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Trend Radar 2008: Offshoring

Posted on Friday, Jan 11th 2008

Did you know, China now offshores manufacturing to Vietnam? If Pakistan behaved itself, may be India would start offshoring some call-centers over!

In 2008, outsourcing, offshoring and globalization are likely to continue as major trends.

Rising wages in the most popular offshore centers (especially Bangalore), are eroding the cost advantage that drove this business to India in the first place. When the practice began, there was a 1:10 cost advantage. Today, this has dropped to 1:3. Over the next 5 years, perhaps, it won’t make sense to send work to India anymore. At least, not to the major Indian cities.

To some extent, the second and third tier cities in India can absorb the lower end work. For the higher end work that requires serious engineering background, the advantage will disappear altogether due to lack of trained engineers. Faculty shortage is acute. Today, there are about 1,700 engineering colleges and 1,300 polytechnics. The faculty shortage is 30 to 35 percent. In a few years, India, at least, will manage to kill the golden goose.

China’s situation is slightly different. Its core competency is manufacturing, a discipline in which it can easily broaden its geographical base to other parts of Asia, as well as throughout its own vast territory. The higher education requirements of manufacturing are not as serious, nor is China as unprepared for the educational system ramp needs as India.

Eastern Europe is rising as an offshore destination. Latin America can also be leveraged better, especially with the proximity and time zone advantages.

The most interesting development could be jobs returning to the US at some point, although that point is certainly not now.

In 2012, however, the cost structure of North Dakota and Hyderabad could become comparable!

This segment is a part in the series : Trend Radar 2008

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Very good point on the cost structure. This is India’s major weakness (other than lack of infrastructure) as it competes only on cost and does not offer a better value proposition. I think that the 1:10 ratio is too high an estimate, even during the early days, when the cost allocation is done correctly.

However, it does not end off-shoring entirely. The IT and web design jobs might stay but the off-shoring may start happening for other higher cost jobs, like Radiology and creative works like Ads and Brand development.

Rags Srinivasan Saturday, January 12, 2008 at 1:16 AM PT

While I agree with the interesting observation you have made about rising prices of labour ion India, somewhere I formed a different line of thought. India is a demographically young country and where it is so, we are also facing major disparities in wealth distribution. This in effect implies that in as much as we have begun to grow in our own right, we are generating a wider berth between the haves and the have-nots.

This in turn leads to the formation of a cycle where every segment of the society tries to upgrade itself on the social scale and in the process creates very high levels of competition.

And this means there are going to be the fittest who survive the race and the weaker ones who sink to the bottom of the pyramid and restart their struggle to the top.

Effectively, what comes across is a cycle where we run through the worst, the worse, the bad, the good, the better and the best. And this self-propogating cycle will hedge India against the risk of turning into another United States of America….be it in terms of its socio-economic status or its feasibility as a skilled nation with an abundance of resources available cheaper than most other places across the map.

Divya Saturday, January 12, 2008 at 4:13 AM PT