ASAC Conference, 2009Niagara Falls, Canada

May 06-09,2009

REAPING ADVANTAGES FROM OPPORTUNITIES OF OFFSHORE OUTSOURCING TO CHINA: STRATEGIC AND OPERATIONAL CONSIDERATIONS

Muhammad MohiuddinPh.D student in International ManagementMember(PhD), Stephan A. Jarislowsky Chair in International Business Management.Albert SuStudent Université Laval, Quebec (Quebec), Canada G1V 0A6

2

Source: World Bank, UNCTAD, U.S. Department of Energy, EIA

Plastics“One of my top customers recently got bids from a Chinese producer that were 26% less than what I was selling the product for. That’s 26% delivered, after shipment all the way from China.”

“China price”Tool & Die

“Chinese prices are frequently 50% of what US counterparts charge, and in some instances are 75%.”

Furniture“China is undercutting US manufacturers’ prices (of wood case-goods furniture) 20-40%“

ElectronicsAsian suppliers in China and Taiwan have a 30-50% cost differential vs. US plants

Canadian trade deficitswith China

Canada’s place in the USA market …

5

2,0%

4,8%

7,1%

14,1%

19,0%

17,8%17,7%

14,7%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

Exportations US vers la Chine

Importations US en provenance de la Chine

Exportations US vers le Canada

Importations US en provenance du Canada

2000 2007

Source: U.S. Bureau of Economics Analysis, Economic Accounts

Principal questions of the research

How can Canadian companies and Canada reap the advantages of the globalisation for their development?

How can Canadian companies better use offshore outsourcing strategy?

How can we create a win-win situation in our business relations with China?

Offshore outsourcing strategy

Offshoring enables a firm to relocate its relatively inefficient production processes to external providers with cheaper and perhaps more efficient production capabilities, the firm can turn its focus to areas where it has a comparative advantage and expand output, or to engage in new business activities.

“Outsourcing is the “Long-term link related to the development of determined activities or tasks that are not essential to the firm by specialized professionals, who, in time, become strategic partners.” (Casani et al.,1996)

Theoretical foundations

The trade theory of Adam Smith’s absolute advantages and David Ricardo’s comparative advantages.

The New International Division of Work / Modular Production System

The Resource-Based View of the Firm The Relationship-Based Theory

New International Division of Work (NIDW)

The NIDW is an outcome of globalization. It can be defined as “the spatial division of

labour» which occurs when the process of production is no longer confined to national economies”. This has led to the “global industrial shift”, in which production processes are relocated worldwide. This can also be called the “Globalization of tasks”.

Globalization and the new international division of work

Source: A. Gupta and al., The Quest for Global Dominance, Jossey-Bass, 2008

i-phone: an American product?

11

Screen: Japan

Flash memory : Korea

Assembly: China

Apple : Design, software and integration of others innovations.

Source: The Econmist,30th December,2008

Resource-Based View (RBV)of the Firm

The core competence approach provides one of the most powerful frameworks for explaining why firms outsource their resources through market agreements (Gilley and Rasheed, 2000).

A firm should invest in those activities that constitute its core competencies and outsource the rest (Prahalad and Hamel, 1990; Quinn and Hilmer, 1994).

Relationship-Based Theory

Through outsourcing, firms can obtain the associative advantages for their internal and relational capabilities. The synergetic approach of associative advantages would be the competitive advantage (Porter,2005) achieved by the creation of complementary resources, defined as “distinctive resources of alliance partners” that jointly generate rents higher than the sum of those generated independently by the resources of each organization (Dyer and Singh, 1998).

Critical resources can be expanded or built up beyond the confines of the firm and be integrated into inter-firm routines and processes. The use of outsourcing must be considered a strategy in which essential process activities could be outsourced in a framework of long-term cooperation where the suppliers are considered to be partners (Pfohl and Buse, 2000).

Research design

Exploratory, search for contemporary truth of offshore outsourcing

Case study research methods which examine contemporary real-life situations and provide the basis for the application of ideas and extension of methods.

4 main offshoring challenges: Why to do? Where to go? What to offshore? What kind of operational mode?

Selection of the companies

for the study

Through Ministry of Economic Development, Innovation and Export of the Quebec government, the Chamber of Commerce of Metropolitan Quebec, and Montreal,

Selection criteria :- Must be a manufacturing company- Doing outsourcing in China since at least 3 years.

We have also studied the various reports, analysis and rhetoric from the different Canadian and Quebecer electronic and press media.

Selection of the companies for the study

In this paper, we took 4 firms. In order to keep the confidentiality of their data, we decided to name them as A, B,C and D. Their functional classifications are as follows: - A is a furniture industry firm.

- B is an automobile parts industry firm

- C is a clothing industry Firm

- D is a electronic industry

Research design (continue)

We have studied three independent variables:

- Motivations for offshore outsourcing to China,

- Nature and quantity of the outsourced activities,

- Implications of the company in managing offshore outsourcing to China.

Research design (continue)

The dependent variables that we studied :- Evolution of the revenues of company since

offshore outsourcing,

- Evolution of the profit since outsourcing,

- Evolution of jobs in Canada since outsourcing,

- Evolution of R&D activities, especially development of core competences,

- Evolution of global competitiveness.

Data Analysis and results: Main reasons of offshore

outsourcing to China

To Reduce operating costs, To access to an abundant and qualified pool of

manpower, To improve global competitiveness of the

company, and most importantly, To specialize themselves in more strategic

activities.

Data Analysis and results: Impacts of the outsourcing on the

companies

Global competi-tiveness

Evolution of revenues

Evolution of profit

Evolution of R&D

Increase of jobs in Canada

Core competence development

Customer satisfaction

A 5 5 4 4 2 4 5

B 5 4 NA 5 3 4 5

C 5 4 3 5 1 5 5

D 5 5 NA 4 1 5 5

Data Analysis and results: Implication for management

-The relevant strategy -The right partner-The right contract-The right strategy

-The right level of commitment-The right location-The right outlook

Possible competitive strategies faced with China

• In industries that are labour and capital intensive

• Integration by specialisation (outsourcing)• Confrontation by differentiation (innovation)• Avoidance by focalisation (niche)

• In knowledge intensive industries

• Exploitation by penetration• Confrontation by innovation• Integration through collaboration

Positioning! Positioning!! Positioning!!!

Firm’s basic strategic choice

Produce by ourselves? Excel in the domains where we posses distinctive advantages, or where there are strategic importance for our future.

Have them produced? Delocalize in a selective manner the activities that represent the least amount of competitive advantage in order to take advantage of the strengths of China to reinforce our international competitiveness and even to halt the disappearance of certain industrial sectors.

Produce together?

Exploit complementarities and synergies through partnerships.

Not produce, or stop producing? Be capable to bring about the radical changes necessary to ensure the “survivability” of our firms.

Conclusion

Study shows that we should not blame the offshore outsourcing strategy. What we need is to understand the global phenomenon in an attempt to prevent its harmful effects.

For those companies where Canada has no comparative advantages, offshore outsourcing is one of the few ways to preserve our place in international markets and particularly on the American market.

The fundamental challenges for the Quebec and Canadian companies are to identify precisely the tasks which they must perform for themselves and those that they have interests to make others to do and how to coordinate these activities across the globe.

Canada faced withthe rise of China

The rise of China is both a threat and an opportunity.Above all, it represents a challenge. If China were not the major

supplier of consumer goods for Western countries, another developing country would be.

The most important is to be able to take advantage of the competitive factors of China in our favour, and not try to beat

China at any cost

To be successful in global competition, firms must put emphasis on the development of new and distinct competencies, instead of simply trying to keep all that they have. They need to know

how to do things differently than their main competitors instead of contenting themselves to passively follow others’

lead.

Questions ?

Thank You very much

Muhammad.Mohiuddin.1@ulaval.ca