A tale of the textile and software industry – part II

My earlier post on the similarities between the textile and software industry triggered some feedback. Some agreed, some didn’t; one comment, from Mike Williams himself argued that we should be able to push our cost so low that the cost of outsourcing would be much higher.
I think this line of thinking is missing one important point and that’s what I want to elaborate on. During the past few decades, globalization led to the emergence of two parallel power structures, that sometimes interact, sometimes are at odds but clearly influence each other.
The first power structure is the traditional national state setup of our world. Traditionally relationships between states defined the power structures, guided wars and defined if and where peace can prevail, as well as which companies get the upper hand, who gets access to resources etc. This structure is very much alive, but a parallel set of global actors are emerging and are gradually bringing forward their interests and start flexing their powers.
Obviously, I mean global corporations. Many of these have long ago ceased to be entities rooted in national countries – they act globally, have a global structure and clear set of goals, vision and strategy. The two power structures are obviously strongly interconnected and dependent on each other (ultimately, the power of a state relies on the taxes it collects from economic actitiies; many companies are state owned etc) but are increasingly at odds with each other. States want to keep jobs, companies ultimately want to minimize costs; states want to increase tax revenues, companies need to generate profits – and so on. Intel’s CEO said some years ago, that his company could easily operate fully outside of USA; Nokia’s push to reform Finland’s tax system was widely discussed and debated; many UK based companies chose to relocate their headquarters for tax reasons.
My point is really that shifting jobs around is not equal outsourcing anymore. A large global company could decide to shift its R&D to where it’s most cost efficient (while certain requirements – related to e.g. IPR protection, legal stability, human rights (at least for good global citizens) – are fulfilled). This may be bad from a country’s point of view, but makes perfect sense for shareholders; no matter how efficient you become, it will be evenually replicated elsewhere. It’s not the way to fight the inevitable – instead focus on high value added areas where the operational costs are negligable and whereyour country will the primary choice for other reasons (such as quality of living, infrastructure etc)
If you can’t beat them, differentiate yourself.

My earlier post on the similarities between the textile and software industry triggered some feedback. Some agreed, some didn’t; one comment, from Mike Williams himself argued that we (Westerners) should be able to push our cost so low that the cost of outsourcing would be much higher.

I think this line of thinking is missing one important point and that’s what I want to elaborate on. During the past few decades, globalization led to the emergence of two parallel power structures, that sometimes interact, sometimes are at odds but clearly influence each other.

The first power structure is the traditional national state setup of our world. Traditionally relationships between states defined the power structures, guided wars and defined if and where peace can prevail, as well as which companies get the upper hand, who gets access to resources etc. This structure is very much alive, but a parallel set of global actors are emerging and are gradually bringing forward their interests and start flexing their powers.

Obviously I mean global corporations. Many of these have long ago ceased to be entities rooted in national countries – they act globally, have a global structure and clear set of goals, vision and strategy. The two power structures are obviously strongly interconnected and dependent on each other (ultimately, the power of a state relies on the taxes it collects from economic actitiies; many companies are state owned etc) but are increasingly at odds with each other. States want to keep jobs, companies ultimately want to minimize costs; states want to increase tax revenues, companies need to generate profits – and so on. Intel’s CEO said some years ago, that his company could easily operate fully outside of USA; Nokia’s push to reform Finland’s tax system was widely discussed and debated; many UK based companies chose to relocate their headquarters for tax reasons.

My point is really that shifting jobs around is not equal outsourcing anymore. A large global company could decide to shift its R&D to where it’s most cost efficient (while certain requirements – related to e.g. IPR protection, legal stability, human rights, at least for good global citizens – are fulfilled). This may be bad from a country’s point of view, but makes perfect sense for shareholders; no matter how efficient you become, it will eventually be replicated elsewhere. It’s not the way to fight the inevitable – instead focus on high value added areas where the operational costs are negligable and where your country will be the primary choice for other reasons (such as quality of living, infrastructure etc)

If you can’t beat them, differentiate yourself.

2 Responses to “A tale of the textile and software industry – part II”

  1. Michael Williams says:

    Of course a global company may locate major development, manufacturing or even services to locations where they are cheapest. However, at least in the medium term, relocation comes with a cost, i.e. administration, training, organisation. If

    Cost_of=relocation + Cost_of_doing_it_in_cheaper country > Cost_of_doing_it_at_home

    then relocation won’t happen. I believe the cost of relocation is significantly higher than people first believe. But nevertheless we need to reduce the cost of doing it at home if we want to keep work in our western countries.

  2. Vajdi says:

    Your line of argument only holds if the condition is true on long term (5+ years). But, if the cost of relocation is compensated for by savings within, say, 5 years and the cost difference is maintained afterwards, it’s still a good business case. A global company won’t be planning with just 1-2 years in mind….