Here, there and everywhere - OUTSOURCING AND OFFSHORING SPECIAL REPORT - The Economist
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SPECIAL REPORT
OUTSOURCING AND OFFSHORING
January 19th 2013
Here, there and everywhere
SPECIAL REPORT
OUT SOURCING AND OFF SH OR I NG
Here, there and everywhere
After decades of sending work across the world, companies are
rethinking their oshoring strategies, says Tamzin Booth
EARLY NEXT MONTH local dignitaries will gather for a ribbon-cutting CO N T E N T S
ceremony at a facility in Whitsett, North Carolina. A new production line
3 History
will start to roll and the seemingly impossible will happen: America will
The story so far
start making personal computers again. Mass-market computer produc-
tion had been withering away for the past 30 years, and the vast majority 4 Reshoring
of laptops have always been made in Asia. Dell shut two big American manufacturing
factories in 2008 and 2010 in a big shift to China, and HP now makes only Coming home
a small number of business desktops at home.
5 Europe
The new manufacturing facility is being built not by an American
Staying put
company but by Lenovo, a highly successful Chinese technology group.
Founded in 1984 by 11 engineers 7 Home or abroad?
from the Chinese Academy of Herd instinct
Sciences, it bought IBM’s Think-
8 India’s outsourcing
Pad personal-computer business
business
in 2005 and is now by some mea-
On the turn
sures the world’s biggest PC-mak-
er, just ahead of HP, and the fast- 10 Services
est-growing. The next big thing
Lenovo’s move marks the
11 Robots
latest twist in a globalisation
Rise of the software
story that has been running since
machines
the 1980s. The original idea be-
hind oshoring was that Western 12 What to do now
rms with high labour costs Shape up
could make huge savings by
sending work to countries where
wages were much lower (see box
overleaf). Oshoring means
moving work and jobs outside
the country where a company is
based. It can also involve out-
sourcing, which means sending
work to outside contractors.
These can be either in the home
country or abroad, but in oshor-
ACKNOWLEDGMENTS ing they are based overseas. For several decades that strategy worked, of-
Many people helped in the prep-
ten brilliantly. But now companies are rethinking their global footprints.
aration of this report. In addition to The rst and most important reason is that the global labour arbi-
those mentioned in the text, the trage that sent companies rushing overseas is running out. Wages in Chi-
author would like to thank Jim na and India have been going up by 10-20% a year for the past decade,
Aisner, Duncan Aitchison, Juan
Alcacer, Sudin Apte, Pradipta
whereas manufacturing pay in America and Europe has barely budged.
Bagchi, Riccardo Barberis, Suzanne Other countries, including Vietnam, Indonesia and the Philippines, still
Berger, Jagdish Bhagwati, Lincoln oer low wages, but not China’s scale, eciency and supply chains.
Crawley, Sebastien Duchamp, Phil There are still big gaps between wages in dierent parts of the world, but
Fersht, Fritz Foley, Jerey Heenan
Jalil, Jerey Joerres, Rosabeth Moss
other factors such as transport costs increasingly oset them. Lenovo’s la-
Kanter, Arthur Langer, Stan Lepeak, bour costs in North Carolina will still be higher than in its factories in Chi-
Simon Matthews, Gerry Mattios, na and Mexico, but the gap has narrowed substantially, so it is no longer a
Vipin Nair, Gary Pisano, Jonas clinching reason for manufacturing in emerging markets. With more
Prising, Harsha Ramachandra, Willy
Shih, Mark Stanton, Brion Tingler,
automation, says David Schmoock, Lenovo’s president for North Ameri-
Michael Zakkour and Britt Zarling. ca, labour’s share of total costs is shrinking anyway.
A list of sources is at
Second, many American rms now realise that they went too far in Economist.com/specialreports
sending work abroad and need to bring some of it home again, a process
An audio interview with
inelegantly termed reshoring. Well-known companies such as Google, the author is at
General Electric, Caterpillar and Ford Motor Company are bringing Economist.com/audiovideo/
some of their production back to America or adding new capacity there. 1 specialreports
The Economist January 19th 2013 1
S P ECI A L R E PO R T
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2 In December Apple said it would start making a line of its Mac
computers in America later this year.
Choosing the right location for producing a good or a ser-
vice is an inexact science, and many companies got it wrong. Mi-
chael Porter, Harvard Business School’s guru on competitive
strategy, says that just as companies pursued many unpromising
mergers and acquisitions until painful experience brought great-
er discipline to the eld, a lot of chief executives oshored too
quickly and too much. In Europe there was never as much enthu-
siasm for oshoring as in America in the rst place, and the small
number of companies that did it are in no rush to return.
Firms are now discovering all the disadvantages of dis-
tance. The cost of shipping heavy goods halfway around the
world by sea has been rising sharply, and goods spend weeks in
transit. They have also found that manufacturing somewhere
cheap and far away but keeping research and development at gest markets, making customised products and responding
home can have a negative eect on innovation. One answer to quickly to changing local demand. Pierre Beaudoin, chief execu-
this would be to move the R&D too, but that has other draw- tive of Bombardier, a Canadian maker of aeroplanes and trains,
backs: the threat of losing valuable intellectual property in far- says the rm used to focus on cost savings made by sending jobs
o places looms ever larger. And a succession of wars and natu- abroad; now Bombardier is in China for the sake of China.
ral disasters in the past decade has highlighted the risk that sup- Lenovo, as a Chinese company, has its own factories in Chi-
ply chains a long way from home may become disrupted. na. The reason it is moving some production to America is that it
Third, rms are rapidly moving away from the model of will be able to customise its computers for American customers
manufacturing everything in one low-cost place to supply the and respond quickly to them. If it made them in China they
rest of the world. China is no longer seen as a cheap manufactur- would spend six weeks on a ship, says Mr Schmoock.
ing base but as a huge new market. Increasingly, the main reason Under this logic, America and Europe, with their big do-
for multinationals to move production is to be close to customers mestic markets, should be able to attract plenty of new invest-
in big new markets. This is not oshoring in the sense the word ment as companies look for a bigger local presence in places
has been used for the past three decades; instead, it is being on- around the world. It is not just Western rms bringing some of
shore in new places. Peter Löscher, the chief executive of Sie- their production home; there is also a wave of emerging-market
mens, a German engineering rm, recently commented that the champions such as Lenovo, or the Tata Group, which is making
notion of oshoring is in any case an odd one for a truly interna- Range Rover cars near Liverpool, that are coming to invest in
tional company. The home shore for Siemens, he said, is now brands, capacity and workers in the West.
as much China and India as it is Germany or America. Such changes are happening not only in manufacturing but
Companies now want to be in, or close to, each of their big- increasingly in services too. Companies may either outsource IT 1
Manufacturing outsourcing cost index Change in US jobs because of outsourcing
% of US cost 2000-10, ’000
0
100
China Other transport equipment +95
Mexico
90 Machinery +50
Metals and minerals +21
80
India Paper and printing +13
70
Automotive +6
F O R E C A S T
60 -9 Wood and furniture
-18 Food and beverages
2005 06 07 08 09 10 11 12 13 14 15
-84 Chemicals, plastics,
petroleum and coal
-284 Textiles and clothing
-407 Computers and
electronics
-70 Other
Companies’ intentions to change manufacturing source, worldwide, % of capacity
2009-11 26% 16% 9% 6% Move between
high-cost countries
Move between
2012-14 23% Offshore 24% low-cost countries 19% Reshore 9%
Sources: AlixPartners; McKinsey; Hackett
2 The Economist January 19th 2013
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The story so far
Oshoring has brought huge economic benets, but at a heavy political price
ONCE UPON A time the rich world’s manufac- oshore information technology and back-
turing rms largely produced in the rich oce work to places such as India and the
world for the rich world, and most services Philippines. India’s outsourcing industry
were produced close to where they were took wing and is still growing.
consumed. Then Western rms started How many jobs in manufacturing and
sending manufacturing work abroad on a services have left rich countries is the
large scale. By the 1980s this was well subject of debate, since denitions are
established. The movement was overwhelm- slippery and companies do not give out
ingly in one direction: away from rich coun- numbers. If a factory shuts and another one
2 and back-oce work to other companies, tries to places where workers with adequate opens halfway round the world the eect is
which could be in the same country or skills were much cheaper. clear, but if a French rm, say, keeps all its
abroad, or oshore it to their own centres Whether openly stated or not, lower workers at home and adds capacity in Mo-
overseas. Software programming, call labour costs were almost always the chief rocco to sell into France, have jobs been
centres and data-centre management rationale. For many rms their very survival oshored? Estimates of the overall numbers
were the rst tasks to move, followed by was at stake, since new competitors were can vary by tens of millions, but Alan Blind-
more complex ones such as medical diag- undercutting them on price. This often er, an economics professor at Princeton
noses and analytics for investment banks. involved shutting capacity in America and University, wrote in 2006 that sending
As in manufacturing, the labour-cost Europe as new factories were opened in service jobs abroad could cause some 40m
arbitrage in services is rapidly eroding, China, Mexico, Taiwan, Thailand, eastern American jobs to disappear to India and
leaving rms with all the drawbacks of Europe or wherever oered the lowest costs. other emerging countries.
distance and ever fewer cost savings to The footloose, opportunistic philoso- Such dramatic forecasts caused wide-
make up for them. There has been wide- phy of the time was best expressed by Jack spread alarm. In a survey by NBC News and
spread disappointment with outsourcing Welch, then chief executive of General the Wall Street Journal in 2010, 86% of
information technology and the routine Electric, an American conglomerate. He said Americans polled said that oshoring of
back-oce tasks that used to be done in- the ideal strategy for a global company jobs by local rms to low-wage locations
house. Some activities that used to be con- would be to put every factory it owned on a was a leading cause of their country’s eco-
sidered peripheral to a company’s prots, barge and oat it around the world, taking nomic problems. France’s new Socialist
such as data management, are now seen advantage of short-term changes in econo- government has appointed a minister,
as essential, so they are less likely to be en- mies and exchange rates. Arnaud Montebourg, to resist delocal-
trusted to a third-party supplier thou- The economic benets of oshoring isation. Germany’s chancellor, Angela
sands of miles away. have been immense. For workers in low-cost Merkel, worries publicly about whether the
countries it has meant jobs and rapidly country will still make cars in 20 years’ time.
Coming full circle rising standards of living. Rich-world work- High levels of unemployment in
Even General Electric is reversing its ers have been able to leave the drudge work Western countries after the 2007-08 -
course in some important areas of its busi- to someone else. For companies lower nancial crisis have made the public in many
ness. In the 1990s it had pioneered the o- labour costs have brought higher prots. countries so hostile towards oshoring that
shoring of services, setting up one of the Western consumers have enjoyed access to many companies are now reluctant to en-
very rst captive, or fully owned, o- more goods at far lower prices than if pro- gage in it. Public concern over the issue has
shore service centres in Gurgaon in 1997. duction had stayed at home. also encouraged politicians to bash compa-
Up until last year around half of GE’s in- But oshoring from West to East has nies that send their work abroad, com-
formation-technology work was being also contributed to job losses in rich coun- pounding the eect. Barack Obama’s presi-
done outside the company, mostly in In- tries, especially for the less skilled, yet dential campaign last year repeatedly
dia, but the company found that it was increasingly for the middle classes too. It claimed that his rival, Mitt Romney, had
losing too much technical expertise and has become the aspect of globalisation that sent thousands of jobs overseas when he
that its IT department was not responding workers in the developed world dislike and was working in private equity. Mr Romney,
quickly enough to changing technology fear the most. Around a decade ago rms in turn, attacked Chrysler, a car rm, for
needs. It is now adding hundreds of IT en- realised they could use the internet to planning to make Jeeps in China.
gineers at a new centre in Van Buren
Township in Michigan.
This special report will examine the
changing economics of oshoring in the corporate world. It will have lost over the past few decades. Paradoxically, the narrowing
show that oshoring in its traditional sense, in search of cheaper wage gap increases the pressure on politicians. With labour-cost
labour anywhere on the globe, is maturing, tailing o and to dierentials narrowing rapidly, it is no longer possible to point at
some extent being reversed. Multinationals will certainly not be- rock-bottom wages in emerging markets as the reason why the
come any less global as a result, but they will distribute their ac- rich world is losing out. Developed countries will have to com-
tivities more evenly and selectively around the world, taking pete hard on factors beyond labour costs. The most important of
heed of a far broader range of variables than labour costs alone. these are world-class skills and training, along with exibility
That oers a huge opportunity for rich countries and their and motivation of workers, extensive clusters of suppliers and
workers to win back some of the industries and activities they sensible regulation. 7
The Economist January 19th 2013 3
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Reshoring manufacturing though, was to be near customers in big new markets, which this
report does not see as oshoring in the conventional sense.
Coming home Messrs Porter and Rivkin argue that rms are now ready to re-
consider oshoring. They realise that in many cases they overdid
it, and are discovering hidden costs in moving production a long
way from home. But, the authors argue, America’s government
is not making the country’s business environment attractive
enough for companies to want to come back.
A growing number of American companies are moving
Given the political pressure, it is natural for companies to
their manufacturing back to the United States want to publicise anything that looks like reshoring. Lenovo says
IN 2005, A START-UP company from California called ET that its decision to bring back computer-making to North Caroli-
Water Systems decided to move its manufacturing opera- na was a way of looking after the rm’s reputation as well as
tions to China. At the time there was a general exodus to Asia in bringing direct business benets. The Chinese rm’s global sup-
search of lower costs, recalls Mark Coopersmith, the rm’s chief ply-chain chief, Gerry Smith, says he has received dozens of tele-
executive. ET Water Systems, which builds sophisticated irriga- phone calls from former university classmates to congratulate
tion devices for businesses, quickly started losing money, not him on the move.
least because it had so much capital tied up in big shipments of But reshoring amounts to much more than public relations.
goods which took weeks to cross the oceans. Innovation suered It is being driven by powerful forces and will only get stronger. In
from the distance between manufacturing and design, and qual- a survey of American manufacturing companies by the Boston
ity became a problem too. Consulting Group (BCG) in April 2012, 37% of those with annual
When ve years later Mr Coopersmith investigated the dif- sales above $1 billion said they were planning or actively consid-
ference between the total cost of production in China and Amer- ering shifting production facilities from China to America. Of the
ica, including the cost of shipping, customs duties and other fees, very biggest rms, with sales above $10 billion, 48% came out as
he was amazed to nd that California was only about 10% more reshorers. The most common reason given was higher Chinese
expensive than China. And that was just on the immediate num- labour costs. The Massachusetts Institute of Technology looked
bers, without allowing for the intangible benets of making the at 108 American manufacturing rms with multinational opera-
devices almost next door. ET Water Systems’ new manufacturing tions last summer. It found that 14% of them had rm plans to
partner, General Electronics Assembly, is in San Jose. As it hap- bring some manufacturing back to America and one-third were
pens, the rm’s owner has a Chinese background and a large actively considering such a move. A study last year by the Hack-
portion of its employees are of South-East Asian origin. ett Group, a Florida-based rm that advises companies on o-
The number of rms known to have reshored manufac- shoring and outsourcing, produced similar results. It expects the
turing to America is well under 100. Doubtless many more are outow of manufacturing from high- to low-cost countries to
doing so quietly. Examples range from the tiny, such as ET Water slow over the next two years and the reshoring to double over
Systems, to the enormous, such as General Electric, which last the previous two years. The oshoring of manufacturing is
year moved manufacturing of washing machines, fridges and now rapidly moving towards equilibrium [zero net oshoring],
heaters back from China to a factory in Kentucky which not long says Michel Janssen, the rm’s head of research. 1
ago had been expected to close. Google
has attracted a great deal of attention for
deciding to make its Nexus Q, a new me-
dia streamer, in San Jose.
The reshoring movement has to be
kept in proportion. Most of the multina-
tionals involved are bringing back only
some of their production destined for the
American market. Much of what they
had moved over the past few decades re-
mains overseas. And for many of the big-
gest rms the amount of work that they
are still sending abroad outweighs the
amount that they are bringing back on-
shore. Caterpillar, for example, is opening
a new factory in Texas to make excava-
tors, but has also just announced that it
will expand its research and develop-
ment activities in China.
According to a survey conducted by
Harvard Business School last year, many
rms are still deciding against basing ac-
tivities in America. Professors Michael
Porter and Jan Rivkin asked HBS alumni
who were running businesses about their
choices of location and found that many
of them were deciding to leave because
they thought wages abroad were lower
than at home. Another important reason,
4 The Economist January 19th 2013
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2 The crucial change that has taken place over the past de- for workers, including the right to a permanent contract after a
cade or so is that wages in low-cost countries have soared. Ac- year of employment, and workers are more aware of their rights.
cording to the International Labour Organisation, real wages in One consultant jokes that it is getting as hard to re people in Chi-
Asia between 2000 and 2008 rose by 7.1-7.8% a year. Pay for se- na as in France.
nior management in several emerging markets, such as China, China’s labour market is so overstretched that all the high-
Turkey and Brazil, now either matches or exceeds pay in America quality labour has been exhausted, you have to hire people with
and Europe, according to a recent study by the Hay Group, a con-lesser qualications, and then quality becomes a problem, says
sulting rm. Pay in advanced economies, on the other hand, rose Alain Deurwaerder, who until recently
by just 0.5% to 0.9% a year between 2000 and 2008, says the ran a factory in Thailand for Ducati, an
McKinsey Global Institute. In manufacturing, the nancial crisis Italian motorbike-maker. Another Euro-
actually reduced pay: real wages in American manufacturing pean chief executive complains about the
have declined by 2.2% since 2005. ightiness of his Chinese workforce: If
By contrast, pay and benets for the average Chinese fac- someone on the other side of the road of-
tory worker rose by 10% a year between 2000 and 2005 and fers 5% more pay, they go.
speeded up to 19% a year between 2005 and 2010, according to Lorne Schaefer, the owner of Jenlo
BCG. The Chinese government has set a target for annual in- Apparel Manufacturing, a Canadian-
creases in the minimum wage of 13% until 2015. Strikes are be- owned clothing company, opened a fac-
tory in Liuzhou in southern China in
2008 because he could no longer nd
Pay for senior management in several emerging workers at home; second-generation Chi-
markets, such as China, Turkey and Brazil, now either nese and Vietnamese immigrants in Mon-
treal, he says, no longer want to work in
matches or exceeds pay in America and Europe the industry. Now he is having similar
problems in China. The latest generation
of workers, thin on the ground because of
coming more frequent, and when they happen, says one execu- the country’s one-child policy, are not keen to toil in factories,
tive, the government often tells the plant manager to meet nor do they want to work for companies that make goods for ex-
workers’ demands immediately. Following labour unrest, wages port, since the quality standards are far higher than for domestic
at some factories have gone up steeply. Honda, a Japanese car- consumption. So even in a labour-intensive industry such as tex-
maker, gave its Chinese workers a 47% pay rise after strikes in tiles, the cost benet that China oers is quickly eroding.
2010. Foxconn Technology Group, a subsidiary of Hon Hai Preci- Higher labour costs alone are not enough to prompt com- 1
sion Industries, a Taiwanese rm that
does a lot of manufacturing for Apple and
other big technology rms, doubled pay
at its factory complex in Shenzhen after a
series of suicides. Its labour troubles are Staying put
still continuing.
European jobs are not coming back because few of them went in the rst place
The pushmi
BCG used to argue that companies RESHORING IS LARGELY an American concentration of family companies, and
unwilling to send their manufacturing to phenomenon. Although the migration of families tend to be more loyal to their
lower-cost countries were putting their jobs to Asia has caused plenty of angst in countries of origin.
very future in jeopardy. Now it says that parts of Europe too, the continent has Companies in northern Europe are the
companies will bring manufacturing little hope of wooing back many of the jobs most inclined to oshore, whereas French,
back to America from China. As soon as it has lost. There are some signs that in Spanish and Italian rms have been held
2015, says Hal Sirkin, a consultant at the Britain rms are starting to look for local back by political and social pressures.
rm, it will cost about the same to manu- suppliers in order to simplify their supply Restrictive rules on ring employees mean
facture goods for the American market in chains. But China’s importance as a low- that it is dicult and expensive to shut
certain parts of America as in China in cost supplier to continental Europe will down capacity at home. So for the time
many industries, including computers continue to rise, for several reasons. being European rms, if anything, want to
and electronics, machinery, appliances, First, Europe’s labour markets are oshore more. Indian outsourcing rms
electrical equipment and furniture. That still fairly inexible and costly, so even if hope that Europe will provide them with
calculation takes into account a wide vari- conditions in China and elsewhere are their next decade of growth.
ety of direct costs, including labour, prop- becoming less favourable there is still a Many European rms have exported
erty and transport, as well as indirect substantial labour arbitrage to be had. jobs to countries in eastern Europe. German
ones such as supply-chain risk. Second, European rms had been o- rms have sent work to a place even closer
After decades of complaining about shoring less in the rst place. Cultural to home: former East Germany, where pay is
American and European workers’ high factors are partly responsible; Germany’s still lower than in the country’s west. France
pay, cushy conditions and unreasonable Mittelstand of mid-sized family rms, for Inc often looks towards Morocco and Roma-
expectations, businesspeople now in- instance, sell their products globally but nia. This near-shoring avoids some of the
creasingly moan about Chinese workers. are more inclined to make things in their transport cost and cultural diculties of
Their aspirations are rising and they are own backyard, says Hans Leentjes, head sending production to places a long way
less willing to work long hours in boring for northern Europe of Manpower, an from home, as many Anglo-Saxon compa-
factory jobs. A new labour law intro- employment agency. Europe has a high nies have done.
duced in 2008 brought in more protection
The Economist January 19th 2013 5
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2 panies to leave China. The country has the world’s best supply
chains of components for industry and its infrastructure works
well. Firms have already invested heavily in being there. And
companies that initially came for the low labour costs now want
to stay because it has become a huge market in its own right.
Nonetheless, the incremental decision to invest in new produc-
tion capacity in China has become tricky, says Gordon Orr, Asia
chairman for McKinsey.
One answer is to invest in other low-cost countries, of
which there is no shortage. Myanmar, for instance, is attracting
interest now that the West is lifting economic sanctions. But the
scale, skill and productivity of the labour force there, and in
countries such as Vietnam and Cambodia, nowhere near match-
es China’s, argues Mr Sirkin. And workers in those countries, too,
are demanding better pay and rights.
Mexico, which has the huge advantage of bordering the
United States, is increasingly attracting production destined for
the Americas that would formerly have gone to China. Average
pay for Mexican manufacturing workers is now only slightly
higher than for Chinese ones, and the time it takes for goods to
travel to North America is measured in days not months. Some
rms, such as Chrysler, a car company, are even using Mexico as
a base to supply the Chinese market. The country has become an
important production hub for the aerospace industry. But Mexi-
co’s poor infrastructure and highly publicised drugs-related vio-
lence may deter some rms.
Even as pay is rising rapidly in China, costs in America are
falling. The successful extraction of natural gas from shale has
dramatically lowered the price of energy. PricewaterhouseCoop- with relatively low value-density, such as consumer goods,
ers, an accountancy rm, reckons that these lower American en- appliances and furniture, according to a recent McKinsey report
ergy prices could result in 1m more manufacturing jobs as rms on global manufacturing. That makes reshoring or nearshoring
build new factories. Companies such as Dow Chemical, a speci- more attractive. Emerson, an electrical-equipment maker, has
ality chemicals rm, and Vallourec, a French steel-tubes rm, moved factories from Asia to Mexico and North America to be
have announced new investments in America to take advantage closer to its customers. IKEA, a Swedish rm that makes products
of low gas prices and to supply extraction equipment. for the home, has opened its rst factory in North America as a
way to cut delivery costs, and Desa, a power-tools rm, has re-
and the pullyu turned production from China to America because savings on
Not only have American wages declined or are rising only transport and raw materials oset the higher labour costs.
slightly, BCG points out, but the dollar has been weakening. The In the longer term reshoring will be boosted by the use of
workforce is becoming more exible and productivity continues advanced manufacturing techniques that promise to alter the
to rise. High unemployment has brought a willingness to work economics of production, making it a far less labour-intensive
for lower pay, especially in southern states. These are mostly process. 3-D printing, a process in which individual machines
right to work states where individuals are free to decide wheth- build products by depositing layer upon layer of material, is al-
er to give nancial support to a trade union, so unions are less ready being used in research departments and factories. Disney
powerful there. The very threat that jobs will be outsourced will is developing 3-D printed lighting for interactive toys, and says
also have played a role in keeping wages down. that in future the interactive devices inside such toys may be
Alabama, one such state, received a big boost last year printed rather than assembled by hand. Additive manufacturing
when Airbus, a European aeroplane manufacturer, said it would machines can be left alone to print day and night. For now they
open a big new factory. Airbus also plans to expand its produc- are used mainly for prototyping and for complex parts, but in fu-
tion in Asia beyond its main factory in Tianjin, China, to be close ture they will increasingly make nal products too.
to fast-growing new markets. Fabrice Brégier, the rm’s chief ex- Robots are already making a dierence to the share of la-
ecutive, says that for skilled workers, China is no longer a low- bour in total costs. Cheaper, more user-friendly and more dex-
cost country. trous robots are currently spreading into factories around the
Big unions in America have sometimes been willing to let world, and they cost just the same in America as they do in Chi-
wages fall to keep jobs at home. In 2007 the United Auto Workers na. Relative to the cost of labour, average robot prices since 1990
union (UAW) accepted a two-tier wage structure under which have fallen by 40-50% in many advanced economies, according
some new blue-collar workers are paid only half as much as lon- to McKinsey. Baxter, a new generation of robot made by Rethink
ger-serving ones. In 2011, after the government had bailed out Robotics, an American rm, costs $22,000 apiece and is so safe
part of the motor industry, the Big Three carmakers employed and simple that it can be taught by an unskilled worker and oper-
more second-tier workers, reducing their overall labour costs. ate right next to real people.
Ford has brought back production from China and Mexico to Baxter and his ilk may mean there will be fewer manufac-
Ohio and Michigan, thanks to a new agreement with the UAW. turing jobs overall, but those that remain can stay close to a rm’s
As the example of ET Water Systems showed, transport domestic headquarters. And even if the manufacturing activity
costs are playing a big part in reshoring. Rising shipping, rail and itself does not employ many people, the supply chains that
road costs are most damaging for companies that make goods spring up around it will create new work. 7
6 The Economist January 19th 2013
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Home or abroad? the conglomerate, owning everything it could, was all the rage,
but for the past few decades rms have been outsourcing ever
Herd instinct more of their operations, in the belief that as long as they kept
the core of their business in-house, the rest could safely be sent
anywhere in the world.
That belief has not always turned out to be justied. After
Boeing, an aeroplane-maker, outsourced 70% of the develop-
ment and production work on its new 787 Dreamliner to around
Companies need to think more carefully about how 50 suppliers, it suered huge delays because its outsourcing part-
they oshore and outsource ners failed to produce parts on time. In 2005 Deloitte Consulting
WHAT AND HOW much of its production to oshore to looked at 25 big companies that had outsourced operations and
other countries is one of the most important choices a com- found that a quarter of them soon brought them back in-house
pany can make. France’s two big carmakers illustrate the point. because they could do the work them-
PSA Peugeot Citroën, the younger of the two, has tried over time selves better and cheaper.
to nd cheaper places than around Paris to make its cars; in the But most companies outsource to
1950s and 60s Citroën opened a factory in Brittany and started save money, so doing more of it has in-
manufacturing in Spain and Portugal, the China and Vietnam of creasingly meant sending work to cheap-
their time for oshoring. Nowadays it makes cars cheaply in Slo- er countries. In 2003, according to TPI, a
vakia and in the Czech Republic. But two-fths of its global pro- company that advises on outsourcing,
duction is still in France, where it has seven expensive factories. about 40% of all outsourcing contracts en-
One reason is that the company is family-owned, and families tered into by American and European
tend to be particularly loyal to their countries of origin. rms involved oshore workers; that g-
Renault, on the other hand, has determinedly pursued a ure has since risen to 67%. In turn, compa-
low-cost strategy, setting up factories in
Morocco, Slovenia, Turkey and Romania,
and now makes only a quarter of its cars Moving production a long way o and separating it
at home. Unsurprisingly, it is Peugeot that from research and development risks harming a rm’s
is now in dire nancial straits. Last au-
tumn, amidst a erce political storm, the long-term ability to innovate
company announced plans to stop car
production at one of its biggest French factories, at Aulnay-sous- nies that decide to oshore production often have little choice
Bois, just outside Paris. But that may be too little, too late. but to outsource as well. Local rms are often in a better position
Yet there are also examples of highly successful companies to operate in a particular environment, and they may control
that choose not to oshore to any great extent, even in labour-in- supply chains. Most of America’s and Europe’s textile industry,
tensive industries. Zara, the main clothing brand of Inditex, a for instance, subcontracts work to outside rms in China, Viet-
Spanish textile rm, is famous for making its high-fashion nam and Bangladesh. Production of consumer electronics is
clothes in Spain itself and in nearby Portugal and Morocco. This largely outsourced to huge contract manufacturers such as Tai-
costs more than it would in China, but a short, exible supply wan’s Foxconn and Quanta. This report concentrates on work
chain allows the rm to respond quickly to changes in customer that is done overseas, either inside the rm but in an oshore lo-
tastes. It sells the vast majority of its outts at full price rather cation or outsourced to foreign contractors, because this part of
than at a discount. Its decision to stay close to home has become corporate globalisation has caused the most controversy.
its main source of competitive advantage. Most rms do not give enough thought to choosing where
The practice of outsourcing is as old as business itself. A to produce. To an alarming degree, says McKinsey, companies
19th-century manufacturing company might have had its own continue to indulge in herd behaviour when deciding where to
machines but not its own eet of horse-drawn drays to distribute base their operations and how to arrange their supply chains.
its wares. The fashion for what to subcontract and what to keep Many of them, says the consulting rm, simply follow each oth-
inside the rm has ebbed back and forth over time. At one time er around to low-cost countries or allow themselves to be drawn
in by governments waving wads of cash and other incentives.
David Arkless, head of government and corporate aairs
It still makes sense 1
for Manpower, which advises large companies on their loca-
Share of American and European companies’ outsourcing contracts* tions, recalls the story of two rival technology rms from Idaho
with an offshore element, % some years ago. One of them moved its production to the state of
70 Penang in Malaysia. The other, having seen its foe reduce its la-
bour costs by half and slash prices by 15%, pursued it to exactly
60 the same place, he says. The pair quickly started competing for
labour with each other and local wages soared. Mr Arkless has
50
seen whole clusters of industries move to Shenzhen in tandem.
Within a year or so the labour costs go up to near the level of the
40
original place, he says. Manpower advises Western rms that if
30 labour makes up 15% or less of their product’s total cost, they
would do better not to oshore. And even if the share is higher,
† there is usually scope for improvement at home. Going some-
2003 04 05 06 07 08 09 10 11 12
where else for the sake of cheaper labour is usually a quick x
*Advised on by Information Services Group (ISG), an outsourcing
consultancy, which covers about half the total and avoids the real problems, says Mr Arkless.
†Year to date
Source: ISG Companies rarely analyse past location decisions to see 1
The Economist January 19th 2013 7
S P ECI A L R E PO R T
OU T SOU RC I N G A N D O FFS H O R IN G
their own factories overseas, but they seldom outsource.
Decisions, decisions 2
Many companies are now rethinking the outsourcing of
Reshoring, selection of companies ever more important functions. Lenovo wants to own more of its
capacity in China and elsewhere; it gets better results from its
Company What and where Why
own facilities than from its outside contractors, says Gerry
Chesapeake Production was shifted from China to Rising labour costs in China;
Bay Candle Maryland in 2011. The company will wanting to respond more
Smith, the rm’s global head of supply chain. That often means
export to China from there quickly to customers taking the work back home.
Ford Motor Production of medium-duty trucks is Thanks to an agreement with
The most prominent current example of the opportunities
Company moving from Mexico to Ohio, saving the trade union, the firm can and risks of oshoring is the relationship between Apple and
2,000 jobs. Adding extra capacity to now hire new workers at $14 Foxconn. From a strategic point of view the partnership could
a Michigan plant will save another an hour not be more successful. In 2010 Foxconn took a huge chance by
1,200 investing billions of dollars in building enough capacity in Chi-
Otis Elevator A factory is being moved from Mexico To keep R&D closer to na to manufacture Apple’s iPhone on the scale required. It built a
to South Carolina manufacturing and reduce uniquely exible and responsive supply chain for the American
logistics costs
rm. On one recent occasion, according to a report in the New
General Production of large household Having manufacturing, design York Times, Apple redesigned the iPhone’s screen at the last mi-
Electric appliances (eg, water heaters, and development close nute and Foxconn woke up its workers in the middle of the night
fridges) is being shifted from China together; being more
and Mexico to Kentucky responsive to customers to get the job done in time. The reason Apple is what it is today is
Foxconn, says a consultant in Taipei who prefers not to be
Sleek Audio Production of high-end earphones Quality problems in China
has moved from Dongguan in China named. The two companies, he says, are inextricably bound to
back to Florida each other.
But Apple may be wishing it was not quite so dependent on
Sources: Boston Consulting Group; PricewaterhouseCoopers; press reports; The Economist
Foxconn. After a spate of reports of poor working conditions for
the rm’s employees (including excessive hours), Apple’s chief
executive, Tim Cook, ordered an investigation, and Foxconn is
2 whether they have proved right, note Michael Porter and Jan Riv- making a number of changes. Even so, the bad news has not
kin of Harvard Business School in a paper, Choosing the United stopped. In September Foxconn had to close a factory for a while
States, published last year. One reason why companies rush when a brawl among employees turned into a full-scale riot. In
into oshoring may be that they are looking for a quick solution October the rm admitted that it had employed interns as
to existing troubles. According to The Handbook of Global Out- young as 14 in its factories. In December Mr Cook announced
sourcing and Oshoring, by Leslie Willcocks, Julia Kotlarsky that Apple would bring some production of Mac computers
and Ilan Oshri, companies are most likely to consider oshoring back from China to America. He said the main aim was to create
their operations when their prots are already falling. jobs in America, but the move may also appease critics of Ap-
Two sets of strategic problems can arise from oshoring ple’s partnership with Foxconn. The Taiwanese rm said that it,
production to another part of the world, especially if it is poorly too, would expand its operations in America, explaining that im-
thought out. The rst of these concerns the logistics of supply. portant customers wanted more work done there. 7
The more that rms spread their operations around the globe,
the more vulnerable they become to disruption from unexpect-
ed events such as natural disasters or political unrest. The second India’s outsourcing business
strikes at the heart of what companies try to do: sell more and
better widgets to customers than their rivals down the road. Of-
ten, the more a rm oshores and outsources, the worse it will be
On the turn
at responding to customers quickly.
Ideas factory
Over the past few decades it became conventional wisdom India is no longer the automatic choice for IT services
that factory jobs could be done cheaply in some far-ung corner
and back-oce work
of the world but more important innovation work should stay
in-house in high-cost countries. Manufacturing was seen as just IF TATA CONSULTANCY SERVICES (TCS), an Indian out-
a cost centre, so it was often oshored. Now many companies sourcing rm, wanted to impress its customers with its de-
reckon that production makes a big contribution to the success of dication, it could do no better than take them to its engineering-
research and development, and that innovation is more likely to services division in Bangalore’s Electronics City. In one room sit
happen when R&D and manufacturing are in the same place, so rows of young men working on computer simulations of crash-
increasingly they want to bring manufacturing back in-house. ing and accelerating cars. Next door is a laboratory full of en-
Foreign suppliers of parts not infrequently turn into com- gines and parts from TCS’s client, a big Detroit carmaker. It is fes-
petitors, and for many companies the risk of losing intellectual tooned with garlands of bright orange marigolds to celebrate
property either through theft or imitation in China and else- Dussehra, a Hindu festival. Next to one car engine is a shrine to
where remains high. Indeed, says Richard Dobbs of the McKin- Durga, a many-armed goddess. Celebrating everyday tools is
sey Global Institute in Seoul, big South Korean groups reckon part of the festival. We worship the car engines, explains one
that American and European companies are making a mistake in of TCS’s engineers. He sends photographs of the ceremony back
outsourcing as much manufacturing as they do, because this al- to Detroit each year. The American car bosses, he says, are a little
lows other rms a great deal of insight into their processes. They surprised but delighted to see their engines being prayed to.
should know: Samsung, an electronics giant, was once an out- However, they like to keep quiet about the work that gets
sourcing partner for several Japanese rms but now dwarfs its done in India. TCS is not allowed to name its customer (clue:
former customers. South Korean rms oshore production to Bruce Springsteen, Prince and Don McLean have all written 1
8 The Economist January 19th 2013SP EC IA L R EP O RT
OUT SOURCING AND OFFSH OR I NG
2 songs about its cars). Ten years ago TCS, part of the Tata Group, shore IT and back-oce services either directly to a rm head-
which includes Tata Motors and Tata Steel, did only very basic quartered in India or under the covers via a Western rm with
work for the car rm. Now it tests thousands of engine compo- a big oshore presence, explains one consultant.
nents, using computer models, and suggests improvements for Hackett, a Florida-based rm that advises companies on
their design. outsourcing, estimates that over the period from 2002 to 2016 o-
For the oshoring of manufacturing China is by far the shoring is likely to claim a total of 2.1m business-services jobs (in-
most important destination, but in services most of the work has cluding IT, human resources, procurement and nance) at big
gone to India. Of the ten leading cities for oshoring, according American and European companies. Still more jobs will have
to The Handbook of Global Outsourcing and Oshoring, six been lost in business processes, including call centres and claims
are Indian. In 2008 India claimed 65% of all oshored IT work processing. Hackett says that about 150,000 business-services
and 43% of oshored business-process work. Brazil, Russia and jobs a year are still being shifted from Europe and America; the
China are also important, and by 2011 as many as 125 oshore lo- oshoring of services remains in full swing. But the rm also pre-
cations were oering IT and BPO services, but no other oshor- dicts that the migration of services to India and to other oshore
ing destination has come close to India, with its huge supply of locations such as China and Brazil will slow down after 2014 and
IT and engineering graduates and its English-language skills. stop entirely by 2022.
The main reason for this startling prediction is that most of
Indian ingenuity the easily oshorable jobs have already gone. Pralay Das, an
The painstaking work of Indian programmers has gone equity analyst with Elara Capital in Mumbai, estimates that
into innumerable Western products, from cars to Disney car- American and European banks and nancial-services rms
toons to Microsoft’s Windows range of software. In 2004 Indian have already oshored about 80% of what they can reasonably
engineers in Mumbai created a virtual Oscar gure for that year’s send to India and other oshore locations.
Academy Awards which melted away like the liquid metal A second reason is that a lot of the jobs that might have
machine in Terminator 2: Judgment Day. Nielsen, a ratings been oshored by Western rms in the coming years have al-
rm on which America’s media industry depends, in turn relies ready been wiped out by productivity improvements. New jobs
heavily on TCS for its data. in Western economies tend to be of a more demanding, higher-
The killer application for the Indian bodyshops, as they level kind and are less likely to be sent abroad.
were originally known, was providing labour to perform simple All this has sent the Indian IT and BPO industry into a funk.
IT tasks at a very low cost. One of their rst tasks was to check There are fears that it will either stop growing or be forced to ac-
that the so-called millennium bug would not cause chaos in mil- cept much lower prot margins as demand for its services falls. It
lions of computer systems at the end of 1999. Indian rms also is clear that for Indian IT vendors, demand for traditional out-
saw rapid growth in business-process outsourcing (BPO), de- sourcing, meaning routine software and application develop-
ned as the export of routine work such as customer care or in- ment and maintenance, is already levelling o, says Pankaj Ka-
surance-claims processing, though IT services still have much poor, an equity analyst at Standard Chartered Bank in Mumbai.
the biggest share. Now, as demonstrated by TCS and the car The work used to roll in at you, explains an executive at one large
giant, India’s outsourcing vendors are taking on far more dicult Indian vendor; now you have to go out and search for it.
tasks for multinationals in many elds, such as testing new pro- It is not only that the oshoring of jobs is reaching satura-
ducts, design and complex analysis. tion point, but also that Western companies, after a decade of ex-
The panic about Western jobs arose because whereas the perience, are changing their attitude to the practice. KPMG, a glo-
traditional Western outsourcing providers, such as HP or Logica, bal consulting rm, even announced The Death of
used to employ mainly locals, the young Indian companies took Outsourcing in a research paper last year. After all, oshoring
the work oshore. The big Western rms themselves then important tasks to an outside provider is quite a risky thing to do
rushed to hire in India; IBM is now India’s second-largest private- and carries signicant hidden costs. Companies in services as
sector employer, just after TCS. Companies can choose to o- well as manufacturing are now far more aware of the pitfalls. 1
The Economist January 19th 2013 9S P ECI A L R E PO R T
OU T SOU RC I N G A N D O FFS H O R IN G
2 Until recently the most important reason for companies to send mainly concerned with their own prots. They give you a good
large chunks of important business functions abroad was to deal for two to three years and then they suck your blood, he
drive down costs. A decade ago wages in emerging markets were says. A rm that outsources a lot of IT also risks losing its exper-
a tenth of their level in the rich world, an opportunity too good tise in a key area and can get trapped in legacy systems, he adds.
to miss. During the recession of 2008-09, says Cli Justice, Some American rms that have outsourced a lot to India
KPMG’s leading expert on outsourcing and oshoring, the race and elsewhere are building shadow capability in services in
oshore accelerated, and more higher-value and complex work their home countries, says KPMG’s Mr Justice. Using unocial
was sent overseas too. budgets, he says, some chief information ocers are hiring peo-
But now many companies are nding that they lost their ple back home to do the same kind of work that their oshore
connection with important business functions, says Mr Justice. teams do, just to have them next door. Only a small number of
At the same time the cost advantage that drew rms oshore in rms have gone to such extremes, yet the fact that it happens at
the rst place is disappearing. Salaries for software engineers are all indicates the value that rms place on proximity, says Mr Jus-
going up rapidly and ination is high. For IBM, says Bundeep tice. And some of the biggest original pioneers of outsourcing,
Rangar, chief executive of IndusView, an advisory rm, the total including General Electric and General Motors, have already tak-
cost of its employees in India used to be about 80% less than in en the plunge and brought their IT work home. 7
America; now the gap is 30-40% and narrowing fast.
The industry also continues to have a huge labour turnover
(see chart 3), which can mean quality problems. That is chiey Services
because the vast majority of the work being oshored is repeti-
tive and dull, and often well below the qualication levels of the
people doing it. Increasingly, local industries such as retail, insur-
The next big thing
ance and banking are oering more interesting jobs with better
career prospects than much of what is on oer in IT and busi-
ness-process outsourcing.
To be sure, much of the work that has gone to India in recent
years is more demanding, but in that part of the market the cost Developed countries are beginning to take back
of labour has soared. Good analysts and product developers in service-industry jobs too
India and China are few and far between, so pay for such jobs HARLEY DAVIDSON, A motorcycle-maker, had a dicult
has been rising by up to 30% a year. According to Mr Justice, pay time after the nancial crisis and nearly took the road out of
for workers with such skills in India and China can be even high- Milwaukee, Wisconsin, its home town since 1901, to go in search
er than in America or Europe, with all the disadvantages of being of cheaper labour. It stayed in the end, but had to prune other
several time zones away from head oce. costs. Last summer it announced it would outsource 70 informa-
tion-technology and other back-oce jobs to India’s Infosys.
Reasons why not Just more and more of our great motorcycle company being
When outsourcing abroad was still relatively new in the done by other countries, lamented one hog-owner from Penn-
1990s, the idea was that outside partners would be better than in- sylvania in an online forum on hearing the news. In fact, Infosys
siders at IT and back-oce work because they were specialists. will be serving Harley and other rms from a new oce full of
And even if they were no better at it, at least they were a lot Americans in Milwaukee.
cheaper. This line of thinking is known inside the industry as This is the 18th new oce Infosys has opened in America in
your mess for less. It has now become clear that outside rms recent years. The company will hire a total of around 2,000 lo-
usually cannot do boring back-oce work any better and often cals in the year to March 2013, up on last year’s 1,200. Other big
do it worse. Many oshore outsourcing relationships have rms are hiring at a similar level. According to NASSCOM, the
proved disappointing and some have ended in lawsuits. trade body for India’s IT sector, the industry has doubled the
Some chief executives found that outsourcing relation- number of locals it has hired in America in the past ve years. It
ships turned sour after a few years. The boss of one global Euro- now employs 280,000 people there and is planning to recruit
pean engineering rm points out that outsourcing partners are many more in the next few years.
So far companies are not reshoring services even on the
modest scale seen in manufacturing. That is partly because in-
formation goes down the wire, so rising transport costs do not
Revolving door 3
play a role. But as the previous section has shown, the oshoring
Labour turnover in Indian outsourcing firms of services is slowing down because most of the work that can
% of total employment in those firms
be done remotely has already gone, and because rms are be-
25 coming more aware of the disadvantages of sending work to the
Wipro (voluntary) HCL
Technologies other side of the world. More and more companies want IT and
20 business-process tasks to be done locally, especially when the
Wipro Infosys
work is complex and strategic. Indian oshoring rms are re-
15 sponding by hiring in developed markets.
A survey of outsourcing executives by HfS Research in Bos-
10 ton last summer found that America is seen as the world’s most
Tata Consulting Services*
desirable region for expanding IT and business-services centres
5 in the next two years. India now comes second, despite its lower
labour costs. Chief information ocers once rushed to send
0 their software-development work oshore, said CIO magazine
2006 07 08 09 10 11 12
Financial years ending March last year, but now they want to keep it nearby. The magazine
Source: Company reports *Worldwide cited the example of Standard & Poor’s, a credit-rating agency, 1
10 The Economist January 19th 2013SP EC IA L R EP O RT
OUT SOURCING AND OFFSH OR I NG
the business argument for it is even more important. Since most
4
Fading advantage routine tasks have already been sent oshore, low-cost vendors
Indian programmer’s Extra costs*, are now trying to win higher-value work, such as managing hu-
average salary, $’000 $’000 Labour man resources and complex, multi-faceted projects. But to get
US programmer's average salary, $’000 arbitrage, % that kind of business they have to be near their clients. For exam-
120 30 ple, one outsourcing vendor, Cognizant, with a CEO of Indian
FORECAST origin and a big Indian workforce but headquarters in New Jer-
100 25
sey, is currently taking market share from rivals such as Infosys.
80 20 The Indian component of its workforce makes up about 60% of
60 15 the total, compared with around 80-90% for TCS and others. A
40 10
typical recent deal, says Malcolm Frank, the rm’s head of strat-
egy, was one it did in 2012 with the American arm of ING, a
20 5 Dutch bank, under which Cognizant will take over business pro-
0 0 cesses for insurance. Instead of sending the work to India, the
2001 03 05 07 09 11 13 15 rm will open new centres in Iowa and North Dakota and take
Source: Offshore Insights Research *Management and logistics on ING’s existing employees. The client wanted local voices an-
swering the telephones, says Mr Frank, and the economics of
that part of the US means that the numbers work for us.
2 which used to oshore much of its IT work but now wants to Some big rms which originally led the way in the oshor-
send it no farther away than three hours from Manhattan. ing of services are now taking work back in-house and onshore.
You do not have to go far outside the big cities to nd that For most of the past decade, General Electric had been aiming to
costs come right down. In a study of job-creation in America outsource the vast majority of its global IT jobs, with most of
McKinsey found that workers for high-level IT support in the that outsourced work going to India. When Charlene Begley, the
cheaper parts of the country cost less than in Brazil or eastern Eu- rm’s chief information-technology ocer, recently re-evaluat-
rope and just 24% more than in India. In a paper, IT Services: The ed its global balance of labour, she found that half the IT work
new Allure of Onshore Locales, McKinsey’s consultants show was being done by outside providers and the rm was losing
that labour costs in dierent parts of America can vary by as some of the skills it needed. With the rise of mobile devices and
much as 30%, with similar dierentials between, say, the cost of iPads, GE wanted to be able to develop new applications for cus-
skilled IT workers in Paris and northern France, or eastern and tomers far more quickly. Now the rm is hiring 1,100 IT engineers
western Germany. for a centre it opened in Michigan in 2009. The company has said
Hiring locals certainly helps to placate public opinion, but that the new American employees will not replace GE’s oshore 1
Rise of the software machines
The attractions of employing robots
ELIZA DOOLITTLE ENTERS the stage un- The coming decade will be about replacing wrote HfS Research, an outsourcing blog.
kempt and talking in a strong Cockney cheaper labour with autonomics. The economics of Robotistan are
accent, but by the end of George Bernard IPsoft’s Eliza, a virtual service-desk certainly compelling. An onshore infor-
Shaw’s play Pygmalion she speaks in a employee that learns on the job and can mation-technology worker may cost
much more ladylike fashion. Another Eliza reply to e-mail, answer phone calls and hold $80,000 a year and an oshore one
was invented by Joseph Weizenbaum, a conversations, is being tested by several perhaps $30,000, wrote James Slaby,
scientist from the Massachusetts Institute multinationals. At one American media HfS’s research director, in a recent report.
of Technology, in the early 1960s. His giant she is answering 62,000 calls a month But Blue Prism’s robots cost at most
computer program was named after Shaw’s from the rm’s information-technology $15,000 a year. They can perform only
character because it learned to speak more sta. She is able to solve two out of three of routine, rules-driven tasks, but there are
clearly over time. It played the role of a the problems without human help. At plenty of those about. One telecoms
psychotherapist, sometimes well enough IPsoft’s media-industry customer Eliza has company, says HfS, replaced 45 oshore
to convince patients that it was human. replaced India’s Tata Consulting Services. employees, costing a total of $1.35m a
Now a third Eliza, named after Mr Mr Dube is sorry to see so much of year, with ten of Blue Prism’s software
Weizenbaum’s invention, is set to turn the India’s intellectual capital being expended robots, costing $100,000. The telecoms
oshoring business upside down. IPsoft is on mundane, repetitive tasks. Much of the rm then spent its savings of $1.25m on
a young company started by Chetan Dube, work that is oshored is boring, which helps hiring 12 new people to do more in-
a former mathematics professor at New to explain the industry’s huge labour turn- novative work locally at its headquarters.
York University. He reckons that articial over (see chart, previous page). A small But nationality still plays a part.
intelligence can take over most of the British start-up, Blue Prism, has developed Because Indians often speak strongly
routine information-technology and a software-development toolkit that allows accented English, the country lost a lot of
business-process tasks currently per- people within a company to create their own call-centre business to the Philippines.
formed by workers in oshore locations. software robots to automate business Mr Dube’s Eliza will have a slight Ameri-
The last decade was about replacing processes. Greetings from Robotistan, can twang, modelled on a Filipino call-
labour with cheaper labour, says Mr Dube. outsourcing’s cheapest new destination, centre operator.
The Economist January 19th 2013 11You can also read
