07 November 2010

Welcome to the 21st Century

From The Economist:
American companies are also setting up shop in India. Bangalore and Hyderabad have “electronic cities” crowded with America’s leading companies. In Bangalore Cisco spent $1 billion on its Globalisation Centre East and General Electric (GE) opened a swanky research centre. IBM employs more people in India than in the United States.

For American workers the most worrying thing about all this is the flight of brain-intensive jobs to India. Americans reconciled themselves to the loss of manufacturing jobs with the thought that they would keep the smart jobs. But they reckoned without two things: the power of the internet and the hunger of emerging-market companies.

India has long since turned itself into the world’s back-office—subjecting paper-processing hubs such as Kansas City to the same forces of competition that devastated former industrial cities such as Gary, Indiana. Now Indian-based companies are moving into an wider range of services: reading CT-scans and X-rays, processing legal documents and helping with animation. They are also moving into sophisticated niches. TCS and Infosys compete directly with IBM and Accenture in consulting. American companies are adding to the trend by moving more of their important operations to India: John Chambers, Cisco’s boss, has decreed that 20% of the firm’s leadership should be in Bangalore.

Companies in India are challenging American ones in an area that they have long considered their own—innovation. The Boston Consulting Group’s 2010 survey of innovation notes that the number of American companies on its list of top innovators is declining while the number of Indian companies is rising. It also points out that the Indian firms place a higher value on innovation than the American companies.

Most strikingly, Indian companies have produced a new type of innovation, variously dubbed “frugal”, “reverse” and “Gandhian”. The essence is to reduce the price of a product or service by a breathtaking amount—80% rather than 10%—by removing unnecessary bells and whistles. Tata Motors is selling its “people’s car” for $3,000; GE’s Indian arm offers a medical ECG machine for $400; Bharat Biotech sells a single dose of its hepatitis B vaccine for 20 cents and Bharti Airtel provides one of the cheapest wireless telephone services in the world. These frugal products are likely to disrupt established Western companies (including GE itself) by forcing them to engage in a bloody price war.

15 comments:

  1. Something that bothers me about the way many people, including the Economist's reporter, evaluate the U.S. strength in innovation by percentage of top innovators or similar metrics.

    We want the percentage of innovation performed in the U.S. to drop, because that would mean lots of smart people elsewhere in the world are innovating, which is good because we all can benefit from their inventions and discoveries.

    I worry about economic analyses that suggest there's only a finite pool of innovation or scientific research, implying that it would hurt the U.S. for China or India to do more of it. I prefer to think there's a huge pool, worldwide, of untapped talent and the world would benefit from enabling all those smart people to use their intelligence more productively.

    Also, as nations' economies shift from agriculture to industry to knowledge work, they become less vulnerable to natural hazards, including those we expect from climate change, so a booming knowledge economy in the third world can be a key component of reducing vulnerability to climate change.

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  2. These frugal products are likely to disrupt established Western companies (including GE itself) by forcing them to engage in a bloody price war.

    Excellent!

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  3. Sorry off topic but I couldn't resist posting this schpeel from Alliance...
    "Over the last 100 years, the average air temperature near the Earth’s surface has risen by a little less than 1 degree Celsius or 1.3 degrees Fahrenheit. Doesn't seem that much, does it? Yet it is responsible for the conspicuous increase in storms, floods and raging forest fires we have seen in recent years, say scientists."

    Says who?...http://knowledge.allianz.com/en/globalissues/climate_change/global_warming_basics/global_warming_definition.html

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  4. Jonathan Gilligan

    "We want the percentage of innovation performed in the U.S. to drop, because that would mean lots of smart people elsewhere in the world are innovating, which is good because we all can benefit from their inventions and discoveries."

    That is a very good point, the level of creativity in the world is expanding rapidly.

    I was also thinking that cheap labour from abroad also means cheap goods which benefit everyone. However, it benefits the better off much more. US manufacturing is certainly going east as Barack Obama is so happy to presage from India at the moment.

    The future can be seen in the UK where manufacturing is a smaller percentage of GDP than elsewhere, thanks to Margaret Thatcher's Friedmanite innovations. Blair's slogan was 'Education, Education, Education'. As someone once involved in higher education, I can say for sure that it didn't work in the way that it was planned. Please see Guardian economic editor Larry Elliot's book "Fantasy Island".

    P.S.

    Someone has to manufacture, so not everyone can move to a knowledge economy to save themselves from the grim reaper of global warming.

    Only 26% of British respondents believe human beings have any effect on the climate according to the BBC. Roughly the same number who believed Saddam Hussein could attack London in 15 minutes. Quite possibly the same ones who regard Tony Blair as an honest, decent, well meaning, educated dude like themselves.

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  5. "These frugal products are likely to disrupt established Western companies (including GE itself) by forcing them to engage in a bloody price war."

    Like Lehman Brothers, GE is only a name that fronts capital. The same capital could easily have a Chinese name in ten years. The nation state is evaporating and has been since the mid 1970s when (for example)manufacturing in Scotland started moving elsewhere. Shipbuilding was earlier.

    Free trade / globalisation is fundamentally a British policy that was grafted on to the USA through the Council on Foreign Relations and other institutions. Even in the 1970s protectionism was a major force in American politics.

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  6. This statement from the Economist article understates India's innovation:

    "Companies in India are challenging American ones in an area that they have long considered their own—innovation. The Boston Consulting Group’s 2010 survey of innovation notes that the number of American companies on its list of top innovators is declining while the number of Indian companies is rising. It also points out that the Indian firms place a higher value on innovation than the American companies."

    People forget that over half the start ups in Silicon Valley in the 1980s and 1990s were the product of ideas from immigrants from Asia, mostly India. The innovation was always there, it's just that Silicon Valley had a far more hospitable climate for innovation than did India. All that has changed is that India how has access via the internet, and against the wishes of the license Raj is now an acceptable place to start a business, especially with India's cost advantages.

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  7. While the results of innovation anywhere in the world are in theory available to everybody, the other side of this process is the long-term reduction in income and wealth of many in the US as low-income societies do so much of this production. Supporters of this process have long claimed that other jobs would replace those high-paying jobs lost in the US, but it clearly isn't happening.

    To those in the developing world, this just seems like fair play, but it hardly looks that way to the tens of millions of Americans see their kids having a lower income status than they did. And this creates an extremely volatile political environment.

    I would add that unlike the US during it's early development, when there was a general shortage of labor and some could leave harsh working conditions to settle the west, in China and India, vast populations of desperately poor peasants await entry into the modern job market, making it unlikely that wages and conditions will improve as fast as they did here during industrialization (as slow as that was).

    Of course some in the US will avoid this and find their niche in the new global economy, but the record shows that many will not, and people don't generally take that quietly.

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  8. @eric144: "Someone has to manufacture, so not everyone can move to a knowledge economy to save themselves from the grim reaper of global warming."

    Two points in response: First, a manufacturing economy is much less vulnerable than an agricultural one (e.g., a factory is affected much less than a field of crops by extreme weather), so industrializing is good, too.

    Second, a nation can have a predominantly knowledge economy while also manufacturing a lot. It's just a question of which sector generates more of the activity.

    Also, there's not always a clear distinction between the two, since a lot of the knowledge work can be tightly integrated into industrial production, e.g. inventing better tools and processes for the factory floor. If factories become more automated, the workers move closer to being knowledge workers. Since Roger is quoting Peter Drucker on innovation, I'll point out that the increasing role of knowledge work on the floor of a steel mill was one of the examples Drucker used in his book, Post-Capitalist Society.

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  9. Here we suffer from the 'It happened in the past, so it must happen now' syndrome. We transferred agricultural workers to manufacturing, so now we will transfer manufacturing and service jobs to... something else. The problem is, as they say in the financial sector "Past performance does not guarantee future results." There is absolutely no evidence to support a belief that whenever one employment sector fails, another will take its place. With both manufacturing and many service jobs now gone overseas, and even intellectual production like computer programming going as well, what is left? Can we all be economics professors and journalists? Our employment structure is being hollowed out, leaving a shell held up by nothing. Doctors, teachers and waitresses may not lose their jobs to outsourcing, but they need someone to treat, teach and serve.

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  10. Mark B.

    In Britain today, there are 70 graduates chasing every job. Welcome to fantasy island.

    ***

    Graduates warned of record 70 applicants for every job. Class of 2010 told to consider flipping burgers or shelf stacking to build skills as they also compete with last year's graduates

    http://www.guardian.co.uk/education/2010/jul/06/graduates-face-tougher-jobs-fight

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  11. "There is absolutely no evidence to support a belief that whenever one employment sector fails, another will take its place."

    Actually, there are thousands of years of evidence that this is the case. If this were not the case, there would be a long-term trend to higher unemployment in every country in the world. There is no such trend.

    For example, unemployment in the U.S. is nowhere near what it was during the Great Depression (when it was over 15% for 8 of the 9 years from 1931 to 1939). It is unlikely to ever get that high again.

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  12. markbahner #10 - How can you use the Depression as an example? There was a depression on, remember? That's why people were unemployed then.

    I agree with Mark B on this one. As to thousands of years of history, prior to the modern era and the nation state, people moved without limitation by borders. So when their economy went into long-term decline, they went elsewhere.

    In modern times there are numerous countries with massive structural unemployment. The US is relatively new to this phenomenon, but there are many countries with long-term unemployment greater than 20%, some far higher.

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  13. Comment received by email, apologies for the delay in posting:

    "The Economist seems to have the analysis about right, but think there are a couple of issues that need amplification.

    Outside of those countries which depend heavily on the export of raw materials (iron ore, petroleum, coal, etc.), in the long run, the wealth of each nation will depend largely on the overall productivity of that nation's economy, combined with that nation's return on worldwide net capital investment. The disruption of consumer product-oriented businesses in the developed world is symptomatic of a trend which will ultimately make the economic playing field much more level between nations. Nations which have historically promoted (or even allowed!) industry within their boarders to improve in productivity have been limited to a handful of "first world" democracies, while governments in second and third world countries have historically acted in ways that inhibited improvements and made their industries non-competitive, adn only profitable when operating behind import protections. This led to the huge disparities in wealth between developed and less developed countries which were so evident in the second half of the 20th century.

    With improvements in government economic policies in less developed countries, the migration of labor of all kinds to the lowest cost countries is inevitable. The immediate impact on a developed country like the USA is greatest among people who's income is based mainly (or completely) on labor, with the lowest skilled labor in manufacturing suffering the most, but with more skilled and more intellectual workers gradually facing similar competition and falling incomes. The resulting decline in labor-generated wealth is largely responsible for widening income discrepancies that many people (especially on the left) find so objectionable. The loss of labor generated wealth must impact even income for service sector jobs which do not face direct international competition, because the wealth available to support service sector wages declines with the fall in the value of product oriented labor. Health care is a giant service industry that will surely suffer declining income over the next few decades via this process.

    In contrast, income based mainly on capital investment may not be impacted at all, and indeed, holders of substantial capital may benefit from investment that takes advantage of lower cost production outside the developed world. Short of confiscatory income tax rates or direct confiscation of capital and/or property, it is difficult to see a way of avoiding an ever widening gap between the relative wealth generated by labor and capital. And even confiscatory taxes are unlikely to solve the problem, since heavily taxed capital tends to migrate rapidly to more friendly locations, further reducing a nation's average wealth. In the very long run (many decades) the cost for labor in different countries must become comparable, but the transition from today to that eventual situation will pose huge social and political problems throughout the developed world. I am very concerned.

    Government policy needs to focus on improving education, training, and re-training, to maximize the productivity of US workers, and simultaneously take steps to deal with the inevitable economic disruptions we face. Politicians willing to address the problems openly and honestly could make a real contribution. Politicains who act as if government expenditures and regulation will solve everything (eg national heath care laws) are only avoiding reality, making things worse, and so, doing a terrible disservice.

    Steve Fitzpatrick"

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  15. My daughter works for a major pharmaceutical manufacturer. Taking a dose of anything manufactured in India or China is literally risking your life.

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