Month: April 2004

Stephen Roach on Outsourcing

[via Yuvaraj] Writing from Bangalore, Stephen Roach of Morgan Stanley has yet another incisive piece on outsourcing:

While I think offshoring is an inevitable by-product of free trade, comparative advantage, and globalization, I don’t think it should be minimized as a contributor to America’s jobless recovery. Sure, there are other factors at work — especially the high fixed costs of hiring associated with the benefits inflation that Dick Berner has stressed. And there is the post-Enron, post-Sarbannes-Oxley risk aversion that continues to constrain Corporate America.

At the same time, I do believe the impacts of globalization are likely to be an increasingly big deal in driving the great American job machine in the future. This conclusion is best understood within the context of the mix of forces that drive turnover in the US labor market — namely, the interplay between the constant flux of hiring and firing. The sum of these flows is considerably larger than the net changes that get such great attention when the state of nonfarm payrolls is reported each month by the US Bureau of Labor Statistics (BLS). For example, the BLS Business Employment Dynamics tabulation puts the sum of gross job gains and losses at some 15.2 million workers in 2Q03 (latest data point) — dwarfing the net change of -180,000 they estimated for the quarter. According to Alan Greenspan, layoffs have not been the dominant force shaping America’s jobless recovery. Instead, it’s the lack of hiring. He argues that “Gross separations from employment, two-fifths of which have been involuntary, are about what would be expected from past cyclical experience, given the current pace of output growth. New hires and recalls from layoffs, however, are far below what historical experience indicates”.

What matters most in shaping macro trends is change at the margin. The global labor arbitrage could well be having a differential effect on the gross flows in the US labor market. It’s not that domestic jobs are being eliminated on a large scale in the US and shifted offshore to the developing world. Instead, it’s far more likely that the impacts are being felt on the hiring side of the equation. US companies are now letting the “opportunity cost” of the domestic hiring decision be shaped increasingly by the alternative of highly-educated, well-skilled, low-cost workers now readily available in many developing countries. At the same time, by lowering the perceived incremental cost of the “next hire” in many occupational categories, the arbitrage could also be playing an increasingly important role in the wage determination process that effects a much broader cross-section of American workers. In other words, the globalization of labor input need not be large in the absolute sense to make a difference in shaping change at the margin. The increased prevalence of offshoring suggests that such a critical mass may well have been attained in the United States. As a result, US companies have no choice other than to become more global in both their perspective and structure.

Like it or not, this is the way globalization is supposed to work. Which takes us to the toughest aspect of the problem — the distinct possibility that there may be strong social and political objections to the very concept of globalization itself. The idea that job contracts need to get re-written because of trade liberalization and an increasingly integrated borderless world doesn’t sit terribly well with disenfranchised workers on the front line of making the adjustment. Globalization may work well in the long run but it appears to have profoundly disruptive impacts in the short run. That could reflect its inherent asymmetries — developing countries first come on line as producers long before they emerge as consumers. That leaves a very tenuous interregnum, where the creation of new markets in the developing world lags the penetration of old markets in the developed world.

And that’s what takes us to the most dangerous point of all — the politicization of the offshoring debate. In this election year, the American body politic has been forced to take sides on this highly charged emotional issue. Analytics and empirics ring hollow in this deeply personal context. Free trade and now offshoring lie at one end of the spectrum — protectionism at the other. For America — complete with its jobless recovery and gaping trade deficit — the pendulum is now swinging in an ominous direction. Out here in Asia, that is a huge and puzzling concern.

India’s Incredible Growth Rate

India is hot! The Oct-Dec quarter saw a growth rate of 10.4%, “powered by a surge in farm output and a strong performance in the manufacturing sector.” Writes WSJ:

On the strength of the growth in the October-December quarter, the economy is almost certain to overshoot the government’s forecast of 8.1% expansion for the fiscal year, which ends March 31.

The fiscal third-quarter expansion was the fastest since the government started compiling quarterly numbers in 1996. India’s gross domestic product grew 8.4% in the second quarter of fiscal 2003-2004 and 2% in the third quarter.

India’s economy is rebounding sharply after a drought slowed growth to 4% in the previous fiscal year. Agriculture, from which two-thirds of the country’s one billion-plus population derives its livelihood, is leading the recovery, with a sizzling 17% rise in the third quarter.

Higher rural incomes and the resulting consumer demand are boosting output in the services and manufacturing sectors. Output in the trade, transport, hotels and communications sector rose 13%, up from 12% in the second quarter. The manufacturing sector continued its robust performance in the October-December period, growing 7.4% on the year compared with 7.3% in the previous quarter.

“Although the difference in the third-quarter GDP numbers is due to agriculture, the good news is that manufacturing is also pretty good,” said M.R. Madhavan, strategist at Bank of America in Singapore. “If this momentum continues in the next fiscal year, overall economic growth would be strong even if the monsoon isn’t as good as in 2003,” Mr. Madhavan said.

Economists say the rising output in the manufacturing and services sectors indicates the underlying resilience of the economy.

JP Morgan senior economist Rajeev Malik said the Indian industry is poised for a “stellar” performance in 2003 as lower interest rates and easier access to credit will continue to boost consumer spending in the coming months. “Industrial activity will also get a boost from the current pickup in external demand,” he said. “Additionally, the economy is entering a new investment cycle, as many companies are planning fresh investments.”

Embedded Linux

Business Week writes that “Linux is fast breaking out of its original stomping ground in servers and into cell phones, cars, telecom gear, consumer electronics…”

Do you use a Linksys Wi-Fi router to surf the Web wirelessly? You’re probably doing so using Linux. Drive a Volvo? Somewhere under the hood, Linux is running on key microprocessors that monitor the car. Watching video on a TiVO personal video recorder or smashing a home run in the 2004 World Series on a Sony Playstation game console? The penguin is the wizard behind all those curtains. For such uses, “Linux is emerging as the favored operating system,” says Scott Smyers, vice-president of Sony’s Network & Systems Architecture Div.

To date, embedded operating systems — unalterable software that runs microprocessors whose job is to perform a limited number of tasks — have remained a small piece of the tech market pie. In 2002, the global market for this type of software was only $675 million, according to Stamford (Conn.) tech consultancy Gartner. That should grow to more than $1 billion by 2007, a number that will still pale by comparison with the broader software and hardware markets.

Even so, embedded systems are a key underpinning of the trillion-dollar global electronics market, says Gartner analyst Daya Nadamuni. And in the future, they’ll take on an increasingly important role as cars become infotainment centers, cell phones become digital jukeboxes, and pacemakers transmit data wirelessly to hospitals to warn of a heart attack.

Cheaper and cheaper processors also are allowing electronics companies to build more and more computing power — and a wider range of capabilities — into everything from exotic medical-imaging equipment to tiny global positioning system location-tracking chips. “If a product only does one thing, it’s less important that there be an operating system on it. But as we see growth in multifunction devices, a real OS makes more sense,” says Peter Glaskowsky, an analyst with tech research firm In-Stat/MDR, based in Scottsdale, Ariz.

The ability to exert control over the software that runs these millions of devices will become a crucial checkpoint in the global economy. And Linux — “open-source” software that’s not only cheap but available to anyone to use or modify — is emerging as an enabling technology in this equation. For example, a maker of cell phones that incorporate an embedded Linux OS may find it easier to build cheaper and more flexible open-source billing and tracking systems. Or an open-source media server might more easily send movies to a Linux-based TV set-top box.

TECH TALK: As India Develops: ICT (Part 4)

Even as thin clients, server-centric computing and open-source software offer the foundation for building out Indias digital infrastructure, there is a need for an ecosystem of application developers which can create specialised solutions for different verticals. India needs the equivalent of a digital hand to transform its manufacturing small- and medium-sized enterprises (SMEs).

The challenge for Indian manufacturing SMEs is to adopt the new technology and process innovations simultaneously. The field of business process management (BPM) holds a lot of promise. Write Howard Smith and Peter Fingar:

The first wave of business-process management, outlined in Fredrick Taylor’s theory of management in the 1920s, suggested that processes were implicit in work practices, tucked away in policy manuals. Process management was called “methods and procedures analysis.”

The second wave, ushered in over the past decade, suggested that processes could be manually reengineered through a one-time activity. Changes were made, but essentially cast in concrete in software, such as the feature-rich but rigid ERP applications. Even with document-centered workflow added to financial-management systems, for example, these applications rarely gave business managers full control over the process life cycle.

The third wave of BPM enables companies and workers to create and optimize new business processes on the fly. Change is the primary design goal. Through agile business processes, value chains can be monitored and continuously improved. The third wave is not business-process reengineering, enterprise application integration, workflow management, or another packaged application-it’s the synthesis and extension of all these technologies and techniques into a unified whole. The third wave of BPM becomes a new foundation upon which to build sustainable competitive advantage.

The essence of the BPM innovation is that we now understand data, procedure, workflow and distributed communication not as apples, oranges and cherries, but as one new business information type the business processNow, we can develop with processes as well as manage with processes.

BPM provides enhanced business agility, control and accountability. It will streamline internal and external business processes, eliminate redundancies, and increase automation. It provides a direct path from process design to a system for implementing the process. Its not so much rapid application development; instead, its removing applications development from the business cycle. BPM supports top-down and bottom-up process modeling, right across the value chain. BPM has the potential to automate the discovery of business processes arising naturally in the course of business operations, as readily as a database naturally fills with business data during use.

BPM puts processes at the centre of business. In the Indian context, where there is still plenty of scope of improvement, BPM can perhaps help to bring forth higher levels of efficiencies in operations. Even as face the twin prospects of competing with Chinese companies and the eliminating of trade barriers, Indian companies need to look at innovative new ideas to achieve competitive advantage in the future. Affordable computing technology combined with process-driven ideas like BPM can perhaps make a difference.

Tomorrow: ICT (Part 5)

Continue reading TECH TALK: As India Develops: ICT (Part 4)