Will offshoring harm Western service economies?
"Restoring American Competitiveness" is an article from Gary Pisano and Willy Shih in the juli/august issue of Harvard Business Review. The article points out that, against the general consensus, American companies will be unable to develop the next generation high tech products due to underestimating the impact of sending their manufacturing offshore. If this is true, can similar effects be expected for the service industry? In other words: will Western countries not only have to fight an uphill battle in manufacturing, but soon also in services?
The article in HBR uses the value chain of personal computers and laptops as an example. Where American companies like HP, Dell and Compaq outsourced initially only their manufacturing to low cost offshore destinations, is now almost the whole industry based in Asia. Every laptop sold by an American brand, with the exception of Apple, is today designed, developed and manufactured outside the U.S.. The same applies to most phones and other mobile devices.
With manufacturing leaving its shores, developed countries tend to focus on creating economic growth through designing and producing services. I wonder however whether the following quote from the article is also applicable to the service industry (p119): One [myth] is the popular belief that an advanced economy like the United States no longer needs to manufacture and can thrive exclusively as a hub for high-value-added design and innovation. In reality, there are relatively few high-tech industries where the manufacturing process is not a factor in developing new - especially, radically new - products."
In other words, are we in Europe and United States still able to develop new high added value IT services if the graduates leaving the universities today start working in an environment where the developers and support engineers can only be reach by telephone and video conferencing?
Today there are still plenty of employees available in American and European companies who were used to sit behind ‘produce’ the service themselves (e.g. develop software, process mortgages). They will however retire in the coming decades leaves employees which have to manage and instruct offshore suppliers based on theoretical experience only. It is already difficult as an experienced hands-on manager to get the services delivered from an offshore vendor, let alone a situation where all the hard core knowledge of creating and delivering services is overseas.
The argument of the authors that an intact value chain is important for future innovation conflicts thus with the message within Thomas Friedman’s in “The World is Flat”. Friedman believes that geographies lost their importance due to the ability to communicate anytime, anywhere to anybody in the world. Also Amar Bhide’s book "The Venturesome Economy" (2008) argues that innovations will find their way to the customer, regardless of the country it was invented.
Personally I believe that this last argument is flawed. An economy can grow only if it produces products and services which customers want to buy. As soon as all the innovations have to be imported the trade balance will become uneven (in the case of the US: collapse completely as there is already a considerable deficit) which in the end will result in a society which gets poorer instead of richer. I think that, regardless of which author is right, we have to be careful that Europe and America don’t end up being locations where everybody is a ‘managers’ and nobody doing any actual value added work anymore.
The article in HBR uses the value chain of personal computers and laptops as an example. Where American companies like HP, Dell and Compaq outsourced initially only their manufacturing to low cost offshore destinations, is now almost the whole industry based in Asia. Every laptop sold by an American brand, with the exception of Apple, is today designed, developed and manufactured outside the U.S.. The same applies to most phones and other mobile devices.
With manufacturing leaving its shores, developed countries tend to focus on creating economic growth through designing and producing services. I wonder however whether the following quote from the article is also applicable to the service industry (p119): One [myth] is the popular belief that an advanced economy like the United States no longer needs to manufacture and can thrive exclusively as a hub for high-value-added design and innovation. In reality, there are relatively few high-tech industries where the manufacturing process is not a factor in developing new - especially, radically new - products."
In other words, are we in Europe and United States still able to develop new high added value IT services if the graduates leaving the universities today start working in an environment where the developers and support engineers can only be reach by telephone and video conferencing?
Today there are still plenty of employees available in American and European companies who were used to sit behind ‘produce’ the service themselves (e.g. develop software, process mortgages). They will however retire in the coming decades leaves employees which have to manage and instruct offshore suppliers based on theoretical experience only. It is already difficult as an experienced hands-on manager to get the services delivered from an offshore vendor, let alone a situation where all the hard core knowledge of creating and delivering services is overseas.
The argument of the authors that an intact value chain is important for future innovation conflicts thus with the message within Thomas Friedman’s in “The World is Flat”. Friedman believes that geographies lost their importance due to the ability to communicate anytime, anywhere to anybody in the world. Also Amar Bhide’s book "The Venturesome Economy" (2008) argues that innovations will find their way to the customer, regardless of the country it was invented.
Personally I believe that this last argument is flawed. An economy can grow only if it produces products and services which customers want to buy. As soon as all the innovations have to be imported the trade balance will become uneven (in the case of the US: collapse completely as there is already a considerable deficit) which in the end will result in a society which gets poorer instead of richer. I think that, regardless of which author is right, we have to be careful that Europe and America don’t end up being locations where everybody is a ‘managers’ and nobody doing any actual value added work anymore.
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