Deciding to Outsource to China

With labor costs in China far below those of the US, the argument for outsourcing is a very interesting topic. Outsourcing in its most basic form is the farming out of services to a third part, often in another country or region (Overby). Companies in the United States have been outsourcing to venders in other countries for nearly two decades (Hirschheim). This practice has resulted in 3.3 million jobs being slashed and lost wages of $135 billion for the American public. Jobs that remain have had their salaries cut at an alarming rate.

The public is beginning to realize the full-scale effects of outsourcing. The economy in America is tanking and with fewer jobs available because of outsourcing, Americans cannot find jobs to support their families. Rudy Hirschheim writes, "The dot-com bust and the resulting loss of jobs intensified the concerns about the loss of domestic jobs to foreigners and fuelled public sentiment against outsourcing" (Hirschheim).

Although many workers are losing their jobs and companies are cutting their wages, not all parties are losing in the outsourcing trend. American companies have many rewards associated with outsourcing work overseas. The Chinese, on average, work for a cheaper wage than workers in America (Numbeo.com). This leads to larger profits for American companies and greater investment in US programs. The Chinese also provides an incredibly vast amount of skilled laborers (Wright). Also, the Chinese government is adding new programs to boost interest of American and European companies to invest their business in China (Wright).

The workers in China work for cheap compared to workers in the US. According to consumer price indexes, China's cost of living is 60.19% lower than in the United States (Numbeo.com). This means on average, people in China spend about 60% less on products and services they use than people in the US. Companies can therefore pay them less because of Chinese standards of living. Some experts predict that more disposable income for Chinese workers will lead to them buying new products and services thus having a positive impact on the entire global economy (Hirschheim). The Chinese market has a competitive advantage over the Indian and US markets. On average, a newly graduated software engineer in China makes around $3500 a year and in India the average is around $11000 (Wright). In the US, the average is close to $50000 (Conchuir).

Another benefit of outsourcing to China is the very large skilled labor pool. Their population is over 1 billion and is still growing (Conchuir). China has over 800,000 IT professionals and is graduating about 200,000 technical graduates each year (Shine). These people are competitive with graduates coming out of India and the US and companies can gain close to 60% cost saving from China when you look at the infrastructure, telecommunications and project management related costs involved in business (Shine). China is graduating more advanced technically skilled workers also. In 2006, China graduated more than 1.5 million engineering majors, while the US graduated close to 125,000 (Wright). Chinese returning home with degrees from top schools in the US, Canada, and the UK provide another source of high-quality talent (Wright).

A third advantage to outsourcing to China is their government's support for outsourcing. The Chinese government has come up with an initiative called the "1000-100-10" project (Wright). This project includes funding of more than $1 billion and aims to double China's services exports (Wright). The plan calls for establishing 10 Chinese cities as outsourcing bases, attracting 100 international corporate customers to offshore in these cities, and assisting the development of 1000 outsourcing venders that can meet the demands of multinational corporations (MNCs) (Wright). This is a bold plan that could work and could be very successful in bringing in MNCs. This plan provides many benefits for current and future development in China. The policy calls for funds and incentives to improve training in technical skills and upgrade quality standards to achieve international certification levels, a framework to improve intellectual property rights protection, improvements in infrastructure to support the outsourcing industry, loans and credit insurance for outsourcing enterprises, a 4,500 yen subsidy to vendors for every new college graduate employed for at least on year, interest rates that favor exporters of software services, priority for software businesses applying for public listings on domestic or overseas exchanges, support for R&D centers set up by domestic businesses with academic institutions, and tax breaks to encourage development outside key outsourcing centers (Wright). Clearly, the Chinese government strongly encourages outside companies to do business in China.

US companies face drawbacks when outsourcing