OUTSOURCING to China Fort Wayne Rubber & Plastics Group: OUTSOURCING to China Fort Wayne Rubber & Plastics Group John F. Wellington, Ph.D.
IPFW School of Business and Management Sciences
February 10, 2005
Make in China for: Make in China for
Chinese markets
Other Asian markets
US markets
Rest of world.
Statistics China: Statistics China Information on the following slides is taken from:
Pocket: World in Figures
2005 Edition
The Economist
China: China Population: 1.3 billion
Population 60 years: 10%
Life expectancy: Women (73) Men (70)
Birth rate: 14.5 per 1,000
Death rate: 7.0 per 1,000
Adult literacy: 91%
Chinese Economy: Chinese Economy GDP: $1.27 bn
Growth in real GDP 1992-2002: 9.3%
GDP per capita: $980
Origins of GDP (%):
Agriculture (15), industry (51), services (34).
Manufacturing (18)
Employment(%):
Agriculture (50), industry (23), services (27)
Trade ($bn fob): Trade ($bn fob) Principal Exports Principal Imports
Apparel & clothing 41 Electrical mach. 55
Office equipment 36 Petroleum prod. 17
Telecom equip. 32 Office equip. 17
Electrical mach. 32 Other mach. 16
Footwear 11 Telecom equip. 14
Total 326 295
China: Export / Import Destinations (%): China: Export / Import Destinations (%) Exports Imports
U.S. 22 Japan 18
Hong Kong 18 Taiwan 13
Japan 15 S. Korea 10
S. Korea 5 U.S. 9
Germany 4 Germany 6
Rubber & Plastics News November 15, 2004: Rubber & Plastics News November 15, 2004
“Be in China or be gone.”
“Big companies, particularly in the automotive sector, are flocking to China and demand their component suppliers come too.”
Manufacturing Objectives: Manufacturing Objectives Make it:
Cheaper, faster, better
With improving reliability
Be agile and flexible
Variety of products, volumes, terms
Absorb cost of related services
Manufacturing Strategies: Manufacturing Strategies Same or more output with fewer resources
Outsource labor / assembly intensive processes
Concentrate on core (value added) processes
Grow where your customers grow
What is Outsourcing?: What is Outsourcing? Transferring operation(s) with management responsibility to another party for well defined deliverables.
Offloading.
Something comes back.
A locus is maintained.
Outsourcing : Outsourcing Manufacturing
BPO
Human resources / employee services Payroll, accounts receivable, etc. Travel
Call centers
IT
Research & development
Offshoring: A type of outsourcing: Offshoring: A type of outsourcing
Shift of production from U.S.
Domestic disconnection, shutdown.
Increase in foreign direct investment, from U.S.
Capacity and cash
Offshoring by other names: Offshoring by other names
Near-shoring
Right-shoring
Best-shoring
Any-shoring.
Why Offshore? : Why Offshore? Cost savings.
New markets, changed markets.
Supply chain.
Restructured organization takes you there.
Prevailing business model.
U.S. Experience Offshoring: U.S. Experience Offshoring What work went offshore
Where lost in the U.S.
Where does it go offshore
Quantity and quality of the work shifted
Impact
Trends
U. S. Experience: U. S. Experience Where’s the data?
Who is collecting the data?
Is the data reliable?
What does the data say?
There is no data.
No government mandated reporting and disclosure.
U.S. Experience Studies Consulted for This Talk: U.S. Experience Studies Consulted for This Talk
BLS Mass Layoff Statistics Program
Diamond Cluster (2004)
Wyatt (2004)
Deloitte, Touche, Tohmatsu (2004)
TAA and WARN
“What accounts for decline in manufacturing”, CBO (2004)
Conference Board
Media sources
U.S. Experience Plant Closings1: U.S. Experience Plant Closings1 Chemical products 81
Electronics 124
Environmental 8
Food 114
Glass and cement products 19
Metal products 308
Plastics products 98
Pulp and paper 68
Refined products 11
Textiles 68
Tobacco products 2
Wood products 63
Other 37
Total 1001 Publication of PCN began on 2/1/03. As of 1/1/04, PDS has reported on more than 500 industrial plant closures. These reported plant closures are detailed below by industry and location.
U.S. Experience Statistics USA : U.S. Experience Statistics USA
Who / when are jobs shifting
Number of jobs shifted
Characteristics of companies
Characteristics of jobs shifted
Destinations
U.S. Experience Who’s Counting: U.S. Experience Who’s Counting
“The Changing Impact of Corporate Restructuring: The Impact of Production Shifts on Jobs in the US, China, and Around the Globe”
K. Bronfenbrenner, Cornell U.
S. Luce, U. of Mass., Amherst
For US-China Economic and Security Review Commission, October 13, 2004
How They Did the Study: How They Did the Study 2001 study
Replicated in January – August, 2004
Media sources
Exhaustive study of announcements, impact, destination, confirmation.
Quality of work shifted.
Slide24: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
Slide25: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
Slide26: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
Slide27: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
Slide28: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
Slide29: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
Slide30: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
Slide31: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
Slide32: Source:
“The changing nature of corporate global restructuring: The impact of production shifts on jobs in the US, China, and around the world.”
US – China Economic and Security Review Commission, October 14, 2004, K. Bronfenbrenner, S. Luce
U.S. Experience: Summary: U.S. Experience: Summary
In 2001-04, increase in production shifts out of U.S.
2001: 204,000 jobs.
2004: 406,000 jobs.
99,000 to China 140,000 to Mexico
Shifts from U.S. to multiple offshore destinations.
U.S. Experience: Summary: U.S. Experience: Summary Broader cross section of sectors shifting jobs to China.
Large, U.S., publicly held, highly profitable, and well established companies shifting.
Midwest has lost most. Illinois, Michigan, N. Carolina, Ohio, California, Indiana.
U.S. Experience: Summary: U.S. Experience: Summary U.S. is primary source of production shifts to China, followed by Europe, Japan, Taiwan, Philippines, Singapore
Shifts from Asian countries into China concentrated in electronics, electrical equipment, textiles, metal fabrication.
U.S. Experience: Summary: U.S. Experience: Summary ● Production shifts from high-wage countries
to multiple low-wage countries.
● Near shore and off shore (Mexico and
China).
● No government mandated reporting.
● Impact on US workers and US economy
China’s Experience: China’s Experience Benefits and costs of world’s offshoring destination
Economic, social, and political consequences
Following is from the Conference Board
China’s Experience: China’s Experience Reallocation process
Movement of workers to higher value jobs
Away from labor-intensive manufacturing
Away from SOE
China’s Experience: China’s Experience In the textile industry—the processing of raw materials to make cloth—China has experienced a 44% drop in jobs
In the apparel industry—in which textiles are transformed into final products—jobs grew by 160,000 between 1995 and 2002.
China’s Experience: China’s Experience 14% annualized growth during 1995–2002
Growth in productivity due to increased efficiency from automation and technology.
Attributed to offshoring of U.S., European, and Japanese firms.
China’s Experience: China’s Experience One recent estimate, based on several state sources, places China’s national unemployment at 23%.
Corresponds to 168.5 million workers in 1999—a number greater than the total number of employed persons in the United States.
Slide42: Manufacturing job losses and gains in China
Type of ownership* -8 -6 -4 -2 0% 2 4 6 Annualized growth Collectively owned
-12,102 Joint-stock (shareholding)
5,943 State-owned
-1,345 -13.45 million jobs lost 8.93 million jobs gained 901 460 669 742 219 Joint ventures (Hong Kong, Taiwan, Macau)
Joint ventures (foreign)
Wholly owned (foreign)
Domestic private
Other * All charts in this report are based on data from 1995-2002.
Note: Numbers on bars indicate absolute growth in each category (unit = 1,000 jobs)
Source: National Bureau of Statistics of China and TCB
China’s Experience 1995 - 2002: China’s Experience 1995 - 2002 State-owned and operated firms lost 12.1 million jobs.
State employment dropped from 81% to 49%.
Influenced in part by the government furloughing millions of factory workers (referred to as xiagang) 1 For a detailed description of the difficulties in counting xiagang, see Dorothy J. Solinger, “Why We Cannot Count the ‘Unemployed,’” China Quarterly 167, 2001.
China’s Experience 1995 - 2002: China’s Experience 1995 - 2002 Difficult to accurately estimate the number of
Xiagang
Many workers remain affiliated with their plant (and thus stay officially employed)
Counted as having retired early and are not included in unemployment number.
China’s Experience: Summary: China’s Experience: Summary Problems that accompany rapid development and transition.
Corruption when assets with weakly defined ownership rights are privatized.
Pollution of the air and water.
Bank reform - non-performing loans remain an issue
China’s Experience: Summary : China’s Experience: Summary Rapid growth in foreign and foreign-funded firms
Domestic private commercial enterprises (non-shareholding) are small but fast-growing
Private firms did not add as many jobs as the SOEs lost.
1 See Dougherty and McGuckin, Restructuring Chinese Enterprises, for a detailed analysis of the conversion process.
China’s Experience: Summary : China’s Experience: Summary Joint-stock companies showed a net gain of 5.9 million workers over the 1995–2002 period.
Many are reorganized SOEs converted to shareholding structure - state remains the sole or majority owner.
This source of employment growth probably reflects more classification change than real economic expansion.
Your Experience: Your Experience Rubber & Plastics News
Institute of Supply Management
Rubber & Plastics News November 15, 2004 Offshoring in China : Rubber & Plastics News November 15, 2004 Offshoring in China Infrastructure building - in progress
Limited to coastal areas
Ownership of intellectual property is not embraced
Proprietary property has two-year shelf life
Reverse engineering is common
Rubber & Plastics News November 15, 2004 Offshoring in China : Rubber & Plastics News November 15, 2004 Offshoring in China
Challenge of gaining entry
Need reliable, trustworthy partner(s) with track record
Understand the Chinese market
Theft of technology leads to new competitor
On-time deliveries the norm?
Sufficient business to make a profit?
Northeast Indiana: Northeast Indiana Kathleen Randolph
Northeast Indiana Workforce Investment Board (NIWIB)