'Offshoring' redux
Source Eubulides
Date 05/03/24/21:59

[Far Eastern Economic Review]
The Next Wave Of Offshoring
March 2005

By Robyn Meredith

As Sumer Shankardass is driven through Bombay, barefoot beggars tap on his
car windows at stoplights, asking for money, but the 36-year-old Indian
entrepreneur ignores them. He is concentrating. A press release issued in
London has caused his cell phone to beep half a world away. He glances at
the text message on his phone and breaks into a victorious grin. He leans
over to tell the others in the car the good news: Norwich Union, the large
British insurance company, is laying off 900 people in the United Kingdom.

Mr. Shankardass knows these jobs-and 3,000 others which were subsequently
earmarked by Norwich for offshoring-are headed for India. That can only mean
good news for wns Global Services, the Indian outsourcing company where he
works as a senior vice president. In 2004, his was one of three India-based
companies awarded outsourcing contracts by Norwich's parent company, Aviva.

On the other side of Asia, in a new Shanghai technology park that is home to
scores of Chinese and foreign tech companies, Jun Qian, 29, is tapping away
at his keyboard, seemingly oblivious to the China where his parents grew
up-a place where an education wasn't allowed, where prosperity could get you
killed. Told that American managers like him earn 10 times as much, he
shrugs. Even if he were given the chance to move to America, he says he'd
stay in China. "I'm focusing on the future," he says. "We have a lot more
opportunities here."

Around the world, a quiet revolution is taking place. It wasn't planned, it
isn't political. But it is steadily marching, some might say leaping along,
and-even if we wanted to-it can't be stopped. The revolution's name is
offshoring, and while the concept is not new-manufacturing jobs have been
moved to countries such as China and Mexico for years-what is different of
late is the huge number of white-collar jobs that are being relocated
abroad, and at a tempo and scale never witnessed before.

And it's just starting. Over the next decade, offshoring will knock millions
of white-collar Americans and Europeans out of work, blowing a hole in the
middle class from Los Angeles to London, from Boston to Berlin, from Toledo
to Tokyo, from Austin to Amsterdam.

"I don't think most people appreciate the magnitude of the change in the
world's workforce," says Intel's chief executive, Craig Barrett. "Over the
next 10 years you are going to see major, major dislocation," he warns. He
should know. Intel is hiring thousands of new workers overseas.

Big and small companies alike in industry after industry have done the math
and are rushing to move even their most specialized jobs to Asia to cut
wages by between half and four-fifths. "We're now outsourcing investment
banking to Mumbai," says Stephen Roach, chief economist at Morgan Stanley.
"I don't know why we would ever hire another software programmer in New York

In earlier years, offshoring, or the substitution of foreign for domestic
labor, meant that an American dialing a toll-free number caused a phone to
ring in India, or a German sending an e-mail to Microsoft got a reply from
China. Now it means that sophisticated computer programs, once written in
Silicon Valley, are coded in Bangalore. Medical X-rays, previously read by
doctors in Frankfurt, are now being analyzed by medics in New Delhi. Bank
clerks are crunching numbers in India and sending them electronically to New
York. Material for animated movies is created now in Hyderabad, not

This is the next wave of globalization, and it is shifting work to
dollar-a-day factory workers and dollar-an-hour white collar workers in
Asia. Alarm bells should be ringing for Americans and, even louder for
Europeans: Fat, rich and spoiled Westerners have for several generations
been shielded from workplace competition with the world's most populous
nations. As both China and India open to the world for business, and
advanced communications technology becoming more and more widespread, some
one billion workers have suddenly been added to the world's labor pool. With
an increase in the number of Asians qualified for white-collar jobs, people
in the industrialized nations are suddenly discovering their high Western
wages are no longer competitive.

There is no single, authoritative source on the number of U.S. jobs lost to
offshoring. In recent years, about 100,000 software-writing jobs have moved
from the U.S. to India alone, according to the Economic Policy Institute.
Those jobs would have paid a combined $136 billion a year in wages. By the
end of 2005, one of every 10 jobs at U.S. information technology vendors and
service providers will have moved offshore, according to data from the
Bureau of Labor Statistics, Gartner and Morgan Stanley. Another 400,000
back-office jobs have already moved offshore and 3.3 million should move by
2015, according to Forrester Research.

Vivek Paul, vice chairman of Indian IT giant Wipro, figures that over the
next five years, 7% of U.S. white-collar jobs could be moved overseas, and a
whopping 60% of software jobs. "There's very little economic rationale for
having those jobs in the U.S.," he says.

Here's the extent of the good news for middle-class America: If history is
any guide, just over a third of those who are laid off because of offshoring
will quickly find a new job and be no worse off, according to consultants
McKinsey & Co. Just over half will have to take pay cuts of at least 15%. A
quarter of those laid off will take pay cuts of at least 30%.

European workers are even in worse trouble: those who lose jobs there are
only half as likely as Americans to find new jobs within six months,
according to McKinsey.

European companies have traditionally lagged behind their U.S. counterparts
in offshoring, but there is new evidence to show that this is changing.
According to a survey of 500 companies conducted last year by the United
Nations Conference on Trade and Development and consultants Roland Berger,
four out of 10 European firms have begun to relocate service operations
offshore, with 40% of all projects going to Asia, especially India.

Yet European companies seem to be all too aware of the obstacles they face
in fully embracing offshoring, chief among them tougher labor laws makes
bidding adieu to unwanted staffers more difficult than is the case in the
U.S. Add to that the need to serve customers in languages other than
English, and the complexities of offshoring for European firms become
apparent. Yet, they will have to overcome these difficulties, or lose out to
their leaner U.S. competitors that have already shed droves of jobs at home.

For Chicago techie David Huber, it is hard to be philosophical about how
Asia's rise is changing the currents of the global economy. To him and
others whose jobs can easily be moved abroad, the changes are all too
personal. His last full-time computer-programming job paid $82 an hour-more
than $170,000 a year. After months out of work, he accepted a temporary job
paying $58 an hour. It lasted a few months. He finds himself worth less to
employers, and that makes him feel worthless. He has watched companies with
jobs to fill offer lowball salaries, then move the jobs to India when
Americans won't work for wages that are dramatically lower than they are
used to. "No job is safe," Mr. Huber says. To him, offshoring amounts to
"dismantling the U.S. middle-class workforce."

Cruel to Westerners, offshoring is cause for celebration in Asia. This
migration of jobs is one of globalization's greatest achievements-a
fast-rising living standard in poor countries that is propelling
better-educated Asian workers into an expanding middle class.

J.P. Morgan's new back office-a place where hotshot MBAs crunch numbers on
stocks traded in New York, London and Tokyo-is nowhere near those legendary
banking centers. Instead, it is in Bombay, India, across the street from a
desperate slum.

In glittering London and New York, those who win coveted first-year
investment banking jobs earn $150,000 a year and buy Porsches with their
bonuses. Soon, there will be far fewer of them: Last year J.P. Morgan began
hiring in Bombay at just $25,000 a year-not enough for a Toyota. Already
there are 2,000 bankers and researchers in India, and within a few years,
the company's plans call for up to 8,000 in India-half in Bombay and half in
a new office planned for Bangalore.

In Shanghai and Kuala Lumpur, in Delhi and Bombay, white-collar denizens of
the offshoring boom now gather at hip bars and pricey restaurants. It is as
if the exuberance of Silicon Valley has moved to Asia. They spend their new
paychecks on trendy Western clothes, trips abroad and new cars. Every month,
two million more Indians and five million more Chinese carry cell phones as
their countries grow richer. Young college graduates job-hop for ever-higher
pay. The future has never looked brighter. While Chinese computer
programmers splurge to buy the latest consumer goods, many will live with
their parents until they are in their 30s, saving three-quarters of their
$5,000-a-year salaries to buy a home or a car. That is not a sacrifice for
them. It is an improvement.

"It is not the best feeling in the world to know that I'm taking away
someone's job," says Sheelan Chawathe, who answers phone calls from overseas
customers of Delta Air Lines from a Bombay office.

How did the vast movement of white-collar jobs come about? The Internet and
other tech wizardry invented in the U.S. inadvertently laid the groundwork
for a great leap forward in globalization.

The boom in Silicon Valley produced not just dazzling new technological
capabilities, but also extravagant parties, stratospheric California rents
and truly exorbitant wages for computer programmers like David Huber, who
were suddenly in short supply. American tech companies began using the H1-B
Visa program to bring programmers from India to Silicon Valley to help
during the crunch.

Even with the temporary immigrant workers, American and European companies
faced a drastic shortage of techies who could write boring computer code to
fix y2k glitches. In desperation, they began the first large-scale
experiments with offshoring: when they moved overflowing work to India, and
found capable programmers on the cheap. It worked. Then, after Silicon
Valley's new technology enabled companies to cheaply route phone calls over
the Internet, companies tried moving $18,000-a-year jobs answering customer
service calls to India. That worked too. So companies began asking what
other white-collar work could move to India, and what other countries with
cheap labor could be home to more jobs sent offshore.

Meanwhile, the dot-com bust forced many tech companies to move more work
overseas to save money if they wanted to survive. Now there is an exodus:
Tens of thousands of Silicon Valley's $65,000-a-year computer-programming
jobs are on the move, and well-paid research and development work is quickly
being shipped to low-cost China and India. Even accounting and law firms are
sending tax and lawsuit preparation work offshore.

Yet offshoring doesn't have to be all doom and gloom for Western countries.
Economists say increased trade-globalization-however painful for those who
lose their jobs because of it, always brings more wealth to the world as a
whole. Offshoring is already a net gain for the U.S. and for the country
where the jobs land. Every dollar of spending that U.S. companies transfer
to India creates $1.46 in new wealth, according to McKinsey research. India
keeps 33 cents of that gain, while the U.S. keeps $1.13 for every dollar
spent on offshoring.

This means consumers in the West are big winners, too. Despite the pain felt
by white-collar workers whose jobs are moved offshore, the jobs transfer
will bring lower prices to the shores of the industrialized nations. Just as
a flood of cheap factory goods appeared at Wal-Marts, Woolworths and Japan's
100-yen stores after factories moved to Mexico and China, costs are dropping
for some service-related work.

Take computers. The movement of IT hardware manufacturing offshore caused
tech hardware prices to fall between 10% and 30% faster from 1995 to 2002
than they otherwise would have, according to the Institute for International
Economics. Hardware and software prices will continue to drop as more
computers are built in China and more software code written in India,
according to the institute.

Moving jobs in other fields will cause similar price drops. Americans may
see a slowdown in the increase in medical costs as the vast, inefficient
processing of insurance claims is moved offshore.

China and India aren't the only ones trying to get in on the offshoring
action. Call it revenge of the colonies, but any developing country with
lots of English speakers and good Internet links is now a prime jobs magnet.
Malaysia razed a jungle full of palm oil trees to build a high-tech
industrial park to woo companies. The search for cheap office workers has
led HSBC, Nokia, NTT, Shell, Cisco, Ericsson, Fujitsu, Cable & Wireless and
more than 250 other foreign companies there. Philippines President Gloria
Macapagal Arroyo has traveled to New York and London to encourage companies
to move call center jobs her country. With hourly pay rates in Asia
averaging at $1, it's easy to see the region's appeal.

However, China and India are particularly well positioned to attract foreign
companies. Together, they produce four million college graduates a year,
twice as many graduates as the U.S. and Europe combined. Whereas a decade
ago, only a handful of China's top universities offered computer science
degrees, with students trained in obsolete techniques, today executives from
Microsoft lecture at Chinese universities-to ensure the company will have a
qualified pool of techies to choose from when it hires. Gaining entry to one
of India's distinguished Indian Institutes of Technology is said to be 10
times more difficult than getting into Harvard.

It isn't just computer jobs that are moving to Asia. Many back-office jobs
at banks, telecom companies and most other big companies are on the move. In
one of the many new Shanghai skyscrapers, a chart runs the length of one
wall in an HSBC office. There, a dozen people plan how the bank will go
about moving hundreds of jobs to Shanghai. Starting with jobs moved from
Hong Kong and Singapore, customer-support jobs are tracked: 10 jobs will
move one month, 23 the next, and so on. Layoff tributaries scattered around
the world are converging into a river of new jobs in Shanghai.

When factory jobs began moving to low-wage countries like Mexico, Poland and
China, many hourly workers responded by making sure their children went to
college and moved into supposedly safe service-sector jobs. Today, many of
those very workers may need to find something else to do as they watch their
own jobs move offshore, just as their parents' jobs migrated a generation
before. No one knows whether this time, the U.S. and Europe will be able to
create new, higher-skilled jobs fast enough to replace jobs sent offshore,
or whether to fear a growing number of long-term unemployed Westerners.

It is hard to argue with the statistics that show the world will get richer
as a result of the increased trade. But averages don't tell the whole story,
and statistics care nothing for who wins and who loses. The millions of
Americans and Europeans thrown out of work by offshoring won't be cheering.
They will be forced to upgrade their skills or to accept lower salaries. The
only good news for those who lose their jobs will be that prices will likely
continue to fall, making it easier to keep their standards of living from
dropping as much as their paychecks.

Back in Chicago, things had begun to look up for techie David Huber. After
more than a year out of work, he called friends to announce, happily, "I
finally got a job." It was a good one, one that paid more than $100,000
counting a bonus. The new salary still amounted to a 15% pay cut from his
last permanent job and a 41% cut from his salary during the tech boom.

However, that job lasted only six months, then his company downsized. That
was six months ago, and the phone company has shut off his long-distance
service until he pays up. But he's not giving up: "I'm waiting to hear back
on about six or seven opportunities," says Mr. Huber, who by now is used to
looking for work.

Plenty of Americans, and even more Europeans, are likely to have grueling
experiences like Mr. Huber's in the coming decade.

Ms. Meredith is a correspondent for Forbes magazine based in Hong Kong.

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