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Offshoring Is a Two-Way Street

Not a day goes by without a news story concerning the outsourcing and offshoring of American jobs, particularly white-collar or technical jobs to India. Between manufacturing production shifting to China, and call centers and information technology moving to India, where will the U.S. find growth in jobs and investment?

Foreign Investment Is U.S.-Bound

Lost in the current political rhetoric is how much offshoring is bound for the U.S. “Multinational” does not strictly refer to U.S. companies operating worldwide. In fact, only 185 of the Global 500 corporations are headquartered in the U.S. The European Union boasts 126 global companies, while Japan accounts for 108. These foreign multinational corporations have a growing presence in the U.S., both in facilities and employees. German technology conglomerate Siemens employs 60,000 people in the U.S., for example.

Asian and European automakers are among the most visible global investors in the U.S., having established major assembly plants for Toyota, Nissan, Mercedes-Benz, BMW, Subaru and soon Hyundai. Following the car manufacturers are the suppliers, which also invest and hire locally.

Even businesses from emerging economies are investing in the U.S. Haier, a major Chinese consumer appliances manufacturer, has a production facility in South Carolina. Grupo Medalo, the Mexican brewer, has built an $84 million barley-processing plant in Idaho. The Association of Foreign Investors in Real Estate reported that foreign investment in U.S. real estate rose by 59% in 2003 and is expected to increase by another 11.9% in 2004.

Meanwhile, the U.S. Department of Commerce reports that $131 billion in U.S. services were performed for foreign clients in 2003. This was $53 billion more than services performed offshore for U.S. customers (see chart). U.S.-based lawyers, accountants and other professionals do substantial work for clients abroad. The business grew by $8 billion from 2002 to 2003. Offshore services for U.S. customers grew by $7 billion during the same period.

The data illustrates how major companies are looking to multiple shores. After the fall of the Berlin Wall, international trade expressed as a percentage of global Gross Domestic Product increased from 18% in 1990 to 26% in 2000.

Since 1990, the practice of offshoring both in the U.S. and abroad has accelerated as one way for businesses to optimize performance. This reconfiguration means that cost-sensitive activities (e.g., labor-intensive production and administrative work) have been growing in low-cost places, while talent-sensitive activities (e.g., headquarters, R&D) have been sustained or growing in the U.S. and Western Europe. Now, with heightened concern for business continuity, this trend has intersected with the decentralization required to mitigate risk.

The development of enabling technologies, particularly communications, also has given companies more flexibility. For example, a leased data line stretching from California to India cost $50,000 per month in 2000; today, it's $10,000.

Global Search for Talented Workers

For U.S. companies, there is a need to build pools of talent to drive innovation, but that could prove to be a challenge because in 2010 there will be 7 million fewer working Americans, ages 25 to 45, than there were in 2000.

Looking ahead, many of our clients have noted that they face a choice: either export work or import workers. In fact, they are doing both. General Electric has established R&D centers in Shanghai, China; Bangalore, India; New York and Germany. Global enterprises are building technology capabilities where talent exists or where talent will move.

One of the places where talented people want to move is the U.S. Companies recruit from abroad to fill open technology positions through the H1-B visa program. This program had grown to enable “importing” up to 100,000 and then to 200,000 technical workers, most with master's degrees, per year.

Reacting to slow job growth and nightly news exhortations, Congress reduced the quota for fiscal year 2004, which began in October, to 65,000 workers. This quota was filled by the end of February, only halfway through the government's fiscal year.

When a U.S. company cannot find or bring the skills it needs to the U.S. at a price point that is globally competitive, it will move the work to wherever its needs can be met. The same holds for those many Global 1000 companies based elsewhere, but who look to the U.S. as their offshoring destination.

Daniel Malachuk is senior managing director for CB Richard Ellis Consulting in New York.

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