International Business Relations Global Outsourcing Trends

1. International Business Relations Global Outsourcing Trends Bay Area CITD Seminar Series Tuesday, January 18th, 2005 Kemarra Inc. - Key Marketing Resources & AssociatesSan Francisco USA  Unlocking Your Market Potential: www.Kemarra.com

2. Globalization & Outsourcing • What started it? • What does it mean for the US? • What does it mean for the developing countries? • Mounting trade deficits • Productivity and unit labor costs • Country facts and figures • What next?

3. Globalization & Outsourcing • Cheaper & faster data and voice telecommunications • Easier global financial transactions • Cheaper hardware • Easy to use, standard software • Lack of staff in the US • Educated English speaking workforce abroad

4. Benefits vs Drawbacks for the US • Corporate benefits • Lower costs • greater efficiency without having to invest in people and technology • Increased focus on core competences • Increased corporate profits • Corporate drawbacks • Increased project management complexity • Some loss of immediate control • IP vulnerability • For the US • Increased corporate profits • Higher US unemployment • loss of industrial base • High trade deficit • Impact on interest rates? • Impact on currency exchange rates?

5. Benefits vs Drawbacks for Developing Countries • Benefits for developing countries • Cash generation • Increased employment & training • Infrastructure build-up • Accumulation of business experience • Drawbacks • Lock into low-wage economy • May become vulnerable to cheaper outsourcing

6. Reciprocal or one-way? • Reciprocal returns • OK if cash earned by countries providing outsourcing services returns to the US via purchase of US goods • One of the reasons for FTAs • One-way loss • China buys far less goods from the US • Complete outflow of US funds without cash return to the US

7. Reciprocal or one-way? • Proponents of NAFTA point out that exports from the United States to Mexico have risen 150% and exports to Canada are up 66%. • The Clinton administration estimated in the late 1990s that expanded trade in North America had created over 300,000 new U.S. jobs. • Detractors argue the trade deficit with NAFTA represents US jobs shipped abroad

8. U.S. monthly goods and services deficit http://www.bea.doc.gov/bea/newsrelarchive/2005/trad1104_fax.pdf

9. Trade Deficit • The US international trade deficit increased to $60.3 billion in November 2004 from $56.0 billion in October, as imports increased and exports decreased. (12 Jan 2005). • In September 2004 the imbalance with China grew to $15.5 billion, beating the previous high. • The goods deficit with Japan increased from $5.9 billion in October to $7.3 billion in November. Exports decreased $1.0 billion (primarily civilian aircraft) to $4.2 billion, while imports increased $0.4 billion (primarily passenger cars) to $11.5 billion. • The goods deficit with the European Union (25) increased from $9.3 billion in October to $10.5 billion in November. Exports decreased $0.8 billion (primarily pharmaceutical preparations, passenger cars, and fuel oil) to $14.6 billion, while imports increased $0.3 billion (primarily pharmaceutical preparations, crude oil, and medicinal equipment) to $25.0 billion. • The goods deficit with Canada increased from $5.7 billion in October to $7.3 billion in November. Exports decreased $1.6 billion (primarily natural gas and trucks, buses, and special purpose vehicles) to $15.4 billion, while imports were virtually unchanged at $22.7 billion.

10. Trade Deficit • Interest payments on US external debt add to burden • Further deficits reduce confidence in US assets • Flight away from US assets would weaken stock market and force interest rate hikes • But US assets would become cheaper for foreign investors http://www.census.gov/foreign-trade/www/http://www.iie.com/publications/papers/mann0899.htm http://www.cato.org/research/articles/reynolds-041203.html

11. Dollar still too high? • High dollar • Makes US goods more expensive abroad • US products therefore less competitive • Imports become cheaper • Dollar still high compared to 1995 level • Global financial crises around 1997 led to flight to $ • Strong US internal growth • Problems • Other countries like China still not on open exchange system – hold their currency artificially low. http://www.iie.com/publications/papers/mann0899.htm http://www.imf.org/external/pubs/ft/fandd/2000/03/mann.htm

12. US Dollar Global Exchange Rate http://www.federalreserve.gov/releases/H10/Summary/

13. Declining Dollar – Good or Bad? http://www.federalreserve.gov/releases/H10/Summary/

14. Labor Productivity • US workers are highly productive • Highly trained • Excellent general infrastructure • Highly automated • Extensive use of software tools • US workers also work longer hours than anybody else • These two factors explain the recent productivity gains in the US while employment levels did not rise Productivity and and unit labour cost comparisons http://www.ilo.org/public/english/employment/strat/publ/ep00-5.htm

15. Unit Labor Cost What’s best - you pay someone $1 an hour and they have to work 10 hours to create x, or you pay someone $10 an hour and it takes them 1 hour to create the same thing …?

16. Outsourcing Trends • US Companies forced to outsource to stay competitive against worldwide competition • Current service providers move higher up food chain • India has very sophisticated BP management • Now doing design work • Microsoft, SUN, IBM, investing in infrastructure • Labor costs rising • Countries such as China and India are producing high number of IT graduates • India: 75,000 • China: 50,000 • Former East Bloc countries now entering EU • Russian generates good math graduates • IP protection enforceability • Life Sciences also a good sector for outsourcing

17. Some outsourcing profiles The rapidly-expanding Shanghai Jinqiao High-Tech Park is one of the fastest-growing sites for foreign investment in China.

18. Some outsourcing profiles

19. What the US needs to do … • US needs to continue the pace of innovation • Become design, marketing and sales force for the world? • Government and private corporations needs to educate workforce continually • Must increase number of technical graduates • US companies must invest internally in the US • Government needs to encourage US employment – tax breaks - American Jobs Creation Act of 2004 • Reduce trade deficit, exchange rate? • Should not impose protectionist trade barriers • Should not impose penalties on US companies outsourcing