Outsourcing is a Red Herring

Now that Barack Obama’s India visit is over, he can get back to flaying outsourcing as the chief reason for job losses in the US. He had toned down the rhtetoric while in India, but he can raise the pitch again lest his critics stateside start accusing him of being insensitive to high unemployment at home.

But as he and his critics fully well know, outsourcing does not create job losses. If anything, it will sustain American jobs and improve productivity. Hard to believe? Yes. Counterinuitive? Yes. But, it is the truth.

A study by McKinsey Global Institute in 2006 confirms this. McKinsey researchers added up costs and benefits of outsourcing and found that for every $1.00 that was outsourced, $1.12 was returned. The source for this fact is Greg Mankiw’s blog. Greg Mankiw was the economic advisor to George W. Bush and was roasted alive by the media and political figures for  defending outsourcing in 2004.

Adam Smith first talked about why make when you can buy it cheap theory in his economic treatise, “Wealth of Nations”. It was further developed by David Ricardo in 1817 and named the “Law of Comparative Advantage“. In short, the law states that a country can gain by specializing in a good/service where it has a comparative advantage, and trading that good/service to other countries. Even modern economists such as Paul Krugman have made additions to this law by proving that transportation costs can actually make or break it. Over the last two hundred years or so, the law has proved accurate with an astonishing effect.

For example, textile production moved from India to England in the eighteenth century, and then to the US and now to China, despite attempted protectionism and xenophobia. It is now spreading further from China to Vietnam, Bangladesh and other low wage countries. This is actually great for the consumers as they spend a lot less buying clothes sourced from a low wage country, but not very good for mill workers. However, the mill workers were forced to improve productivity, innovate and eventually move on to jobs that required higher skill and paid better. Obviously, several people suffered on an individual basis and there is no denying that.

Moving onto modern times and looking at a different industry such as software, where higher skill jobs are being lost to lower wage coutries, the same principle applies. A US software engineer today is far more productive nad paid better than his counterpart in India or elsewhere. By the time the productivity of the Indian engineer reaches his level, he would have already moved on to a better paying job that requires a higher skill-set, perhaps managing several such Indian software engineers.

The logic is pure and simple: India today has a comparative advantage in producing software and the United States will gain from buying Indian made software. In return, products/services that the US has comparative advantage in producing must be sold to India. Both coutries stand to gain from this trade. As India sells its low cost software, legal and back-office services to the US, the US can sell its expertise in nuclear energy and cleantech, defence, hi-tech, space, and infrastructure to India. In fact, today, India is or will be the biggest consumer of US made internet products or services – Facebook, Twitter, Foursquare, etc., and that will sustain thousands of US jobs.

It is also clear that Obama and his economic advisors actually get it. Obama talked about trade when he was in India this week and it makes boatloads of sense. He announced deals worth $10B where Indian companies will buy products/services from US corporations. This in turn will create close to 60,000 new jobs in the US. So, why point to outsourcing as the cause of domestic job losses when the real reason is that the US has not been able to sell its goods and services to its traditional markets – the EU and Japan, as their economies are slowing down as well? Domestic investments in factories and infrastrcture have plummeted as a result and jobs have been lost.

The reason is that outsourcing provides a favorite whipping boy and a tool to energize the vote. It has an emotional quality to it and allows politicians to empathize with scores of unemployed, and it makes good TV. Who wouldn’t cry when CNN shows the heart rending story of a steel factory worker who lost his job, his house and everything because his job moved to China?

But, the truth is, that blaming outsourcing for job losses is like beating a dead horse. It is a practice that has withstood the test of time and will not go away because a few politicians wish for it. Rather than engage in false propaganda, US should work with emerging economies in Asia and Latin American to lower tariffs and increase trade allowing for greater domestic investments and more higher paying jobs to boot.

I leave you with this:

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Innovations 2010 – My Take

On Saturday January 9th, 2010, IIT Bombay Alumni Association’s Pune chapter organized its annual Innovations conference. It was held at the Devang Mehta auditorium in Persistent Systems campus, and needless to say it was extremely well organized; starting with the registration, every detail was covered and numerous networking opportunities were provided. 

The event was kickstarted with a keynote by Sanjay Nayak, CEO of Tejas Networks, which is a Bangalore based optical networking startup. Tejas, which has been around for the last 5 years or so, is profitable and has revenues close to $150m. That is quite an impressive feat from an Indian high-tech startup, selling products from India worldwide. It is also a shining example to the naysayers who keep on saying that Indian product companies cannot sell products in the US. I hope that more people follow Tejas’ lead and venture into the space. Sanjay mentioned that India itself is a great market for petrochemical and telecom markets, and if you design products that satisfy the needs of these markets, you will have the advantage of selling close to home in the markets you know; something that your gadzillion dollar competitor does not. That said, it is imperative that the products you build are international class; in other words, you must implement internationally standard processes and techniques to make this happen. One thing that is lacking in India is government support – by making a policy that Indian Govt agencies/companies must buy from Indian product companies if the product quality is on par, the government will give a significant boost to innovation in the high-tech space. Instead of innovating for MNCs, people will start innovating for their own companies.

After Tejas, 12 companies presented their innovations in six minute slots. I will only mention the ones that I felt were the best and the worst of the lot. Bilcare with its non-clonable security system for identification tags is possibly the most far reaching invention that was presented. The implications are enormous – in India, where every type of ID and license is duplicated, if you can have a fool-proof way of identifying something or someone, the impact would be felt across the spectrum. Think of the UIDI, Ration Card, Driving License, Passport – everything will be authentic and no one will get away with duplicate or illegal IDs. The next step here is probably to marry this to RFID or some other wireless standard so the data can be scanned remotely. 

Then, there was ANEESH, which is a way of generating energy from ocean waves at a low cost, and in fact DNA did a front page feature on this technology. This technology can change the power delivery mechanics in the coastal areas; in fact it is entirely possible that each village/town on the coast can start generating its own power by tethering to an ANEESH array some 200m in the sea. However, it is difficult to see how ANEESH can deliver power required for larger inhabitations or factories unless a single system starts generating over multiple megawatts. The distribution econmonics are not likely to work otherwise.

There were a couple of good innovations in the area of automobile engineering; one was an electrically controlled supercharger that would provide the needed torque at low speeds as opposed to a turbocharged engine, and the other was a newly designed rotary internal combustion engine. Both are undergoing trials with auto majors so the jury is still out. I am not a mechanical engineer and it has been really long since I studied the IC engine cycle, but I felt that these techniques must certainly have been looked at elsewhere in the world. They certainly did not feel like brand new, but I could be wrong.

Moving onto the others, there was a simple mechanical device for collecting waste matter from stationary trains.  It is attached to the trap and prevents waste matter from being ejected while the train is stationary. I felt that there was nothing groundbreaking about this one as the western countries have already solved this problem – why not just use what has worked very well all over the developed world? Another innovation that I didn’t feel great about was the DFMPro from Geometric. Again, I don’t think there is anything innovative in this one. Companies have been doing injection moulding  and using CAD tools to test the designs for manufacturability for a long time. Geometric might have added a feature or two to make it easier to use, but this certainly did not seem like anything new. The last presentation was by Shreehari Marathe who talked about a way of creating rains by burning tyres and salt. This felt like weird science and as the innovator himself admitted, he hasn’t been  able to perform controlled testing as there is too much variability in atomospheric conditions. I think this innovation really did not deserve to be here, for it is simply too early and needs a lot of testing before it is presented to an audience. People have tried cloud seeding many times in the past with mixed results. Plus, the idea of burning tires is environmentally unsound due to presence of possibly toxic and hazardous chemicals.

The presentations were followed by a sumptuous lunch with lots of opportunities to network. The arrangements were top class and nothing to complain about. After lunch, three successful entreprenuers were supposed to share their experiences. I really liked Mangesh Kale’s presentation as I thought that he had really done the whole thing from scratch. I think it will do wonders to entrepreneurs in the audience to hear people like Mangesh speak about how they went about building their business. The last presentation(s) was done by two Nirman Fellows, both engineers, one from IITB and the other from UDCT. Nirman is a fellowship program started by Dr. Abhay Bang, encuraging young people to work in villages for some specific period. I have a world of respect of Dr. Bang, but I have no idea what this session was doing in the Innovations conference; Nirman is no a successful venture vis a vis PARI. The presentations were confusing, used marketing terms. I wonder if the presenter was under the influence of Dilbert and Dogbert. The angle of social entrepreneurship was mentioned by the emcee earlier, but never did I see a single slide about making money in this presentation. I believe that the organizers would do well to focus on innovations in the future and cut out such sessions. The Q&A session that followed was very entertaining. Dr. Kane asked tough pointed questions posed by the audience and himself. I believe that defending a solution in front of a crowd takes guts and requires clear thinking. It may bring out strong and weak points of the solution that were not previously on the radar.

All in all, this was an excellent conference and I am looking forward to attending the next one. PuneTech will do a detailed review on all the innovations as well as a report on the conference, so stay tuned.

The Quest for Waste AKA Managing Waste in India

Waste management in India is a big challenge and local government seems unable and/or unwilling to tackle the problem. While cities have a semblance of garbage collection mechanism, it is practically non-existent for small towns and villages across this vast land. In addition, the recent boom has generated uncontrolled and unplanned development giving rise to mountains of garbage in towns and villages close to bigger cities. Of all the civic services a local government can provide, waste management has a huge impact on public hygiene and livability index.
 
The question is, how do we change this picture? The answer might be the most cliched acronym in India – PPP or Private Public Partnership. Ketan Shah, a serial entrepreneur from the Silicon Valley is now starting his new quest in waste management. Ketan, who has had several successful exits, is originally from Udwada, a small coastal village in Gujarat, close to Daman and Vapi ( One of the biggest industrial zones of Gujarat ) After his last venture, he decided to go on a sabbatical and spend time in his hometown. What he found was that the village had turned into a garbage dump. Daman and Vapi are growing very fast and people’s search for cheaper land is taking them to surrounding areas. The increasing demand for land has multiplied the prices by orders of magnitude. Indeed, land around the village seems more expensive than the Silicon Valley. The exploding population is generating mountains of garbage with no collection mechanism to account for. Granted the village had little garbage collection infrastructure previously, but to Ketan’s recollection, it certainly was not a dump. This coupled with unplanned development, industrial growth and out of control traffic have converted this seaside village into a nightmare.

In the true Silicon Valley entrepreneurial fashion, he has taken the initiative to change it. First off, he started a trust, the sole goal of which is to improve civic services infrastructure within Indian villages and small cities. Udwada became the first village on the list for obvious reasons. That was the easy part. The hard part was to follow; the first challenge was to clean the garbage that had collected over a period of time. Once that was done, a regular collection system with a buy-in from local leaders (government) had to be setup. Thirdly, a place to dispose off the garbage had to be found and lastly, a way of getting people to pay for garbage collection had to be found.

 
Once he identified the challenges, he set out to tackle them. He hired garbage trucks and workmen to clear out the garbage. In order to understand the composition of the trash, he himself got down to it and spent a week with the workers clearing out the trash and getting sick in that process. Once the trash was analyzed, he realized that majority of the trash could be recycled or turned into compost. At the same time, he worked with local leaders and got their support for this project. The project started with good enthusiasm, media coverage and support, but has now stalled. The dumping ground became inaccessible due to the rain and people living in that area started complaining. Key lesson: Nobody wants garbage in their backyard. Ketan called for townhall meetings and distributed educational pamphlets to create awareness among locals. Nothing further can be done till a new dump site is found.  Acres of land granted to every village for this purpose seems to have disappeared from govt. books. Now he is working with local govt. officials to get a new dump site. That seems to be a big task and will take time. Meanwhile, he is also trying to find private land, away from the town, on lease.
 
Ketan does not see a long term future to running this as charity. It needs to run like a business and Social enterprenuership  is the model in his mind. Ketan has also realized that money is not a issue for these villages. Most local government has enogh revenue to provide such serivces if they really want to and people are willing to pay IF they get good service in return. Daman actually has a working model that proves his theory – around 14,000 households there pay Rs. 850 per year to have their trash picked up every day by a private waste management company. There is no reason why this would not work across India if people realized the benefits.
 
Ketan firmly believes that people do have the awareness. They understand benefits of clean roads but they don’t have any trust in the local government. They just don’t care anymore. Current local government system that provides services such as these is broken and Ketan thinks a parrallel system is needed to take care of basic neccessities of people across villages and towns.
 
Let’s hope for our sake that everyone quickly realizes that the new model, which has worked very effectively in the developed world, takes root here and grows. After all, the US creates 56 tons of garbage every year per person, which is more than any country in the world, but still manages to clean it day in and day out; you will never see overflowing garbage bins anywhere.
 
Ketan can be contacted at ketan_k_shah@yahoo.com if you need more information

Too Soon to call for a Semiconductor Recovery?

Are we really out of the most dreaded recession after the great depression and on our path to recovery? The answer might be a resounding yes if we look at the recent crop of earnings reports from technology companies, and other data emerging from market analysis firms. In fact, the NASDAQ composite is already into deeply positive territory on the expectations of an imminent recovery.

Revenue and Inventory declines from 2008 to 2009

Revenue and Inventory declines from 2008 to 2009

However, a quick dissection of recent earnings announcements from a few prominent semiconductor companies shows that we are not out of the woods yet. The chart above shows that sales numbers are still horribly bad compared to last year, and inventories have declined sharply as well. This means that companies have managed to satisfy the underlying demand by using up their inventories, and will or already have started ordering replacement units from fabs. This explains why the fabs have reported better numbers than the IC vendors. In a normal growth phase, every company wants to keep its channel well stocked to feed demand. This is not the case now as companies are drawing down on finished stock to reduce costs and improve margins. So much for the expected recovery in demand …

Where does this demand come from ultimately? The consumer, of course. The US, Europe (as a whole) and Japan are the three largest economies in the world.

 

People living in these countries constantly keep (or, at least used to) buying new things such as laptops and PCs, cell phones, gaming consoles, automobiles, audio and video equipment, personal media players, TVs, toys, and other gadgets. Companies that manufacture consumer electronics ICs directly feed this demand. Consumers also buy services such as wireless and wireline voice and data, broadband, cable and satellite TV feeds. This in turn generates demand for the entire telecom, datacom and wireless infrastucture and service providers. Infrastructure IC manufacturers are responsible for suppplying this demand. In the US alone, the consumer is 70% of the entire economy. The consumer is also a major portion of the EU and Japanese economies. The consumption in all three major economies in the world has cratered, as evidenced by the continuous 6 to 9 month declines in the exports from China, Taiwan and Japan, major export reliant countries.

The real demand will not be back till the consumer starts spending again. And, that is almost impossible in this economy. Take the US for example – official unemployment is at ~11% (some say, it is near 16% unofficially), one in ten homeowners is underwater, and credit lines have been severely downgraded by banks. Three major sources of funds used by consumers have been seriously compromised. To use a banking term, the consumer is now de-leveraging and getting his house in order. There will be no more spending sprees till the US savings rates are back to historical levels. The EU and Japan are in even worse situations as their banks are still over leveraged and that still needs to be played out a la Bear Sterns and Lehman Brothers.

My belief is that the semiconductor industry and the companies that serve the semiconductor industry are not coming back till personal finances get better. That is not likely to happen for a while. Some analysts are calling Q2, 2009 as the bottom, which very well may be so, but I don’t expect to see a quick recovery from this point on. In fact, the worsening unemployment and foreclosure numbers may push us back into a double dip recession. If not, the recovery will be tepid and totally unspectacular.