit; Major French Company is Purchaser.” The Washington Post. 23 July 1987.
http://www.encyclopedia.com/doc/1P2-1334182.html
Singer, Stephen. “GE Chief Defends Outsourcing, Pension Benefits.”
SignOnSanDiego.com. 28 April 2004:1.
Vietor, Richard H.K. and Alexander Veytsman. “American Outsourcing.” Harvard Business School. 2 February 2007: 3-17.
“Why Outsource to India?” 2008. http://www.outsource2india.com/why_india/why_india.asp