Critically evaluate the impact that outsourcing has had on GE. Analyze their decision to have multiple outsourcing partnerships.
Introduction
Before discussing this question, it is important to know why US companies like GE and others engage in outsourcing their strategic business units to foreign countries. Mostly outsourcing involves transferring or shifting the manufacturing or services related jobs to other economically efficient foreign countries in order to enjoy several advantages. These advantages relate to capturing the sales-growth, attaining lower labor costs and other cost reduction opportunities. A company can transfer its manufacturing business function, processing, business infrastructure, or operations to other countries where it seems to be economically and strategically viable. Through outsourcing, a firm was capable of generating higher profits since lower costs were the main advantage enjoyed by outsourced companies. The success of an outsourced function or operation depends not only on lower costs but also on political stability, language, skills, infrastructure, property rights, and legal system etc of that country.
The major pull behind outsourcing from foreign markets was saving in labor costs and probably, this was the reason why GE globalized itself around the world. Workers worked at a much lower wage rate in the Asian countries than they worked in the US. The wage rate was almost 5 to 6 times higher in US than in the Asian markets. This appeared to be the most important incentive for US companies to shift their operations to foreign markets where they could enjoy cost advantages. Thus, the main reason behind outsourcing business operations and functions to foreign markets was seen to be cost advantages attained through lower labor costs and favorable business environments due to which there was tremendous growth in sales.
Impact of Outsourcing on GE
General Electric Company (GE) is a firm which is recognized for spreading its manufacturing and services throughout the world. It operates in around more than 100 countries and has therefore, got the largest market capitalization and employment of about 315,000 people throughout the world. GE operated plants mostly in Asia, India, Latin America, and Europe creating tens of thousands of jobs in these regions. Through these plants, the company had developed an international presence over the years and was recognized as one of the most successful international companies. Through outsourcing, GE’s revenues from all business units had increased manifold. In 2003 alone, the revenue amounted to $134.2bn and it is heartening to note that 45% of the total was contributed by the international markets. The chairman believed that there is a lot to be untapped in the international markets therefore; emphasis should be placed more on outsourcing. The maquiladoras of Mexico, the Special Economic Areas (SEAs) of China and the technology and software sector of India each with its own advantages contributed to the growth and profits of GE internationally (Vietor and Veytsman 2007).
The impact of outsourcing on GE can be seen clearly in its annual sales growth internationally and the rising profits. The company enjoys cost advantages from lower labor costs and favorable government policies. Countries like China and India have extremely low wages due to which the manufacturing and services are outsourced to such regions where they can produce the same for a lower cost. It also enjoys tax advantages particularly from Mexico and China through which it is involved in free trade. After the implementation of NAFTA in Mexico, a free trade zone was created in North America which further lowered the taxes to be paid while importing and exporting. This is why the largest operation of GE outside US was in Mexico where the company was spread throughout the region. The most important advantage of Mexico was the geographic proximity to the US allowed for reliable and inexpensive shipping and a swift transit time. Business relationships were formed with companies in countries all over the world due to which outsourcing was given more and more emphasis. GE’s financial and real estate services grew drastically in the region of Mexico. Outsourcing has opened vast land of opportunities for GE in various parts of the world. These may range from growth, investment, cost saving and profit making opportunities depending upon the foreign market. Outsourcing was not only done through contracting services to another company but also included setting up a subsidiary in a foreign market or the formation of a joint venture. A dozen of joint ventures were particularly formed in China. China appeared to be attractive for outsourcing because of the low labor and electricity costs. Cheaper land and exhibition of synergy between customers and markets further impacted GE’s revenues positively worldwide. Moreover, in China outsourcing also led to innovation as GE engaged in leasing for the very first time. Though some risks are also associated with outsourcing but GE has realized with time that in the long run the advantages and benefits of outsourcing outweigh the potential risks. GE successfully entered the phase of global competition positioning itself much above other global competitors making it prominent and visible in the eyes of the entire world. The manufacturing capability of GE expanded which enabled the company to serve a larger customer base in a much better way around the world. GE’s markets swelled throughout the world and the company increased its distribution channels and services to serve the ever increasing number of markets. The retail distribution networks of GE covered thousands of outlets across the world. Diverse needs of business of GE are met through outsourcing which included a range of services and business units.
Thus, there was a considerable impact of outsourcing on the success of General Electric Company internationally through which products, services and intellectual talent was outsourced for its global businesses. Dramatic growth in sales, profits, cost reductions; employment, global positioning, and high quality are some of the several advantages enjoyed by GE through outsourcing.
Multiple Outsourcing Partnerships
Coming to the second part of the question, GE had outsourcing partnerships in more than 100 countries around the globe having the largest and most prominent in Mexico regions specially maquiladoras, Special Economic Areas of China and India. GE’s decision to have multiple outsourcing partnerships was fruitful since every country offers different cost saving and profit making opportunities for them (Vietor & Veytsman 2007).
GE Mexico
The largest outsourcing partnership of GE was with Mexico where it expanded its production to over 30 plants and provided employment to over 30,000 people. The decision of having an outsourcing partnership with Mexico proved to be very beneficial for them since the plants over there were capable of producing capacitors, electric motors, control devices, lighting products more efficiently. For outsourcing, Mexico appeared to be very attractive since it had a geographic proximity to US making shipping possible in a reliable, inexpensive and swift way. Moreover, the intellectual property right and legal system of the country was fully developed which provided greater transparency in regulation and administration of the maquila industry. The banking system was proper and there was a fixed exchange rate over a long period of time due to which GE considered Mexico to be a successful outsourcing partnership. GE was also a part of few joint ventures in Mexico so that the company integrated with other businesses as well. One attraction for GE in Mexico was the languages spoken, Spanish and English were the common languages spoken by the Mexican people due to which communication was possible with GE USA. Moreover, Mexico also had a domestic market with incomes of more than $6000 per capita and a population over $100mn. GE’s decision to do business from Mexico led to a robust growth in financial services and set the path of growth in infrastructure investment. Though the wages and other utility costs were higher as compared to other foreign cheaper markets but the company overlooked the fact since in the long run, there were prospects of high growth and prosperity for GE. Mexico’s reputation globally is also worth mentioning since there were various support programs initiated by the government to further improve its performance and reputation worldwide. Thus, the decision of GE to form an outsourcing partnership with Mexico is fruitful for GE in the long run since there is a lot of potential and business opportunities there specially in the maquiladoras which are the reason behind success of GE in Mexico. Maquiladoras are famous for their structure, tax advantages, economic impact and implementing NAFTA agreement (Vietor &Veytsman 2007).
GE China
In China, GE was engaged in $1.5bn in investments, more than 12000 in employment and formation of several joint ventures. A huge research facility was also opened in China which made GE a successful business research company. The company took advantage of the areas where cheap land was available and built plants on them for manufacturing and services. The things that made it attractive for outsourcing were the low labor and electricity costs. GE’s decision of outsourcing to China was very beneficial since it allowed exhibiting a synergy between the markets and the customers especially in areas of electronics, telecommunications, transportation, healthcare, manufacturing, research and development and distribution etc. Moreover, the setting up of GE in China also promoted innovation since for the first time it announced to set up a subsidiary in China for leasing purposes. The management at GE was of the view that first they were not sure about their decision of outsourcing GE to China since the country involved potential high risks but in the long run their decision appeared to be fruitful as the advantages are more than the risks. Through China, GE was able to position high itself among the global competitors and making a mark in the business world. Outsourcing enabled goods and parts to be sourced from domestic producers so that the cost savings exceeded 10%. The outsourced goods mostly involved consumer products since they were produced at a much lesser cost in China than in the USA or other countries where the company was engaged in outsourcing. The partnership with China allowed for the swelling of markets where GE manufactured products to be sold in these markets, developed distribution channels for selling and establish services including product-related and financial services. Thus, the decision of GE to establish partnership with China led to rising growth in sales, outsourcing and expanding manufacturing capability (Vietor &Veytsman 2007).
GE India
GE established a major presence in India slowly and gradually which resulted in revenues and orders swelling to $1bn from this country. The partnership with India of GE was essentially a technological partnership. The outsourcing relationship was built on India’s need for business for its high-tech sector. GE made success through this partnership by placing emphasis on the human capital since the country had a vast pool of inexpensive and educated labor that could speak good English but required some training. The software outsourcing in India promoted the educational training and programs intended for the refinement of labor. The company can make huge successes from investments in computer software development which would cost twice as much in USA. With decreased costs, the profits are much higher for GE in India. The company’s established by GE in India which were involved in consumer finance, joint ventures, outsourcing services, finance and accounting services, collection services, insurance services, data modeling, software solutions etc were recognized all over the world as India’s leading companies. The decision of having a partnership with India was successful since it allowed to source products, services and intellectual talent from India for its global businesses. The most important advantage that GE had from India was the low costs which allowed for substantial savings than other countries thereby retaining high quality. The sales, sourcing and savings from low wages grew dramatically thus making the partnership a huge success. GE India is further striving to improve quality levels and lower the cost of operations and the outsourcing market of India is highly appreciated in this regard (Vietor &Veytsman 2007).
Thus, through the above discussion it can be undoubtedly concluded that GE’s decision of having multiple partnerships around the world proved to be very fruitful and advantageous for the company both in short as well as long-run. Outsourcing promoted international competition between the foreign countries specially Mexico, China and India. GE was able to enjoy strong positions in the world from these countries and continued un-tapping the growth opportunities in them (Vietor &Veytsman 2007).
1. Analyze the impact that outsourcing will have on the US economy in general. Justify your stand.
Introduction
Reading this case study, the first thing that we understand while analyzing the impact of outsourcing on US economy in general is that outsourcing has set up a strong stage for unemployment in US and the people are looking for work since the jobs have gone overseas. Since 2001, the country has lost more than 2.5mn jobs due to outsourcing and the situation is further deteriorating (Cook & Nyhan 2004). At the same time, outsourcing has also benefitted the economy by growth in GDP due to rising profits and low costs from production sourced to other countries. In my answer to this question, I’ll attempt to discuss both the positive and negative side to outsourcing. I’ll also include information from other readings which I searched in the library and over the internet to make my answer more concrete and authentic.
Negative Impact
As the case mentions, increase in outsourcing has created domestic employment woes resulting in ever increasing number of job losses plus lower wages. The main purpose of giving air to outsourcing in America was to transfer manufacturing or service jobs to foreign countries where there were lower labor costs and the produce was sent back to America for sale. This was common in business functions, assembly line, manufacturing, infrastructure and operating processes. The wages given in Asian markets especially in India were much lower than what employees were paid in US. Therefore, the different US companies in order to attain lower costs replaced the US employees with similar others who were ready to work for much lower in different countries. Outsourcing was viewed by critics destroying US jobs and posed a grave threat for the educated labor of US. Employment was gravely hurt in different American sectors such as professional and business services, information industries, electronics, and textiles etc as these sectors in order to enjoy lower costs and higher profits began to send US jobs abroad. In 2003, a study revealed that there was 15.5% reduction in employment in these sectors (Brainard & Litan 2004). Goods and parts were imported from cheaper countries specially China due to which labor engaged in the manufacturing of goods in these sectors in US had to leave since they were no longer required by the company. More and more companies followed the outsourcing trend in US and kept on moving millions of jobs out of the country to China, India and other Asian and Eastern European countries. Analysts view that through outsourcing, hundreds of companies are actually exporting America either by sending jobs abroad or employing cheap labor abroad instead of American workers.
Moreover, outsourcing has not only hurt employment but also the wages of an American worker. Since firms could easily find workers who could paid 20-40% less than the prevailing wage rate, this exerted a downward pressure on effective wages. Replacement jobs were easily available for low-skilled workers which forced them to work on a lower wage rate. Further, the newer firms did not even provide health care benefits to the workers since employing them was big enough. This way outsourcing led to the exploitation of the American workers and they could not place any demand with the firm they were working for which decreased their bargaining power. The total wages kept on moving out of the country and the American households’ incomes declined whereas the rich thrived resulting in rising income inequality (Wilder 2004).
Positive Impact
On the positive side, there were also people supporting the concept of outsourcing. This was because through outsourcing effective cost savings were achieved by a firm through lower labor costs, utility costs and tax advantages. The consumers were provided the goods and services at lower prices from foreign manufacturers due to the lower cost involved. The benefit of outsourcing can be seen in controlling the rising medical costs. The operations of pharmaceutical companies were outsourced to foreign companies due to which 50% operational expenses were saved. Outsourcing was not only done of good but also of professional services which benefitted the trade. It made sense that the companies imported goods from abroad at lower cost than producing it domestically at a higher cost. The resources saved could then be utilized in more productive purposes. Though outsourcing hurts employment in the short-run but it creates jobs in the long-run in the US export sector. Moreover, the costs of the domestic firms decline thereby providing goods and services to consumers at a lower price. This benefitted the American households since the goods and services were cheaper to them and more could be saved now. Economists are of the view that outsourcing does not reduce the number of jobs but changes the mix of jobs. The sourcing of services raises the living standards and promotes job specialization (Hyman 2003).
Comparing both the positive and negative impact of outsourcing for the US economy, it becomes obvious that the issue which remains as a matter of concern for the American economy is the loss of jobs. The situation is going to aggravate further because according to the Forrester Research, another 3mn jobs would leave America by 2015 as 40% of Fortune 1000 companies have outsourced some of their work to foreign countries. Moreover, another 14mn or 11% of the total workforce are at the risk of outsourcing. Due to the increasing number of job losses, the demand for labor had declined drastically reducing the wages and other benefits to which the American workers were entitled before. The situation was such that the low-skilled workers had to accept job without any health-care and pension benefits. Educated persons after spending so many years in educating themselves were not getting employment and even if they got, the pay was too small for what they actually deserved on the basis of their educational investment. The benefits of outsourcing were numerous particularly that it helped in free trade and boosted domestic GDP. Outsourcing is here to stay because it provides vast amount of benefits which has strengthened the US economy. The only issue remains of job losses; if this could be solved then outsourcing will become a heaven in disguise (Hira & Hira 2008).
Other Readings
It was seen that there was heated debate being done on the pros and cons of outsourcing. The Nobel Prize winner Paul Samuelson stresses on the negative side of outsourcing that it hurts employment and reduces wages forever while not letting countries like China and India to enjoy competitive advantage. On the other hand, Columbia Professor Jagdish Bhagwati stresses that through outsourcing the US economy gains in the form of cheaper imports and stronger markets for exports (Drezner 2004). Those who gain from outsourcing are US shareholders, investors and American consumers but those who lose are the American wage earners. A report by McKinsey global Institute estimates that the net savings by corporations through outsourcing have increased b 45-55% and profits are extremely higher since American products are sold abroad through offshore operations (Clott 2004). The survey highlighted that the US economy gains $1.12 on every dollar spend for outsourcing to India. Another report on employment loss estimates that one-third of those displaced do not find employment again and those who do, have to work at a much lesser wage rate (Olian 2004).
A research team led by Dr. Behravesh and his associates found out that though in the short-run, outsourcing hurts employment but in the long-run it increases the number of US jobs, pushes up real wages and improves the economy’s performance (Grisworld 2004). This happens as a result of rising profits due to which savings are increased. The savings are used to employ more people and create new jobs within US. According to the Global Insight Report, outsourcing was able to generate 90,000 new US jobs in 2003, wages rose by 0.13% keeping inflation and interest rates low and productivity high but still people are against this practice as people are left jobless in the end (Brunelli 2004).
If the US tries to protect the job losses then it will ultimately destroy jobs. It will be difficult to export if the American firms did not import services from abroad which hence increases productivity putting a positive impact on standard of living, prices and profits (Kornad 2004). It was also pointed out that outsourcing IT services to India has actually led to a wage gain of 2-5% in US while the company are also performing better financially due to cost savings (Shyam 2006).
Conclusion
Summarizing the discussion, it can be said that outsourcing has both its advantages and disadvantages. The disadvantages as explained above are considered by some analysts to persist in the short-run which eventually benefit the US economy in the long run. Free trade has always been considered good for any country and therefore, it is also beneficial for America (Mann 2004). Companies can enjoy higher profits through reduced costs and the savings can be used in a capital intensive manner. Reports have been published which have pointed out that outsourcing has been creating US jobs and will continue to do so in the future at an increasing rate (Seide 2004). The economic indicators and GDP growth over the years indicate clearly that outsourcing has been beneficial for the US economy. The companies invest the savings into new technology which eventually causes the American jobs to increase over time (Grisworld 2005). Without outsourcing, innovation and using advanced technologies would appear to be impossible since they require a lot of investments which is possible only through outsourcing. Thus, outsourcing is beneficial and entails a positive impact on the American economy in the long-run (Gussert 2005).
BIBLIOGRAPHY
Blinder, A. (2006). Offshoring: The Next Industrial Revolution?. Foreign Affairs. 85 (1).
Brainard, L and Robert E. Litan (2004). Offshoring Service Jobs: Bane or Boon and What to Do. The Brookings Institution: Washington, DC.
Brunelli, M. (2004). Report: Offshore outsourcing helps U.S. job market. Available: http://searchcio.techtarget.com/news/article/0,289142,sid182_gci959840,00.html. Last accessed 14 Oct 2008.
Clott, C.B. (2004). Perspectives on Global Outsourcing and the Changing Nature of Work. Business and Society Review New York. 109 (2), 153-170.
Cook J and Paul Nyhan (2004). Outsourcing’s Long-Term Effects on U.S. Jobs at Issue. Seattle, WA: Seattle Post-Intelligencer.
Drezner, D. W. (2004). The Outsourcing Bogeyman. Foreign Affairs. 83 (3), 22.
Griswold, D. (2004). Why We Have Nothing to Fear from Foreign Outsourcing. Available: http://www.freetrade.org/pubs/FTBs/FTB-010.html#_ednref7. Last accessed 14 Oct 2008.
Grisworld, D. (2005). Foreign Outsourcing Invigorates US Economy. Available: http://www.outsourcing-offshore.com/foreign.html. Last accessed 14 Oct 2008.
Gussert, A. (2005). Outsourcing hurts American workers: the solution to losing U.S. jobs overseas is to change the trade rules. State Legislatures.
Konrad, R. (2004). Outsourcing technology jobs strengthens U.S. economy, study says. Available: http://www.sfgate.com/cgi-bin/article.cgi?f=/news/archive/2004/03/29/financial2200EST0355.DTL. Last accessed 14 Oct 2008.
Hira, R and Anil Hira (2008). Outsourcing America: The True Cost of Shipping Jobs Overseas and What Can Be Done About It. AMACOM.
Hyman, G. (2003). Overseas Outsourcing Hurts U.S. Economy, Says Firm. Available: http://itmanagement.earthweb.com/it_mgmt_trends/article.php/2118191. Last accessed 14 Oct 2008.
Mann, C. L. (2004). Global sourcing of IT: economic gains and policy challenges. Available: http://www.engineeringpolicy.org/Mann%20ASME.pdf. Last accessed 14 Oct 2008.Olian, J. (2004). Outsourcing of U.S. jobs: Bad or good. Available: http://seattlepi.nwsource.com/business/205207_outsourcedebate27.html. Last accessed 14 Oct 2008.
Seide, M.J. (2004). Two sides of outsourcing issue. Available: http://www.azcentral.com/business/articles/0815outsource15.html. Last accessed 14 Oct 2008.
Shyam. (2006). The impact of outsourcing on American Economy. Available: http://www.chillibreeze.com/articles/The-impact-of-outsourcing-on-the-American-economy.asp. Last accessed 14 Oct 2008.
Vietor, R.H.K and Alexander Veytsman. (2007). American Outsourcing. Harvard Business School. 9-705-037.
Wilder, B. (2004). Outsourcing: its impact on us all; Whether inside the United States or overseas, CPA service outsourcing appears here to stay. Catalyst (Dublin, Ohio). 12 (5).
;
