Sunday, December 12, 2004

CHI BM ? IBM and the Lenovo Deal : A Form of Offshoring?

John Oates of the Register opined on December 3, 2004 that "Offshoring [is] inevitable, so get over it", writing:

"The movement of jobs from high cost to lower cost countries is now inevitable and attempts by Western governments to stop it happening are doomed to fail."

The immensity of the problem becomes visible when it is not only jobs that are being moved but entire production divisions, such as the sale of IBM's PC business to the Chinese Lenovo Group.

In anticipating the IBM-Lenovo deal, InfoWorld has an article by Robert McMillan of IDG News Service entitled Dell slams expected IBM-Lenovo deal, in which Michael Dell gave his opinions on the deal, indicating that Dell thought his company would maintain its position as the world's Nr. 1 PC company because of its predominantly US manufacture.

So why has IBM gone the Asian way? First, China has a lot of dollars to spend, holding nearly 10% of outstanding US Treasury securities. Second, the IBM and Lenovo deal manifest something we already know from outsourcing and offshoring. Obviously, China is on the march in the world economy due to low wages and a gigantic market, and much manufacture is being offshored to them (or to similar low wage nations such as India).

What is the difference between offshoring and outsourcing? Performix provides these definitions:

"Outsourcing means a third party takes over the execution of a business process such as a contact centre; offshoring means that a business process is taken to a different country."

Where there is a gain, there is generally also a compensating loss, so that outsourcing or offshoring is not without its drawbacks. McMillan makes a very interesting observation about Dell which points to the problems of outsourcing and/or offshoring products and services:

"Dell has some first-hand experience in the problems that can accompany offshoring. A year ago the company moved customer support operations for its Optiplex desktops and Latitude notebooks back to the U.S. after corporate customers complained about the quality of service they were receiving from international facilities."

Similar problems may surface when entire divisions of manufacture are sold to foreign investors, which is nothing other than outsourcing or offshoring on a larger scale. Business divisions are simply sold to firms operating in lower wage countries and an equity interest is kept by the seller in the company of the buyer, as in the IBM case. The bottom line is that IBM profits increase - at the cost of US labor.

As far as other potential drawbacks are concerned, analysts see the IBM and Lenovo deal to have the potential for culture clash and to perhaps lead to difficulties in customer relations with existing customers.

See also

McKinsey & Co. for analyses of offshoring and

CNET for a chart of world PC computer sales by company.

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