Why you shouldn’t be too worried about India and China

OK, so make sure you don’t read what I didn’t say. You still need to be worried about India and China — the matter what country or industry you’re in, if you’re not thinking about the effects that these two countries will have on you, you’re already in trouble. But we need to keep the threat in perspective. India and China are both exceptionally populous countries, between them accounting for over one third of the world’s population. In terms of the potential talent pool, we are often tempted to think of them as limitless. But they’re not. Like my own home country, South Africa, a large percentage of the population are unskilled. Only a very small group of people in these countries would be regarded as talented enough to contribute to the industries that benefit from the offshoring and outsourcing of service industry work from developed countries.

Because of this, there is a growing war for talent in these countries. The immediate ramifications of this is that salaries and remuneration packages are starting to climb — in some cases quite dramatically — and that will put the squeeze on the price these companies charge, thus starting to remove one of their greatest competitive advantages. Once this happens, the pace of outsourcing will dramatically decrease. And it is happening.

BusinessWeek, Feb 14, 2005, reported on the Indian outsource industry, under the heading, “good help is so hard to find” (read it here). They document that the Indian outsourcing industry grew by 35% in 2004, and now companies are battling to find and retain talent. In addition to negotiating salaries with new recruits, they also offer such perks as finding a new home, providing compensation for lost salary we new recruits don’t give notice and helping them find schools for the children In short they are almost offering a complete concierge service – something that we at TomorrowToday have spoken about often with our clients. In essence, India and China are simply joining the “real world” of talent management in the connection economy.

In addition to the perks being offered, the basic salaries have skyrocketed. In 2000, an entry-level software writer earned $ 4082. Last year he would have earned $ 6,628. A project manager would have earned $ 13,585 in 2000. Now she would earn $ 31,131. That’s a staggering 50% compound annual growth rate. Add all the perks to that, and one can only imagine the growth in costs in these companies.

Then, of course, came the Citibank fraud scandal. During this past month at least 14 people have been arrested for fraudulently transferring at least $ 426,000 into their own accounts from the accounts of Citibank customers. One of the real scandals here is that these people were all Indians, with at least five of them being previous employees of MphasiS BFL Ltd, an Indian Citibank call centre contractor. They had persuaded Citi customers to give them passwords and other account details. Of course this kind of scam which targets US customers is a nightmare for the Indian offshoring industry. They must, and they have, beef up security significantly – but this too adds costs and makes it more difficult to attract and retain talented staff. Of course this type of fraud can and does happen all over the world — once again, India and China are just welcomed to the real world of globalised capitalism. (Read more about this story at BusinessWeek, 25 April 2005 – available only to premium subscribers – click here).

So, be worried about India and China. But not as worried as you thought you needed to be. And if you are Indian or Chinese and living outside of your home country, you need to know that now might be a good time to go back — they need you, and they are now willing to pay global rates to have you. (By the way that is happening: Chinese people are leaving Canada in droves to go home — more of them left Canada than came to Canada in 2004).

Of course, there is also the argument that outsourcing actually sustains American jobs (for the technical economists reading this, you will recognise the doctrine of comparative advantage put forth by economist David Ricardo in 1817 – there is still merit in it, but see the next paragraph if you’re not a fan). This is certainly the view of The Economist, or at least it was in their Feb 21, 2004 edition (read The Great Hollowing-out Myth – premium content for subscribers only). In brief, they argue that the majority of the jobs lost the in the United States and past five years are cyclical, not structural, and only a tiny proportion have gone overseas — in fact the American economy has an amazing amount of “churn” with more than 2 million jobs a month — this has a positive effect on productivity. The current round of outsourcing will force America’s service industry (in particular the IT sector) to become more efficient and productive, which will ultimately lead to more jobs, most of which will be higher paying. Of course, this is small comfort to the few individuals who will be hurt in the process, and that is where most governments aim to step in and provide safety nets during times of turbulent change.

One of the counterarguments to this line of thinking is that it fails to take into account the shift towards knowledge working. For comparative advantage to work, a country’s labour, capital and technology must not be able to move offshore. When this doctrine was first espoused, the most important comparative advantage is a country had were climate, natural resources and geography. The assumptions that factors of production were not easily transportable overseas and that different countries would have different relative costs of production were realistic. However, in the knowledge economy these underlying assumptions now appear unrealistic.

If all of this is making your brain hurt then console yourself with a very simple summary: at the moment India and China had a massive advantage because of the cheapness of their labour costs. That advantage is fast disappearing. The real comparative advantage is in productivity, innovation, retention of staff, overall level of knowledge and connections. Companies and countries that work hard over the next two to three decades to develop these advantages will obtain and maintain massive competitive edges over everybody else. Everyone, including India and China, has to learn this lesson.

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