A basic outsourcing question.

[krithika desai]

Say IBM gets something done with 1/10th of what they w'd have been required to spend in the US, I wonder where the resulting savings go? into American/Indian/Chinese coffers? How is that money circulated back into the economy?

[John Summers]

that money goes directly into the coffers of IBM. the chief executive/board get huge fat bonuses, the share price goes up a few cents.
then when they find it is cheaper to hire staff in country X than country Y the staff in country Y lose their jobs.
oh, and the actual 'stuff' the company makes gets sold, mainly, in the West, although of course when time catches up on western companies then they will find no one can afford to buy their products anymore.
For example, say you are IBM making WebMagic Appserver, and selling it for �3000. Who is paying �3000 for it? Indian or Chinese companies? HA ha i don't think so. Western IT companies are buying it. Now what you (IBM) and all the other western IT companies do is outsource 90% of their staff to cheap labour markets. Now, how many companies can buy your Appserver for �3000? mmmmmmm, actually very few are left.
I think someone on JavaRanch has a signature which says "Did you just make your best customers redundant?".
john

[Stephen Pride]

I agree somewhat with what John said. I recall reading an article/editorial a while back that mentioned this same issue (although the company and product were different). I wish I would have saved it. The gist of it was that even though the production cost (labor, materials, et al) were reduced, it rarely if ever transcended to the consumer. And even in the cases where the savings happened to "trickled down", usually the middlemen and/or time negated all actual "savings" to the end consumer.

[J. Yan]

Originally posted by John Summers:

For example, say you are IBM making WebMagic Appserver, and selling it for �3000. Who is paying �3000 for it? Indian or Chinese companies? john

Why not?
Just consider the following facts of China:
1.) World largest wireless phone market
2.) World 2nd largest PC market only behind US (will take over US as world #1 in 2010)
3.) World 4th largest car market behind US, Japan, and Germany (will take over Japan as world #2)
4.) World 8th in term of total IT spending (in 2002), predicted to be 6th in 2006 and 3rd in 2010
5.) World 4th largest importer only behind US, Japan, and Germany (surprise! China didn't refuse to buy anything made in U.S )
.......
The list will be too long if I list everything here
The only problem is that in short-term, western companies may not profit as much as they do in the developed countries. I just read some news a few days ago that IBM will provide Websphere platform for free to some Chinese companies .

[HS Thomas]

john :I think someone on JavaRanch has a signature which says "Did you just make your best customers redundant?".
Tim Holloway. And the signature says -
"Did you just lay off your best customers ?". I never really understood that until now. Thanks.
regards

[Matt Cao]

Originally posted by J. Yan:

Why not?
Just consider the following facts of China:
1.) World largest wireless phone market
2.) World 2nd largest PC market only behind US (will take over US as world #1 in 2010)
3.) World 4th largest car market behind US, Japan, and Germany (will take over Japan as world #2)
4.) World 8th in term of total IT spending (in 2002), predicted to be 6th in 2006 and 3rd in 2010
5.) World 4th largest importer only behind US, Japan, and Germany (surprise! China didn't refuse to buy anything made in U.S )
.......
The list will be too long if I list everything here
The only problem is that in short-term, western companies may not profit as much as they do in the developed countries. I just read some news a few days ago that IBM will provide Websphere platform for free to some Chinese companies .

Hi,
Don't forget Sun.
I saw it from http://www.sys-con.com/Java/article.cfm?id=2268
Since when China refuse to buy things from US? China only refused when discovering the loopholes and got the thing for dirt cheap. I could tell you stories how China space industry started and how it venture to the present day. But my basic work ethic principal prevents me.
When I see your respond, I imagine the day Chinese frugality portion of their DNA been removed. Don't be so offended. When you live in a huge populations with a very tiny economic pie, you are bounded to be a hustler. Just the human fact.
Regards,
MCao

[J. Yan]

1.) When I see your respond, I imagine the day Chinese frugality portion of their DNA been removed.



2.) Don't be so offended.

Not at all. Most time I am mature enough. Sometimes I am just making fun here

3.) When you live in a huge populations with a very tiny economic pie, you are bounded to be a hustler. Just the human fact.

Good point.
Regards
J. Yan
[ October 22, 2003: Message edited by: J. Yan ]

[John Summers]

J Yan
I cannot believe software costs the same in India or China as the UK/USA. Yes, I do not deny that China is a huge market. What I am saying is that the software there is cheaper.
Windows XP in the uk is �200. I don't know for sure, but I would bet money that the cost in Yen does not convert to anywhere near �200.
Listen, please, this is what I am saying....
Imagine a software company that makes a product purchased by other software companies (Jbuilder, Websphere, whatever). Now, if those software companies are in the UK you can charge them more for the product than companies in China/India.
Now, imagine this company outsources itself to China/India. If NO OTHER IT companies do this, they will make a lot of money.
problem: all other IT companies are outsourcing, too.
Now who is left to buy their product at UK prices? NO-ONE!! so they can only sell at China/India prices and MAKE NO BENEFIT from outsourcing.
john

[Tim Holloway]

Actually, if you want MS-Windows dirt cheap, go to Thailand, where Microsoft dropped the price into the ground because they were being undercut by piracy and Linux (though to hear Ballmer and Gates, the two are synonymous ).
Of course it helps if you can read Thai.
You price according to supply and demand. If the pricing can't cover the cost of production, you go under - at least for items not being sold/given away as "loss leaders" (e.g. Internet Explorer, Windows Media, etc.). Conversely, if you can, you gouge for all it's worth.

[J. Yan]

Hi, John:
I understand your point, but you seem not to get mine. Many people are misled by the concept "average". "Average" is just one way to compare things. It's good for some cases, but not for all. For some cases, the average is almost meaningless. Consider the two examples below:
Example 1: Student A took 3 classes and got a GPA 4.0; Student B took 30 classes and had a GPA 3.5. Can you tell me which one is a better student if only using GPA as criteria?
Example 2: Suppose you are the CEO of Motorola. Suppose UK's population is 50 million and everyone in UK will buy a Motorola cell phone, and suppose China has a population of 1 billion and only 10% of its population (i. e., 100 million) will and can afford to buy Motorola cell phone. Which market is more important to you? If you are a ruthless capitalist (which means you don't care whether the rest 90% Chinese earn $5/month and half-starve blah blah...), I would say of course it's China. In this case, the number (not percentage) counts. Actually last year nearly Motorola's 1/5 revenue came from China market if memory doesn't serve me wrong.
Do you think Boeing will sell the exact same airplane to China for any less? You know when Chinese travel abroad, what do they buy most? Digital cameras, digital camcorders, and laptops. Why? Because it's more expensive to buy the same brand and the same model in China.
I never said the salary of the Chinese people in China is comparable to the salary of people in UK (I don't think it's even close). What I was trying to say is that don't over-panic on globalization. Rich countries can still benefit from the trade with China (which is rich as a whole, but sucks on everything about average).
Have fun
J. Yan
[ October 23, 2003: Message edited by: J. Yan ]
[ October 23, 2003: Message edited by: J. Yan ]

[Rufus BugleWeed]

Since when China refuse to buy things from US?

Whenever China started keeping its currency exchange rate low compared to the dollar, that is when.

[Matt Cao]

Hi,
You sounded like China is Japan. It is a darn half-ass communist country. It has its own peculiar ways of doing things as long as her country will not look like Germany or Russia. There are still two Germany as far as average German think and as far as people I contact with. Russia, who is truely running the country. In the West, we think everything so simple because we have the foundation of law and order. Even the USA Founding Fathers were lawyers and wealthy people in their times. Suppose if the Founding Fathers were militants, what kind of country US have? Are we anything better than banana country?
If I am wrong someone in China will correct me, China approach is making herself prosper before embracing Capitalist fully. If you think by letting China currency exchange flow with the market, then you probably have the experience of running billions people in your previous life. In time, it will increase. I will not recommend leaving the exchange rate at it is neither because things do changed over times.
Regards,
MCao
[ October 23, 2003: Message edited by: Matt Cao ]

[John Summers]

Actually,
I've seen a few articles in newspapers asking whether China can fully embrace capitalism yet remain non-democratic. You know, the argument is that the population's horizons will broaden, they will have greater access to world media and the internet, blah blah. actually, isn't there some way that the Chinese goverment blocks out all non-acceptable websites?

john

[J. Yan]

Hi, John:
I just double checked Motorola's figure for you, and found that one article said actually China was 28% of Motorola's sales (guess the writer meant this year).
http://www.thestreet.com/_yahoo/tech/scottmoritz/10092348.html
[ October 25, 2003: Message edited by: J. Yan ]

[John Summers]

j yan,
does stuff like mobile phones and software really cost the same in China? I'm amazed! I know in Taiwan it's quite a bit cheaper, and Taiwan has a massively higher GDP than China.
By the way, please dont think I've got something personal against Chinese people. I haven't! (My last girlfriend was one, well Taiwanese, aghh lets not get into that...).
john

[JiaPei Jen]

[B]You know when Chinese travel abroad, what do they buy most? Digital cameras, digital camcorders, and laptops. Why? Because it's more expensive to buy the same brand and the same model in China.[/B]

It is due to the tariffs that are imposed on the imported goods. The tariffs go to the Chinese Government. That kind of money does not go to the manufacturers.
[ October 28, 2003: Message edited by: JiaPei Jen ]

[Roseanne Zhang]

"does stuff like mobile phones and software really cost the same in China?"

Mobile phones are a lot more expensive in China for sure!
[ October 28, 2003: Message edited by: Roseanne Zhang ]

[Roseanne Zhang]

BTW, BEA/China
http://dev2dev.bea.com.cn
is a lot more active than BEA here
http://dev2dev.bea.com
Is it interesting?

[Rufus BugleWeed]

Today's NYT has an interesting article about currency manipulation.

That will clearly annoy some members of the Senate Banking
Committee. In a letter to Mr. Snow on Oct. 16, the day after the
Treasury delayed the release of the currency report,
Senator Charles E. Schumer, Democrat of New York, and two
of his colleagues said both China and Japan were manipulating
their currencies.
"As you also know, China is not the only country engaged in illegal
currency manipulation," the letter said. "We are also concerned with
Japan's ongoing and massive intervention in global currency markets. These
actions, intended to obtain an unfair competitive trade advantage for
Japanese export industries, amount to a substantial subsidy of its major
exports."
Philip Suttle, global head of foreign-exchange research at J. P. Morgan,
finds it hard to argue with that contention. "In a very basic sense, it
seems hard to see how they can avoid saying that China and Japan are
manipulating."

Sounds like Japan is quite true.
[ October 29, 2003: Message edited by: Rufus BugleWeed ]

[J. Yan]

Originally posted by John Summers:

does stuff like mobile phones and software really cost the same in China?

Mobile phones used to (10 years ago) be very expensive, especially when compared with the average Chinese's salary. The one time cost (phone plus activation fee etc) was about Yuan 10000.00 (1 USD = 8.28 Yuan ??? at that time), and the service fees were even more horrible (many people complained that they could afford buying a mobile phone, but could not afford using it). 10 years ago, owning a mobile phone (the old fashion big Motorola junk) is almost the symbol of social status, somehow like owning a car in China today. It must not be that expensive right now (sorry, I don't know the current price), since my unemployed younger brother who lives with my parents now has one . The current two big things are: automobiles and computer chips. Let's see how things will be going.
Software is totally another story. What can I say ? Even the domestic Chinese companies suffer too...
I want to know how many people in UK really paid Pound 200 just for buying Windows XP alone? I bought an official Windows 98 disk from Microsoft for $5 when I was still in graduate school several years back (because my school got a deal with Microsoft), and two years ago I bought a laptop and it came with the Windows XP (so I don't know how much I actually paid for it).
BTW, I have experience living in both a developed country and a developing country. What I can tell you is that not everything in a developed country is more expensive in a developing country.

Originally posted by JiaPei Jen:

It is due to the tariffs that are imposed on the imported goods. The tariffs go to the Chinese Government. That kind of money does not go to the manufacturers.

Yes, that's true. 10 years ago, buying a Lexus at the price of Yuan 660K (including all the fees) in China was considered as a super cheap deal. Many people in southern Chinese provinces got rich by smuggling cars.
[ October 30, 2003: Message edited by: J. Yan ]
[ October 30, 2003: Message edited by: J. Yan ]