American Outsourcing

1. American Outsourcing Jason Harris Brandon Eudy Joe Elko Tim Chenier

2. Question 1 Case Introduction • Objective look at the increasing trends of transferring manufacturing or service jobs abroad and the effects they have on the United States, Mexico, China and India • Outsourcing – subcontracting a process, such as product design or manufacturing, to a third-party. • Outsourcing Destinations: • Mexico • India • China

3. Question 2 Jobs Outsourced to Mexico • Maquiladora – labor-intensive assembly operation that imports inputs from a foreign country, processes these inputs and then ships them back to the country of origin. • Mostly manufacturing • First-generation – labor-intensive with limited technology • Third generation – businesses that performed research, product-design, & development • Electrical & electronics industry • Automotive & metal mechanics industry • Textile, medical, and chemical plants • Administrative employees – 7% • Technicians – 12% • Production workers – 81%

4. Question 2 Disadvantages for Mexico • Employee benefits • Higher wages • Transportation • Food subsidies • Affordable housing

5. Question 2 Jobs Outsourced to India • Intellectual Capital – readily available and inexpensive skilled labor • R&D hub for a wide range of industries • Software engineers • Call centers

6. Question 2 Why India Is A Good Location • Inexpensive skilled labor • Readily available intellectual capital • All sectors privatized

7. Question 2 Jobs Outsourced to China • Special Economic Areas – created to attract foreign investors, create jobs, and generate exports. • Manufacturing jobs

8. Question 2 Problems With China • Milk • http://news.bbc.co.uk/2/hi/asia-pacific/7720404.stm • Pet Food • http://www.newscientist.com/article/mg19426023.600 • Toys • http://en.wikipedia.org/wiki/2007_Chinese_export_recalls#Toys • Heparin • http://www.nytimes.com/2008/03/06/health/06heparin.html?_r=1

9. Question 3 Companies That Outsource GE’s World Presence • Mexico • Production of capacitors, electric motors, control devices and lighting products with significant market share in real estate and financing. • China • High technology industries, aircraft engine maintenance facilities, training, and component manufacturing. • India • Human capital emphasis resulting in the successful sourcing of products, services, and intellectual talent from India’s 100 million well educated English speaking citizen

10. Question 3 Companies That Outsource (cont) GE’s World Presence • China offers arguably the most cost effective labor rates and the purchasing power of a 1.3 billion population that is unrivaled in the world. • India currently offers intellectual talent from a pool of 100,000 million plus English speaking citizens that is also unmatched in today’s market. • While there are advantages of outsourcing to Mexico, there are viable alternatives to the services that Mexico provides.

11. Question 4 Follow Up Research The Philippine Offshoring and Outsourcing Industry • Quality Human Capital • Abundant labor force of 32 million • English proficiency • Cultural adaptability • Strong customer service orientation • Large pool of accounting and business graduates • Highly trainable • Cost effective • High level of commitment and loyalty • World Class Infrastructure • Telecommunications • $10B high-bandwidth fiber backbone and digital network • Deregulated telecommunications industry • Power • Reliable electricity with excess capacity over current demand • Real Estate • Low rental rates with favorable terms • Dedicated IT parks in urban areas

12. Question 4 Follow Up Research The Philippine Offshoring and Outsourcing Industry Segment Breakdown Cost Effective Labor http://www.bpap.org/bpap/index.asp http://www.dti.gov.ph/dti/index.php?p=134 http://en.wikipedia.org/wiki/Business_process_outsourcing_in_the_Philippines http://www.mckinsey.com/mgi/publications/Philippines_offshoring.asp Industry Growth

13. Question 5 Follow Up Research • GE’s Core Finance Sectors include • Capital Solutions • Corporate Financial Services • Healthcare Financial Services • Real Estate • http://gecommercialfinance.gecapsol.com/cms/servlet/cmsview/ComFin_Corp/prod/en/main/index.html • Why Focus Healthcare Financial Services in China? • Population of USA 303,824,640 • https://www.cia.gov/library/publications/the-world-factbook/print/us.html • Population of China 1,330,044,544 • Number of hospitals in the USA 5,708 • http://www.aha.org/aha/resource-center/Statistics-and-Studies/fast-facts.html • Number of hospitals in China 12,599 • 1 Hospital for every 53,000 people in USA • 1 Hospital for every 106,000 in China

14. Question 5 Follow Up Research (cont.) • Why Focus Healthcare Financial Services in China? (Cont.) • China is changing its Healthcare approach • China considering a revamp of Healthcare system • Moving from Government run to private • China imports of medical equipment at 2Billion annually • http://www.chinabusinessreview.com/public/0411/chindex.html • China has been open about healthcare problems and the need to update it. • Inefficient • Corruption • Lack of quality standards • Poor service • Just not enough hospitals • And China is ready for change • Announced that it intended to spend $123 billion by 2011 to establish universal health care for the country’s 1.3 billion people • http://www.nytimes.com/2009/01/22/world/asia/22beijing.html

15. Question 6 Follow Up Research • GE consumer electronics divisions are: • Computer Accessories & Home Electronics • Digital Cameras • Generator Systems • Holiday Lighting • Telephones • http://www.ge.com/products_services/consumer_electronics.html • Best Destination: China • China’s outsourcing market is growing at 30% annually • Substantial market opportunities to sell in China • Good Universities with strong training producing intelligent students • Better Infrastructure than India • 5 Times cheaper than India • English skill swiftly progressing • Much lower labor cost over US • http://www.randomwire.com/2008/01/01/china-101-why-outsource-to-china/ • By 2025 every Chinese under 25 will speak English http://blogcritics.org/archives/2004/07/23/200238.php

16. Question 6 Follow Up Research (cont.) • Other Reasons to Look to China: • Population of China 1,330,044,544 • Most lack American basics of home electronics • Becoming more open to Western culture • New laws allowing foreign ownership • https://www.cia.gov/library/publications/the-world-factbook/print/us.html • To capitalize on the opening market in China: • Focus on Computer Accessories & Home Electronics division • Why establish GE’s Computer Accessories & Home Electronics in China? • 1.3 Billion people becoming exposed to western culture • As the people of China gain wealth Home Electronics market will explode. • GE needs to be positioned in China to take advantage of this market

17. Question 7 Follow Up Research • China would be the best outsourcing choice for GE Healthcare. GE Healthcare develops and manufactures a wide variety of health related technology, products and services. It achieved $16.9 billion in revenues in 2007, with R&D expenditures being ~$1 billion. (http://www.gehealthcare.com/usen/about/ge_factsheet.html) This indicates that efforts towards outsourcing should support lowering general labor costs and not R&D costs. GE Healthcare needs a large labor pool to assemble its medical products, work in pharmaceutical factories, and support its IT business. China has the labor pool to provide inexpensive labor for large plants and IT service call centers.

18. Question 7 Follow Up Research (cont.) • $0.84 – cost per hour, compared to $2.21 cost per hour in Mexico. (Exhibit 8) • Labor is 33% cheaper than India (Exhibit 17) • China had 9.5% GDP growth in 2004, compared to Mexico, 4.4%, and India, 6.8%. (Exhibit 18) • Highest FDI(Foreign Direct Investment) Confidence Index score – 2.03 (Exhibit 19a) • China had more attractive FDI attributes than India in 13 out of 20 categories. (Exhibit 19b) • A large amount of China’s citizens are moving from rural areas to cities, estimated 12 million every year by 2050. (GE Aligns Its Development to that of China, ChinaDaily.com.cn, 10/30/2007) • http://www.ge.com/ar2007/pdf/ge_ar2007_full_book.pdf

19. Question 8 Relation To The Course • Globalization – IT call centers, programming, R&D, etc. Technology now allows the integration of cultures. This creates an environment where work can be performed and accepted anywhere. • New Economy – Physical borders/barriers are no longer an issue. Items can be sold electronically and customer service can be administered from anywhere. • Business-to-Business – Buying and selling outsourced products throughout the supply chain before a product reaches the end user. A business (A) has the ability to outsource production and sell at a price lower than before to another business (B) downstream in the supply chain. This potentially increases profits and lowers costs for both A and B. • Business-to-Consumer – Outsourcing affects the end user. Outsourcing allows for goods to be sold for less, increasing the well-being of the customer. Outsourcing all changes interactions with end users (ie. Customer service centers in India) • Electronic Privacy – Outsourcing forces sensitive information to be transmitted over the internet. This creates an opportunity for personal information to be pirated.

20. Question 9 Conclusions • The increase in technology has provided the backbone for outsourcing to occur on a level never before achieved. Through improved communication channels, everyone in the world is potentially only a phone call or email away. Through improved transportation infrastructure, raw materials and finished goods have the ability to be manufactured and distributed anywhere on the planet. This development has sparked strong growth within poor nations, such as Mexico, India, and China, but also pose a severe threat to the U.S. job market.