Theme 2012
The challenges of Outsourcing
With rising labour costs and less technically skilled personnel at home, European firms have outsourced many of their value-adding activities to companies in lower-cost countries such as China. However, European policymakers and businesspeople often do not fully understand the complex relationships among outsourcing, corporate sources of competitive advantage, and European-Chinese strategic relations. As European companies outsource more of their core manufacturing activities, especially those in high-technology industries, many of them are being forced to transfer and surrender key technologies to Chinese partners and suppliers in order to, for instance, gain access to the prosperous Chinese market. In turn, this technology and knowledge transfer helps to spawn Chinese rivals that over time are likely to directly compete with foreign companies in the global market.
Difficulties
For many Western firms, it is increasingly difficult to compete in the global marketplace from a solely domestic manufacturing and R&D base. European companies in a wide range of industries (e.g. textiles, computers, telecom equipment, heavy machinery, and automobiles in the 1980s; semiconductors, medical equipment, office equipment, digital appliances, and software in the 1990s) have steadily farmed out the manufacturing and assembly of entire products to more cost-efficient sites. Lately, the pace at which European companies are outsourcing critical functions to foreign companies has accelerated. However, this also comes with several potential downsides. By outsourcing a business process, managerial control often suffers. This occurs because it is harder to manage the outsourcing service provider, than to manage one's own personnel. Moreover, the hidden costs of outsourcing are hard to predict, which causes overall costs to be underestimated. Therefore, before a company decides to outsource its business process, it must examine all important factors carefully.
China and outsourcing
China has transformed its economy radically over the past three decades. When the government began to liberalise its economy by gradually introducing free-market economics, the country became more attractive to foreign firms seeking to produce and sell in the world's most populous country. Over the past fifteen years, foreign direct investment has skyrocketed in the Chinese economy (by some estimates, it has reached almost a half-trillion dollars). During the same period, China's annual economic growth rate has routinely topped upwards of 8 percent, and in some years it approached 10 percent. Outsourcing has fuelled much of this growth. Seeking to produce for both the Chinese and global markets, foreign companies have built up enormous manufacturing capacity in China. Since the mid-1990s, China has climbed the value chains well. Strategic alliances and outsourcing arrangements have enabled scores of Chinese industries to become more efficient and competitive in just a few years.
Company participating information
At the department of Industrial Engineering & Innovation Sciences, there is expertise about all of these issues. By participating in the International Research Project, students and professors apply this expertise to your particular situation.
References:
http://qje.oxfordjournals.org/content/120/2/729.full.pdf
http://www.sciencedirect.com/science/article/pii/S0030438706001074
