I can almost feel the consternation in the outsourcing think tanks at the strategy departments of narrow-minded companies and consultants all over North America. For a decade their entire existence has been based on chasing lower labor costs without having a clue about total cost, cycle time, and value to the customer. Shedding a few pennies off of their labor was worth having a few million bucks in inventory sitting on the high seas for several weeks.
First Mexico, then Taiwan and Singapore, then India and China. The latter were supposed to be the end-all nirvana of outsourcing… almost a billion unknowingly impoverished workers willing to work for pennies. So much for that.
Last week the Financial Times published an article on How India and China Risk Being Stifled by a Skills Squeeze. As an example, FT reports that in India annual employee turnover is approaching 40% while wage inflation has increased to about 20%… per year. This situation exists both in the production of hard goods and in the delivery of services, but also in the science and technology arenas.
Many companies also set up offshore operations to tap into the presumed larger availability and lower cost knowledge workers. We often hear about how India and China graduate several times as many engineers as the U.S.. But an engineer is not necessarily an engineer. A McKinsey study from a few months ago looked at the supply and demand sides of offshore knowledge workers and found that while supply greatly exceeded demand, the supply of workers trained to U.S. standards was significantly less. This was especially the case with engineers.
The increase in demand and resulting wage inflation is creating larger amounts of discretionary income, resulting in increased demand for goods and services. For companies that have created operations in those countries in order to be closer to their customer, the future can be rosy.
But those companies that focus purely on labor cost are starting to run into walls. A few countries are left, and perhaps Africa remains a large untapped source. However the outcome will always be the same. There are many companies that have focused on their internal waste and have generated savings that are orders of magnitude greater than the "labor cost penalty" for operating in higher wage countries. And there is no better example than Toyota on the fruits that locating operations close to your customer can create… even if it means new plants in much higher wage area.