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Offshore operations have recently gained attention as
executives are finding themselves making critical
decisions concerning their workforce, pricing,
sourcing and logistics, quality, competition, and
international tax advantages/penalties.
Intel started manufacturing in Tijuana 34 years ago,
just after the company was founded. Today 65 percent
of Intel's revenues are generated overseas.
Manufacturers such as Intel operate two types of
offshore operations: manufacturing plants that perform
everything from basic assembly to high level
engineering, and marketing operations.
Opening a division in another country may sometimes be
dictated by the local tax structure. For example, the
European Union (EU) had planned to tax Intel's chips
at a 35 percent rate so the company is opening a plant
in Ireland. Similarly, Intel may choose to open a
sales and marketing division in China because it is
likely to be necessary in the future to avoid stiff
tax rates.
Although jobless American factory workers probably
think their jobs are the only ones being exported to
low cost labor countries abroad, the reality is the
manufacturing employment decline is global, resulting
from accelerating worker productivity worldwide. This
is coupled with the realization that the cost savings
from manufacturing overseas are likely to be
temporary. For example, Israel used to cost ten cents
on the dollar per engineering man month but it has now
risen to $1.10 on the dollar. Shanghai, China now
costs about half of what it costs to produce chips in
the U.S., rather than one-tenth.
Employment has been impacted by offshore outsourcing.
A recent study by economists at Alliance Capital
Management shows that 20 of the world's largest
economies lost a total of more than 22 million
manufacturing jobs from 1995 to 2002. The United
States accounted for about 2 million of those jobs.
China has added 2.5 million manufacturing jobs since
2000, but despite that recent growth China saw its
manufacturing work force decline from 98 million to 83
million since 1995.
The
simple reason is increased productivity.
Global competitive pressures drive the need for
efficiency in manufacturing, which is accomplished by
implementing technology. The result is more output
from fewer workers. Even as overall global
manufacturing employment declined by 11 percent from
1995-2002, the Alliance study showed industrial output
rising by 30 percent.
The
issues surrounding offshore manufacturing are too
great to cover in one single article. The trickle down
is enormous. For executives, these issues have created
new challenges in sourcing global talent.
“We
are finding ourselves working much earlier with the
executive team to develop offshore talent strategies,”
said Rod McDermott, Managing Director at McDermott &
Bull Executive Search. “The available talent with
experience transitioning U.S. or Latin American based
manufacturing facilities to an Asian partner is
somewhat limited. A mistake could cost a company
significantly, in cost overruns, lost revenues and
market position.”
Executives are finding that the variables involved in
the decision to move to an “offshore model” are more
dynamic than ever before. Some companies that have
recently moved to a Maquilladora manufacturing
operation are finding in a matter of two or three
years that, to be competitive in their industries,
they must move to Chinese manufacturing. As one
executive commented, “Find someone who has
successfully established oversees operations before
undertaking such an effort. The mistakes are numerous
and costly, and the pitfalls are out there for the
inexperienced.”
Craig Lipus & Todd Gitlin
are Principal Consultants with
McDermott & Bull.
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