Outsource and die?

Hardly a week seems to go by without some former stalwart of the British or US manufacturing industry moving its manufacture somewhere cheaper.

The electronics industry has been doing this longer than many others – the contract manufacturing industry has been around for a good few years now.

Now though we're even seeing established outsourcing bases lose out to upstarts. For example, Hitachi announced last month that it is moving disk drive manufacture from Mexico to China, the Philippines and Thailand.

I've been a sceptic of outsourcing and off-shoring for a good while, but just recently I got an insight into how even smart execs are forced by their investors and accountants to do this kind of thing from Mark Canepa, the CEO of Extreme Networks. As he said, "Nobody makes things any more, we just specify and design."

He added that he'd heard from a colleague about manufacturing costs recently: "Labour is $30 in Germany, $20 in the US, $3 in Mexico, 80 cents in China, and it'll probably be 50 cents in Vietnam when that comes on-line."

What about shipping cost - doesn't that make it cheaper to manufacture nearer your customers? Well, yes - but as he pointed out, "Less than half our business comes from the US, so you've got to ship it anywhere."

On the face of it, that's an entirely reasonable attitude to take, especially in a business environment where greedy shareholders can sue a company's board for not maximising their (short-term) return.

However, a few days later I happened across a reminder that I'm not the only sceptic here, in the form of a short article from researchers at Warwick University's Business School.

The researchers point out that while it took Toyota and Sony 30-35 years to move from a cheap labour advantage to become innovators, it took Samsung and Acer 20-25 years, and Indian firms such as Wipro, TCS and Infosys just 15 years.

They add. "What we are also finding is that many firms are too focused on short-term gains and are failing to fully comprehend the longer term competitive threats from these emerging markets.

"In fact, in the case of China we find that some firms are unintentionally 'breeding' their future competitors. Once valuable brands, key technologies, effective management practices, or customer connections 'leak' out, often via local partnerships and joint ventures, what distinctive competitive advantages remain? Where will western firms move to in response to the Indian and Chinese challenge?"

It's a very good question, and one that much of the IT industry – US-headquartered and largely run by short-termist accountants – looks poorly placed to answer.

This story, "Outsource and die?" was originally published by Techworld.com.


Copyright © 2007 IDG Communications, Inc.

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