Offshoring: The Consumer Wins ReceivedSPF: Pbutt receiver=nym.alias.net clientip=66.11.179.38 Comments: This message did not

Two perspectives on offshore outsourcing by Demir Barlas, Line56

Thursday, March 16, 2006

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Editor If you're following tech news, you may have noted that Democrats in Michigan intend to introduce an anti-offshore outsourcing bill at the state level. That legislation is going to be the impetus of continued discussions about offshore, in Michigan and elsewhere. There are a couple of ways to think about the issue. The article is going to incorporate a selection from a related paper by Daniel T. Griswold and Dale Buss of the Mackinac Center for Public Policy, followed by my reactions.

Griswold and Buss

Two Michigan-based companies well illustrate the rich and often complicated dynamics involved in offshoring jobs and in evaluating the results of the practice. Delphi Corp., based in Troy, Michigan, is one of the world's largest suppliers of high-tech components to automotive and other industries. Covansys Corp., based in Farmington Hills, Michigan, is a provider of technology services that has one of the largest payrolls of offshore employees of any American company in its industry.

Formerly the parts-making subsidiary of General Motors Corp., Delphi became an independent company in 1999 and, since then, has pursued a tough-minded strategy not only for remaining one of the world's most technically advanced automotive suppliers but also for penetrating other industries with its electronic components and systems. As a result, Delphi has been successful in increasing the non-GM parts of its business to about half of its expected $30 billion in revenues this year, compared with just 20% of its revenues at the time of the spin-off. This advance has included huge new portions of business from rival auto makers in the United States as well as around the globe. But Delphi's diversification push also has gained customers in a wide variety of other technology-intensive industries, including other transportation sectors (design and manufacture of the complex stabilization devices in Segway scooters), consumer electronics (development and production of both leading brands of satellite radios), and medical devices (manufacture of state-of-the-art electronic wheelchairs and other products).

The success that Delphi has achieved so far on its own has required vast adjustments throughout the company. Delphi has eliminated thousands of high-wage manufacturing jobs in the United States that were no longer tenable in the face of much cheaper foreign compebreastion; and with a desire to hang on to as many such jobs as it could, the United Auto Workers union just this year agreed to a significantly lower wage structure for any new production workers hired by Delphi, a historic concession by the union. Delphi also has spread its white-collar work all over the world, establishing and expanding technical centers in China, Korea, India and Mexico, close to its global customers. In fact, more than 70% of Delphi's workforce now is employed outside North America.

But unlike the trend in Delphi's manufacturing jobs, the offshoring of technical work actually has served to benefit the company's IT-related workforce in America. Since 2000, Delphi actually has expanded the ranks of its scientists and engineers around the world to more than 16,000, compared with just under 15,000 as recently as 2000. Many of these new hires are software engineers in Asia and in Mexico who, indeed, are handling coding, maintenance and other relatively mundane tasks that previously were performed at Delphi locations in the United States. But by helping Delphi control its costs while yielding work of quality equal to their American predecessors, these offshore specialists buttress the company overall. Perhaps even more important to Delphi employees in America is that, even with extensive off-shoring, Delphi has not dislocated any of its American software engineers or other IT employees. Most of these highly educated and experienced workers actually move on and up to other, higher-value-added functions that still can be performed only in North America. Such functions include mathematics-based modeling that allows Delphi to reduce the use of expensive laboratory equipment for testing.

"If I can take advantage of some of these lower-cost countries to do things I can't do here in the U.S., we grow the business more easily," says Tony Kayyod, who helps make sourcing decisions as the director of Delphi's global engineering and manufacturing "footprint." "I can either do two programs completely engineered in the United States, or ten in the U.S. -- with some of the engineering done in low-cost areas elsewhere."

Thus, to no small degree as a result of its offshoring strategy, Delphi, its shareholders, and its thousands of employees in Michigan are prospering. Indeed, Delphi has become a formidable redoubt of technological superiority in the heart of the old industrial Midwest.

The second firm, Covansys, handles information-technology work that is outsourced to it by local clients including auto makers and state government who simply want their data-crunching, telephone technical support and other needs handled capably and as inexpensively as possible to help them cope with cost pressures and compebreastion. While the recent recession years battered Covansys's finances (its revenues have remained flat to date in 2004), the company announced a transaction in April that bodes well for future growth. It landed a five-year contract with Fidelity Information Services, a unit of the giant mutual-fund concern, to become the primary provider of outsourced IT services to Fidelity. The arrangement is expected to increase Covansys's revenues by more than five percent in 2005. Fidelity also purchased a 29% equity stake in Covansys.

The company employs about 375 people at its head-quarters in Michigan as well as more than 1,800 additional staffers at 16 other offices scattered across North America. Covansys also employs more than 2,000 IT workers in Bangalore and its two other offices in India, where they perform most of the same digital functions as their U.S. counterparts, with the same quality of results at a fraction of the cost. Covansys clients continue to specify that the company conduct more of its work in India. Two examples are PeopleSoft Inc., which recently directed Covansys to expand PeopleSoft's development center in India, and BearingPoint, the accounting and consulting firm that contracted Covansys to help it open and operate BearingPoint's first development center in India. About 26% of Covansys's revenues in the first quarter of 2004 came from India compared with 15% a year earlier.

"This is a play we've been through before," says Martin Clague, former president and CEO of Covansys. "It's just in a different sector. We've been through it with manufacturing, with all of the gnashing of teeth and short-term protectionism here that greeted the rise of Japan Inc. But at the end of the day, economics win. And even in Detroit, many people stopped buying American cars in favor of imports. Then at the end of the day, Detroit said, 'We have to make cars that are as good as if not better than Japanese cars.' But many of the parts for those cars are made and outsourced overseas. And at the end of the day, the consumer has won."

Editor

"The consumer has won." You can find support for this thesis by looking in any Wal-Mart. Prices have come down remarkably over the past several years. There are powerful computers available for what high-end telephones once cost. Complicated electronic devices are on sale for a handful of dollars.

If you looked at prices alone, you'd see a pretty rosy scenario.

But my problem with a lot of the commentary on offshore outsourcing, particularly arguments for its role in a booming economy, is that a lot of what I hear doesn't synchronize with my personal experience.

Speaking of Wal-Mart, you might remember the incident last Christmas season when one of the stores was mobbed by shoppers hunting for cheap laptops. I saw a photograph of people who were actually running for these laptops, crushing each other in the process. Then there was the other Wal-Mart in Illinois to which 11,000 people applied for jobs.

In this section, then, I'm not going to concern myself with statistics or economics. I'll tell a simpler and more personal story instead, and hope that it contributes something to the larger debate.

My perspective has always been that of an immigrant to the United States. I came to this country when I was nine, and my family and I were below the poverty line for several years. We settled in Denver in the early 1980s. Looking back, I remember a clean and prosperous city. Things were affordable. Our rent was $300 a month. We knew people who had been able to afford cars within months of arriving in the U.S. Jobs seemed to be plentiful. The school system was excellent. I'm proud of the education I received from the Denver Public Schools (DPS), an education that has since enabled me to attend Cornell University and UCLA.

It was only toward the end of the 1990s that I started noticing high-level changes in the fabric of the country. Almost overnight, Los Angeles (where I then lived) seemed to devolve into a kind of Karachi, with the dot-com crash, bus strikes, grocery strikes, rolling blackouts, and 9-11 sucking more and more out of the city. The school system collapsed or had collapsed some time ago. One of the major high schools was de-accredited last year, and the rest (including Beverly Hills High School, on which I have some inside information) couldn't hold a candle to DPS back in Colorado. The entire system of public infrastructure is rotten. It is easier to take public transportation in Istanbul than in many parts of Los Angeles. Prices are absurd. There are houses in neighborhoods daily riddled by gang warfare that sell for seven figures. It is routine to meet people with two or even three jobs who cannot even maintain themselves in the same neighborhood as their jobs.

As someone who was born in the Third World and lived there as both a child and an adult, I can say with full confidence that the entire city of Los Angeles, with the exception of some tiny enclaves of great wealth, is a Third World city, and one that has gotten worse every year with no prospect of reversal.

I live in New York state now. It is instructive to enter New York City by car. Recently I took some people who had never been to the United States to New York City. They were expecting a magnificent metropolis; what they got was a vast slum. There was a kind of brown cloud of filth over the entire city, the roads were tiny and full of potholes, the neighborhoods seemed to be part of a demilitarized zone, and the smell of urine was everywhere. Just as in Los Angeles, there are a few minuscule pockets of wealth scattered around New York City, but those pockets are probably shrinking.

Remember, my perspective on all of this is of a child who remembers major distinctions between the public infrastructure of his own Third World country and the convenience and pleasantness of Denver and of an adult who has enough of a practical knowledge of the world in order to sense a change.

I saw a picture in the New York Times the other day. It was a picture of a very clean and wealthy suburb. I thought it was part of Beverly Hills at first, or maybe Cherry Creek in Denver. Then I looked more closely at the caption. It read "Bangalore, India." I raised my eyebrows. I have always known of the existence of great wealth in India and Pakistan, but it has been restricted to a handful of elites. What I saw now was different; it was the emergence of a larger clbutt of wealthy people. The houses I might have expected to see in the idealized Denver of my childhood, the houses that this country once promised to anyone with even a high school education and a basic willingness to work, are going overseas.

Wealth is fleeing the United States. Not in an absolute sense, because the rich are getting richer. Whereas once you might have had ten wealthy people in a neighborhood compared to one hundred middle-clbutt people, you may now have one Pharaoh (think of Tyrell from BladeRunner) atop the whole neighborhood, holding more wealth than the previous ten rich people combined, and the middle clbutt has disappeared.

Wealth is fleeing the United States. It would be a fallacy to blame any particular person or trend for this. But it is wrong, wicked, or self-serving to deny that it is happening, to close one's eyes to the slow but steady and apparent impoverishment of the United States. Offshore outsourcing isn't responsible, but it is surely part of the galaxy of events that is removing wealth from what one was once the center of the global economy to what was once the periphery (making it the new center).

When I read various articles that come down supporting offshore outsourcing and trumpeting the great wealth it is creating for Americans, I feel out of place. I feel like Winston in Nineteen Eighty-Four. I wonder if I'm going mad, if I'm the only person who can actually see what is happening to my country, if I'm supposed to believe that the standard of living has gone up whereas, by every measure, it has fallen. Perhaps this is what it was like to live in the former Soviet Union. Every year the government would tell you that Soviet citizens enjoyed the best living conditions in the world, and every year the gap between reality and what 'they' were telling you simply grew wider and wider and one day the pretense just crashed.

America is now what the Pakistan of my very early childhood used to be, a country with a great deal of wealth concentrated in a very few hands. The difference is that poor Pakistanis never believed, as Americans still do, that they have the greatest opportunities in the world. They knew that their country had screwed them out of any upward mobility, and so they made their best efforts to immigrate to places where they did have opportunity. Americans are still living in a miasma. I recently spoke to someone who lives in a trailer park who solemnly informed me how lucky they were to live in America and not the Third World. Lucky! This was someone with no health insurance, no access to decent education, no job worth the name, nothing. I wished I could have taken this person on a tour of the Bangalore suburb I saw in the newspaper. At the end of such a tour, this person could at least have taken action. They could have demanded more opportunities from the U.S. government and business establishment. They could have shrugged their shoulders and gone off to a foreign country to make better money. But as long as they lived in ignorance of the fact that their situation was actually deteriorating relative to that of much of the rest of the world, they were trapped.

Finally, this is what makes overly rosy discussions of the economic value of offshore pernicious. What value there is, accrues to the very wealthy; and by insisting so stridently, like a Soviet propaganda organ, that America is better off every day, these discussions are preventing Americans from recognizing the prevailing reality and acting on it.

This is part of a series of high-level discussions of IT and e-business issues that, while grounded as far as possible in data and fact, also incorporates a modicum of speculative thinking. -- Editor

"From The Editor" is an Op-ed series intended to foster critical thinking and discussion of current issues. Opinions stated do not necessarily reflect the views of Line56 Media as a whole.