OUTSOURCING to China Fort Wayne Rubber

1
OUTSOURCING to ChinaFort Wayne Rubber Plastics
Group

• John F. Wellington, Ph.D.
• IPFW School of Business and Management Sciences
• February 10, 2005

2
(No Transcript)
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Make in China for

• Chinese markets
• Other Asian markets
• US markets
• Rest of world.

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Statistics China

• Information on the following slides is taken
  from
• Pocket World in Figures
• 2005 Edition
• The Economist

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China

• Population 1.3 billion
• Population lt 15 years 25
• Population gt 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

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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)

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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

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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

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Rubber Plastics NewsNovember 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.

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Manufacturing Objectives

• Make it
• Cheaper, faster, better
• With improving reliability
• Be agile and flexible
• Variety of products, volumes, terms
• Absorb cost of related services

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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

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What is Outsourcing?

• Transferring operation(s) with management
  responsibility to another party for well defined
  deliverables.
• Offloading.
• Something comes back.
• A locus is maintained.

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Outsourcing

• Manufacturing
• BPO
• Human resources / employee services Payroll,
  accounts receivable, etc. Travel
• Call centers
• IT
• Research development

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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

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Offshoring by other names

• Near-shoring
• Right-shoring
• Best-shoring
• Any-shoring.

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Why Offshore?

• Cost savings.
• New markets, changed markets.
• Supply chain.
• Restructured organization takes you there.
• Prevailing business model.

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U.S. ExperienceOffshoring

• What work went offshore
• Where lost in the U.S.
• Where does it go offshore
• Quantity and quality of the work shifted
• Impact
• Trends

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U. S. Experience

• Wheres 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.

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U.S. ExperienceStudies 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

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U.S. ExperiencePlant 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.

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U.S. ExperienceStatistics USA

• Who / when are jobs shifting
• Number of jobs shifted
• Characteristics of companies
• Characteristics of jobs shifted
• Destinations

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U.S. ExperienceWhos 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

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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.

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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
25
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
26
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
27
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
28
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
29
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
30
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
31
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
32
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
33
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.

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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.

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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.

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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

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Chinas Experience

• Benefits and costs of worlds offshoring
  destination
• Economic, social, and political consequences
• Following is from the Conference Board

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Chinas Experience

• Reallocation process
• Movement of workers to higher value jobs
• Away from labor-intensive manufacturing
• Away from SOE

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Chinas Experience

• In the textile industrythe processing of raw
  materials to make clothChina has experienced a
  44 drop in jobs
• In the apparel industryin which textiles are
  transformed into final productsjobs grew by
  160,000 between 1995 and 2002.

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Chinas Experience

• 14 annualized growth during 19952002
• Growth in productivity due to increased
  efficiency from automation and technology.
• Attributed to offshoring of U.S., European, and
  Japanese firms.

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Chinas Experience

• One recent estimate, based on several state
  sources, places Chinas national unemployment at
  23.
• Corresponds to 168.5 million workers in 1999a
  number greater than the total number of employed
  persons in the United States.

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Manufacturing job losses and gains in China Type
of ownership
Joint ventures(Hong Kong, Taiwan, Macau) Joint
ventures (foreign) Wholly owned
(foreign) Domestic private Other
901
460
669
742
219
Joint-stock(shareholding) 5,943
Collectively owned -12,102
State-owned -1,345
8.93 millionjobs gained
-13.45 million jobs lost
-8
-6
-4
-2
0
2
4
6
Annualized growth
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
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Chinas Experience1995 - 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.
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Chinas Experience1995 - 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.

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Chinas 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

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Chinas 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.
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Chinas Experience Summary

• Joint-stock companies showed a net gain of 5.9
  million workers over the 19952002 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.

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Your Experience

• Rubber Plastics News
• Institute of Supply Management

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Rubber Plastics NewsNovember 15,
2004Offshoring 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

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Rubber Plastics NewsNovember 15,
2004Offshoring 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?

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Northeast Indiana

• Kathleen Randolph
• Northeast Indiana Workforce Investment Board
  (NIWIB)