Tuesday, July 03, 2007

Outsourcing to India Brings Wage, Price Pressures

India is experiencing rising price pressures (see chart above), especially wages for high-skilled IT labor, which are rising at somewhere between 10-15% per year to as high as 50% depending on who you talk to. Whether it's 10% or 50%, it's still much higher than wage inflation in the U.S. software sector, which is below 3%.

Wage and price pressures, a falling dollar, and high employee turnover (25% annually in some cases) are all factors that have led "Some in Silicon Valley Sour on India," according to today's WSJ, and have resulted in some American companies bringing jobs back to the U.S.

"For a large swath of Silicon Valley -- start-ups and midsize companies that do sophisticated tech work -- India is no longer the premier outsourcing destination.

One issue is that although India annually turns out nearly 500,000 engineering graduates, but just a quarter of India's computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies."

Competition for these skilled IT professionals has been so intense that Indian engineers now routinely make about 75% of their American counterparts, up from 25% only a few years ago.

Bottom Line: MNCs are now looking to lower-cost alternative outsourcing and offshoring destinations like
Vietnam (Intel built a $1 billion semiconductor factory there), and the Philippines (AOL, Procter and Gamble, and Barnes and Noble have large-scale service centers there).

Globalization and international trade are competitive and dynamic "discovery processes," part of an endless pursuit of efficiency, cost savings and value-creation. The ultimate beneficiaries of globalization, the discovery process, and intense competition are consumers, who get better products, increased selection and lower prices from increasingly competent producers: "competition breeds competence."

(HT: Sanil Kori)


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