Panel: Outsourcing is 'cruel' but necessary

2/3/2010 8:37 PM EST

We've seen the IDM model. The fabless. Fab-lite. How about the empty chip model? Any comments on outsourcing trends?

2/4/2010 9:09 AM EST

Much of this outsourcing is related to:

a) free/cheap capital available overseas (through government grants, sovereign funds etc.)
b) variation in tax treatment that hide the true competitiveness of any give firm or operation.

Outsourcing has nothing to do with "getting closer to customers" and all with chasing cheap monies and short term gains.

Recently built US fabs are more productive than their Asian peers but they are typically below scale and not clustered geographically which prevents further productivity gains.

Asian governments rely on steady job creation for legitimacy and stability. Playing fair is not part of it and it's sad to see US-based companies not seeing through that.

2/4/2010 2:42 PM EST

From the bottom of the food chain it appears that the management of our companies has become more focused on making money than on providing a product or service to the mutual benifit of their customers and themselves. The current condition of our economy shows that in the end they may not be all that good at making money or anything else.

2/4/2010 2:58 PM EST

um prato fundo pra toda fome que há no mundo

2/4/2010 5:19 PM EST

There is no doubt its all about short term gains and the dollar. Its easy to say its cruel unless its you that is outsourced. Bottom line terrible management leads to problems intially but then snowballs and then we have the outsourcing because by then the company is already stretched out and it becomes easy to dump us for the quick return while the whole time the brain surgeons in mgt. were supposed to do their jobs before it got to that point!

2/5/2010 3:12 AM EST

One of the commentators commented you want to outsource to stay closer to your customers and that is the heart of the matter. You will have customers only where you have manufacturing jobs. A country which doesn't have any manufacturing jobs will have 17% unemployment - no way you have a growing customer base here. It's like the chicken and egg problem. Once you start off shoring, the very act of off shoring drives more businesses and employment and that's where you see the growth.

To be sustainable, any economy will have to have manufacturing and related jobs. A business model that I think will help balance this will be identical to the one used by the car industry. You manufacture in each country to cater to the demands of that country. Developing countries will see growing manufacturing as their demand grows and developed countries will be able to retain their manufacturing to sustain their huge demand. Manufacturing in one country to sustain demand in another is not sustainable. It will drive demand to the country where you do the manufacturing.

2/5/2010 3:45 AM EST

I think the governments in the developed countries should declare a extra tax on the profits of the MNCs that serve demand in developed countries and are based in the developed countries as a function of how much they actually manufacture in the developed countries. So companies which manufacture more locally are taxed less.

This will help them bridge their deficits and make the MNCs take up more sustainable business models.

2/5/2010 3:34 PM EST

Outsourcing is a given based on the secular changes driven by the macroeconomic environment. Shifts in both the government regulations, especially as it impacts manufacturing, and our own business models required to achieve profitability.

There are structural manufacturing weaknesses caused by high fixed operational costs- both labor and regulation driven. As a result, companies have no choice but to outsource. We can lament it but those are the facts. Operational transition to outsourcing is required, not only to be profitable, but to survive.

“Focus on what they do best” and ''closer to their customers” may be by products of this trend but they are not the driving mechanisms.

2/6/2010 10:43 AM EST

As far as outsourcing is concerned, it is a reflection of global and regional political developments - focussing only on lower wage costs masks the other equally compelling reasons to design and build in Asia. As an American who grew up in the 1960's I would have laughed in the face of anyone who told me that China and Viet Nam would be the last bastions of free market economies - but in large part it's true today. Of the G20 group of industrialized economies the US is second only to Japan in repressive business taxes. Add-in innumerable regultory agencies, state and local governments who treat you like their private ATM machine and a suit-happy legal system - why wouldn't any business that could outsource do so? Someone posted a message on this board saying "tax those who outsource". Yeah, right - our government has done such a great job with the post office, railways, public eductaion and nearly everything else they touch let's give 'em more money! Here's a better idea - start by reducing the tax and regulatory burdens of companies who employ in the US. This is the shortest possible distance for money to get from corporate bank accounts into US employees pockets.

2/6/2010 11:56 AM EST

I think developed countries cease to be called as developed countries if they dont outsource, jobs which are obsolete or cost more that they cant afford/not worth for business are one which are outsourced. Developed countries are known be front runners in innovation, Otherwise they will start digging their own grave. So talk of outsourcing seems simply a noise.

It will take minimum more than 100 years for india to reach a state of what is US today(if india really shows that interest!!), Indian govt has shown almost zero interest in investing to research in history or will do so in near future.

2/6/2010 3:34 PM EST

The U.S. semi industry is turning into a service industry, right? Or wrong? Driving around the Valley the other day, all I saw were empty buildings in the business parks. I did see not fabs, but many Starbucks and Jack in the Boxes.

2/7/2010 2:53 AM EST

It's the natural tendency of mature markets to reduce costs in order to fuel growth. Outsourcing is a gradual process. Firstly basic IC manufacturing tasks, test, packaging, design in support, then, finally, IC design itself. The initial benefactors of this are small local companies, followed by those who can do it cheaper overseas. But local companies benefit first. This is a byproduct of being a free and open society.

So as long as new technology is available, and readily funded, the cycle regenerates. The problem in SV lately, as many in finance know, is the increasingly intrusive role government assumes. SOX rules meant to penalize Enron-types have poisoned the IPO well. The SOX tax is a repeat of what's been happening on a national scale. But now, the aggregate plus SOX tax toxicity are proving enough to sicken this once high flying, vigorous performer. Let's hope we can recognize it, an un-poison the well.

2/7/2010 10:20 PM EST

China owns a good sized chunk of the USA's 14 trillion dollar debt. As a result of that plus the pansy in the white house, we are unable and probably unwilling to oppose them should they decide to finally annex Taiwan, and incidentally, TSMC and most of the other top-of-the-line semi-Fabs with it. Since most of the US military is made up of COTS (commercial off the shelf), we are literally in the palm of their hand. A previous poster was very astute when he said that manufacturing is where the growth will be. China builds everything nowadays. It is fortunate for us however, that the growth we’ve seen in the USA will likely continue because of the American Can-Do spirit. I for one will never be put down, or outsourced, or replaced, because I AM American.

2/8/2010 12:41 AM EST

My wish list: 1) I'd like to see IM Flash build the next fab in Utah, not Singapore. 2) I'd like to see Intel build a new green field fab in the U.S. 3) Three cheers for GlobalFoundries!

2/8/2010 11:10 AM EST

We have a small fabless semiconductor company, we would like to keep our fab, assembly, test in USA but are unable to be competitive in the marketplace if we do not use Asian subcons. We have to figure out a model that will make US companies successful, else we shall lose our core competencies to other countries and with it the jobs.

2/8/2010 1:01 PM EST

Funny. I thought the major reason for so much outsourcing was
1. A presistent war on unions.
2. The latest managment "fad".
3. Nobody outsources the CEOs profit.
(As a stock holder, I wonder when we are going to be able to demand that?)

2/11/2010 12:35 PM EST

Outsourcing is cruel and necessary: both true. At a simple level it is necessary because it is cheaper; cheaper for a whole host of reasons all of which boil down to the difference between highly developed economies based societies with rights and nascent economies now exploding in societies with far fewer rights (that's being kind). But behind all that it is part of the far greater phenomenon of globalisation, which isn't simply about new business models with distributed supply chains. The breadth and depth of globalisation has undoubtedly accelerated since the fall of Communism in the USSR. Part of this has obviously led to amazing opportunities for growth but the downside are the abrupt and painful structural changes which often result when large firms decide to focus investment offshore.

I have been working as a SW engineer for the past 15 years or so in Europe (mainly in Ireland, though also in France and with frequent contact with and travel to US firms ) and I have observed with a mixture of amazement and apprehension how my industry has been buffeted by the harsh winds of globalisation. Indeed it is no exaggeration to say that the industry has undergone something of a revolution even in the short time I have known it. (One of the fruits of that revolution for me has been an extended period of flat wages and then in 2008 job loss! Thankfully I have moved on from that now!)

All firms I have worked for (Irish, American, or otherwise) have in recent years downsized in the US, Ireland, and Europe, while continuing to build their Asian (or in one case Eastern European) businesses. There is no doubt: capital is still surging into lower cost locations. I think it reasonable to assume that this will continue until such time as those locations are no longer lower cost. That will probably mean, broadly speaking, when their standard of living has increased significantly, and sadly, ours will probably have to decline. It seems to me highly likely that Engineering will continue to decline as a preferred option for young grads as a result of declining opportunity and salaries - relative to what these people might expect in other professions.