Successful businesses operate like pirates – always on the lookout for the next opportunity to plunder. The pirates were in the Middle East for most of the 20th century. Towards the last decade of the 20th century, they were in the Silicon Valley.
But today, they are camped in the Eastern waters along the shores of China and India. It’s not just numbers that makes these two countries attractive to tap into labor. The fact that they are emerging economies, means that there is lesser regulation to comply with. And to top it, India encourages foreign ownership in IT and imposes no export taxes. Contrast that with the US where the corporate tax rate is the second highest in the world (Japan being the highest) and a plethora of regulations which almost end up instructing businesses how they need to be run – pirates don’t like to be policed, let alone be instructed at every step.
A look at the chart below shows that the US GNP (Gross National Product) has consistently been greater than its GDP (Gross Domestic Product) over the last few years. This means that a significant amount (about $100 billion) in goods and services are being produced outside of the US, by US companies. Contrast that with China, whose GDP is consistently above its GNP.
Both China and India pose obstacles and risks, yet the businesses are willing to take these risks. India suffers from a poor infrastructure (NY Times: In India,Dynamism Wrestles With Dysfunction), but has skilled human resources. Hence the US businesses have chosen the less infrastructure intensive jobs like IT analysts, legal analysts and even medical x-ray analysts for India.
China, on the other hand has a well laid out infrastructure, but the main risk is the threat to intellectual property (NY Times: The Real Problem with China). Moreover, the labor force is essentially High School dropouts with only 7% having a college degree or higher (People’s Daily: China’s labor force lags behind in higher education). Hence US businesses deem it ideal for routine manufacturing jobs. But hi-tech manufacturing is also moving to China and could pose a risk from an intellectual property and quality perspective.
The labor cost differential varies based on the skill level – for example, Customer Service differential is lower than the core IT development differential. But as demand increases, the labor rate for the higher skill IT development job function will rise faster, reducing the cost differential faster. However, once we look at the effective cost of offshoring, the differential may be even lesser when we factor the productivity loss of about 20% to 30% due to the geographical gap and the cost of hiring and retention since the offshore market is currently an employee’s market.
With these limitations across both countries, it is clear that the offshore model will reach a point of diminishing returns at some point. Coupled with this is the projection about the exponential growth that the economies of China and India will witness over the next few decades (see attached chart).
This exponential growth cannot be fueled by domestic labor alone. And in parallel, the US economy is projected to grow at its normal rate as well. This points to a huge demand for human resources, across the globe. How is this demand going to be met?
In the near term, the US seems to be expanding its manufacturing base into other Asian regions like Taiwan, South Korea, etc. This base needs to be induced back into the US – and that is possible only by making the US worker more attractive to hire – that is, reduce the unnecessary compliance regulation in the environment and around the worker. In a recent Newsweek article, ex-President Bill Clinton highlights a case where two big Chinese companies set up shop in Nevada to manufacture light bulbs and turbines for wind farms in Texas. Their sole reason behind this move was the tax credits in Nevada which supplemented the Federal tax credits.
Hiring in the US is further restricted by additional compliance requirements around labor itself. In certain trades like an electric technician, in some states, you cannot be hired till you pass an open book exam in which you sift through 1000 pages of the code book to find the answer to the questions asked in the exam – this is borderline ridiculous especially when you think of the tax dollars spent on conducting the exam in the first place.
What this boils down to, is a huge mindset change within the lawmakers in Capitol Hill. The current mindset is to create laws at the drop of a hat – did company A fail to pay its taxes? Let’s create a Federal Collection Agency to prevent that.
Businesses need to be induced to do business, not to hire lawyers to protect them from the onslaught of legislation. The lawmakers need to solicit input from the business community towards making the hiring of the US worker an attractive proposition. Topics discussed with the business community could include the minimum wage itself. During the recession many white collar workers took pay cuts and stayed employed. Could a more flexible minimum wage policy have saved a few more jobs or prevented them from being offshored? It would be interesting to see the opinion of the business community on this topic.
Competition from the global workforce has arrested the growth in salary of the average US worker. Hopefully, competition from the global workforce will also arrest the indiscriminate growth of corporate legislation and taxes in the US. It has to – there is no option.