Offshoring on the rise

By Gérard Bérubé

In the 1960s, the pressure came from Japan. Some 30 years later, it was Mexico's turn. Today, it is emanating from China and India. The issue? Offshore outsourcing or "offshoring" — the much-criticized practice of shifting jobs to emerging economies. The move to offshoring stems from a growing desire to liberalize the economy. The question is whether things have gone too far.

As we explained in March, greater liberalization has never precluded upsurges of protectionism. Now, however, the increasing number of voices raised in favour of protectionism may be indicative of a sudden turn of the pendulum. The impact of offshoring can be seen in companies such as Toyota, which nudged out Ford to become the world's second-largest automobile manufacturer last year; and Wal-Mart, already the fifth-largest importer of Chinese goods in the world; and countries such as India, whose ever-increasing popularity as a technology service provider is threatening 14 million American jobs. In fact, it is estimated the US lost nearly three million manufacturing jobs in the past four years to countries where labour costs are cheap. That's why the spillover into the service industries is leading some observers to fear the worst.

Since the trend is said to be irreversible, globalization ad-vocates are suggesting industrialized countries concentrate on value-added jobs. However, others fear offshoring, which involves high transition costs, will encourage political leaders to again put up trade barriers to curb this shift.

But back to Wal-Mart. The world's largest company in sales, it calls the shots in the retail trade. Its focus on low prices and reliance on products from China are forcing competitors and suppliers to follow suit or become niche players specializing in up-market goods.

The trend isn't confined to the retail market, nor to the US. According to a study published this year by Mercer Management, larger European firms have made transferring manufacturing jobs a priority. (Nortel is a good example of this practice on this side of the Atlantic. Even after refocusing on its core activities, it decided to outsource the rest of its manufacturing operations.)

By 2005, European companies intend to double their supplies from countries where costs are low, particularly China. A survey of purchasing managers from 50 major European groups revealed while 15% currently do business with "low-cost" countries, 42% will be doing so by 2005. It seems we can expect a tidal wave of offshoring that will not be limited to soft sectors such as textiles, which have taken full advantage of offshoring options and are now producing most of their goods in Asia. This time it will sweep over most manufactured consumer goods — every thing, in fact, that can be assembled.

After shaking up the manufacturing sector, offshore outsourcing has spilled over into the service industries. India, for example, has become the "world's office" in less than 10 years. While it has quickly de-veloped into the number one source of IT subcontractors worldwide, India initially specialized in repetitive tasks like data entry and call centre services. But things have changed; it has now taken over value-added services and R&D. Each year, India produces 250,000 highly skilled English-speaking graduates and just about 300,000 engineers, whose en- try-level salaries are five to 10 times lower than those of their Western counterparts.

In January, TECHNO-Com pétences, a firm specializing in the development of labour and employment in IT and communications, held a conference on the migration of IT jobs to emerging economies. Industry experts pointed out that 40% of North American corporations have opted for offshore outsourcing, which can generate savings of 30% to 50%. Jobs are being lost to countries that have much to offer, including an abundant, skilled, bilingual and cheap workforce. Thanks to the Internet, Indian workers are only a mouse click away from their clients.

Few solutions have been offered to deal with this trend. It's been suggested we continue gathering strategic intelligence while promoting specialization in high value-added sectors that are less susceptible to offshoring. But that's about it!

It should come as no surprise if protectionism makes a comeback, fuelled by growing disillusionment with globalization.  A majority of respondents to a Conference Board survey were negative about the impact of globalization over the past 10 years, and respondents in both developed and developing countries were pessimistic about the future.

Gérard Bérubé is editor of the Économie et finance section of Le Devoir in Montreal