China labor prices are rising - what it means for outsourcing

China’s labor costs for electronics manufacturing are rising even faster than I thought they would. In my work for the Outsourcing Navigator Series, I see dozens of quotations for manufacturing projects each month, and nearly every one includes a China estimate.

Based on this information, I’ve concluded the following:

Before November 2006, China’s labor costs were rising 3 to 5 percent per year. Then in November that gradual slope in the cost curve took off like a rocket. The result: For all 2006, costs rose nearly 16 percent with the vast majority of that increase occurring in November and December. In the first three months of 2007, the rate of increase has flattened a bit but has not reversed course. My estimate for 2007: A 10 to 13 percent increase.

At this rate, China’s labor costs either have or soon will reach parity with Malaysia and Thailand, thus making Vietnam the lowest labor cost location in Asia.

What does all this mean for your sourcing decisions?

More than ever, OEMs need to refrain from making decisions based on fanciful whim about where they think costs are lowest and start getting the facts — and the facts need to be accurate. Plus, they need to start doing their homework on Total Cost of Ownership (TCO) whenever thinking about China, Malaysia, Thailand, Vietnam or even Singapore because all of these geographies are becoming progressively intertwined from a regional

Here’s the bottom-line:

Rising labor costs in China will inevitably relieve the competitive pressures that have been holding down prices throughout the region so it is reasonable to say that prices throughout Southeast Asia are going to start going up. When and how much — who knows? The best course of action may be for North American OEMs to take at look at Mexico, and Western European OEMs to look toward Eastern Europe.

If you need help with TCO or want to know more about what’s going on in Asia and the rest of the world, check out my upcoming Outsourcing Navigator workshop next month in Chicago.

China targeting outsourcing potential to boost economy

New Delhi, May 19 : China's Jiangsu Province is targetting outsourcing as potential area for economic growth in the next few years.

Zhang Weiguo, the deputy governor of the province, was quoted by The China Daily as saying that a national strategic blueprint to develop the outsourcing industry is being given due consideration by the authorities.



He said the blueprint aims to provide new and diversified modes of economic growth to keep up with global trends and achieve sustainable development.

China's economy has grown rapidly in the last 15 years, and service industry outsourcing has in recent years emerged as a new economic growth point, particularly in Shanghai, Tianjin, Dalian and Shenzhen.

"We have great advantages in technology and human resources to compete and have a big share in the outsourcing service market," Zhang was quoted, as saying.

One of the fastest developing and wealthy provinces in the country, Jiangsu boasts a large number of hi-tech enterprises and companies in information technology, software, electronic information and telecommunications.

Statistics show the province yielded revenue of 200 million dollars from outsourcing services in 2006. Apart from Nanjing, the provincial capital and one of a dozen State-designated outsourcing base cities, six cities - including Suzhou, Wuxi and Changzhou - were recently named provincial-level outsourcing base cities by the provincial department of foreign trade and economy.

Fifty companies out of 1,000 from these cities were chosen to be key outsourcing enterprises.

Get More from Outsourcing

Most of us fear outsourcing, and with reason: Our jobs are on the line. Still, most of us work for organizations that will engage in one or more outsourcing deals. Learning how to deal with the changes outsourcing brings can actually work in our favor. Here are some tips.

Work on the outsourcing relationship. Most companies put little time or effort into these relationships, which soon become little more than a battle over invoices, due dates and other contract-related issues.

It's critical to treat the relationship formally, assigning specific point personnel to handle it (even if at this point you have only a small internal office of the CIO). This is especially critical when most of the people on the "other side" are your own ex-colleagues. You might like the "feel good" factor of seeing your former colleagues continue to identify themselves as members of your team, but beware. I've seen some who still did that 18 years into an outsourcing relationship. The problem is that those people never made the transition to representing their new employer and thus were unable to bring its best thinking to bear on the client's interests.

Focus on the future. Most long-term sourcing transactions go through at least one major contract renegotiation midstream. There's nothing wrong with this—few of us are brilliant enough to anticipate 10 or more years of changing needs. But if you're going to go through a year's worth of renegotiation, why settle for a few minor tweaks in the pricing algorithm and not much more?

It's not enough to enter into renegotiations focused on what has changed about your company's IT needs since you engaged the sourcing firm. Focus on change itself, the inevitable byproduct of passing time. You'll see, for instance, that tying the sourcing partner's resources to the configuration just makes it difficult for the partner to make changes that could save power, servers and other underlying costs. You might also decide to build staff redeployment and retraining into the contract. You could pay a defined sum toward them each year while putting in safeguards that would protect you from paying for severance if the outsourcer must lay off some staffers because of a lack of work. Another idea for renegotiation: Pay the sourcer a bonus for cutting costs more than expected or consistently delivering quality results.

Commit yourself. When you outsource a business process, do it cleanly. I've seen outsourcing relationships in which a single transaction passed back and forth over the sourcing boundary five or six times. Commitment can only come with trust, but it's important to make up your mind that your objectives are indeed trust and commitment. And, make no mistake, a failure to commit shows up as a lack of success—on both sides of the table. Once you have established trust, you will be less concerned that you might be able to get something done a little cheaper through someone else, and you will become comfortable with not spelling out precisely how the partner should do everything. In other words, you will learn to treat the partner like the next department over.

By the end of 2008, more than US$120 billion in outsourcing deals will be up for renewal. Many clients are in deeply unhappy relationships, yet most will end up outsourcing again. Now is the time to hone your ability to form partnerships. You'll be mastering an in-demand skill.

BTO industry to be USD 680 billion by 2008-09

The market potential of the Business Transformation Outsourcing (BTO) industry is expected to be aroundUSD 680 billion by 2008-09 and grow at the rate of five per cent,according to a ASSOCHAM study.
The study said the percentage of BTO services in the outsourcing spectrum was expected to increase from 19 per cent in 2004 to 31 per cent by 2009.
While, West Bengal is considered as one of the favourite IT destinations in the country Kolkata is almost at one of the last rungs of the potential Business Transformation Outsourcing (BTO) ladder, it said.
The study entitled " Business Transformation Outsourcing (BTO):Third Generation Outsourcing," was conducted by Associated Chamber of Commerce and Industry of India recently.
However, cities like Bangalore and Gurgaon have ranked as the most favourite BTO destinations, followed by Delhi, Chennai and Mumbai.
Kolkata has been placed at the sixth position followed by Pune in the seventh rank.
However, the industry gains popularity it was poised to grow at 10 per cent per annum.
The study said as the BTO industry was a normal extension of the BPO industry.
However, the study also pointed out that those cities that were already a BPO hub were most likely to be placed in the top rungs of the ladder.
Availability of quality infrastructure, talent pool, geographic location, local climate and tax benefits available from the local government were the main factors which a BTO layer looks for while setting up its base in a city.