Siemens Follow-up

Just a quick follow up to my recent post on German outsourcing. I fear the issue rather got lost in an interesting, if secondary, topic in the comments section. One reader was, however kind enought to draw this article to my attention.

The German firm Siemens will move most of the 15,000 software programming jobs from its offices in the United States and Western Europe to India, China and Eastern Europe, a company official said Monday.

“Siemens has recognized that a huge amount of software development activity needs to be moved from high-cost countries to low-cost countries,” said Anil R. Laud, managing director of Siemens Information Systems, the group’s information technology subsidiary in India.
Source: SignonSanDiego.Com

Now this dates from mid February so it would appear that there was fire to the smoke, even if it may have expediently been extinguished. I repeat: this reality is inevitably going to arrive on our doorstep and we would do better have some more informed public discussion over some of the implications. In this regard I would again draw attention to one comment of Jean-Claude Trichet in the interview I cited yesterday.

there is the unfortunate phenomenon that public opinion very often discovers the problems at the moment they are tackled, when governments, parliaments and social partners carry out the structural reforms that are urgently needed. This late and brutal discovery could have a negative impact on confidence. Had the public been more aware of the underlying problems, the reforms, when decided upon and implemented, would have increased confidence. That is the reason why we believe that transparency, pedagogy and tireless explanations are an essential part of preparing structural reforms.

We have only recently seen in the Spanish context one way a public which felt it may have been kept systematically misinformed by its government can react. We would do well to learn from this. Globalisation is here, it is more potent than ever, and it won’t simply go away just because we choose to ignore it. I may have cause to disagree with Trichet about precisely which structural reforms I would like to see assertively advanced, but the point he is making is absolutely valid. Be warned.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

6 thoughts on “Siemens Follow-up

  1. If outsouring was driven only by cost differences, things really wouldn’t be that serious. Companies don’t look to costs only, and Europe has other strengths as well. Problem is that outsourcing is driven by many other potent forces, some of which we are essentially powerless against: we just can’t cancel the time difference between Europe (the US) and India leading to “a 24/7 capability and overnight turnaround time”. The internet will continue to make outsourcing more and more attractive and possible, but we are not going to battle outsourcing by curbing the internet, and we shouldn’t. The widespread use of English and the increasing supply of high-educated and technical savvy Indian’s and Chinese (and Maleysians, and Philipines…) are other factors that drive outsourcing. But we can’t, won’t and shouldn’t stop or retard these – essentially benign – processes.
    Moreover, as this report shows, the Indians have seen there comparative advantage, and they are going to make the most of it (they have to, if they want to solve their unemployment problem).
    So i agree: globalization and outsourcing are here to stay, and i don’t think this is necessarily a bad thing. Be warned, be prepared, but don’t panic.

  2. On the theme that cost relativities are not the only factor in competitiveness, we have this classic example of outsourcing by America from a supplier based in Germany:

    “A complex of angular towers and a spire that would be among the world’s tallest structures has been officially selected as the design for the World Trade Center site in New York. Berlin-based architect Daniel Libeskind’s project is centred around the excavated pit of the former World Trade Center.” – from:

    For more details on the competing designs for replacing the WTC:

    But to focus on outsourcing shows a preoccupation with symptoms rather than with the diagnosis of causes. Seems to me we really should be focusing on this:

    “Since the mid 1990s, labour productivity growth in the EU has slowed in 45 out of 56 industrial sectors. In contrast, U.S. productivity has surged in half of these sectors.”
    – from:

  3. And regardless of the productivity stats in either the EU or the US, outsourcing is resorted to in both places. Not to be belligerent, but what’s the point there?

  4. The point?

    Edward wrote of the mooted possibility of Siemens outsourcing up to some 15,000 company jobs in programming and software development to India, China and Eastern Europe. That will doubtless concern Siemens’ employees but does it indicate a larger problem of concern to Europeans generally?

    Within the last few days:

    “EUOBSERVER / BRUSSELS – EU Heads of State and Government will tomorrow [26 March] announce the creation of a high-level group to instill dynamism into the EU’s Lisbon Strategy – its goal to become the most competitive economy in the world by 2010.

    “The group will be chaired by former Dutch leader Wim Kok, who has also recently headed up a report into boosting employment in Europe. . . ”

    One credible rationale for this timely intervention is provided by:

    “Since the mid 1990s the average growth rates of real GDP, labour productivity and total
    factor productivity in the European Union have fallen behind those in the United States.
    What makes this remarkable is that this is the first time since World War II that these
    performance measures have shown lower growth rates for the EU for several years in a
    row. . . ” – from:

    Ivan: “If outsouring was driven only by cost differences, things really wouldn’t be that serious.”

    As you saw, I take your other point about cost relativities being only one factor in competitiveness but have a look at Chart 2 in this: showing hourly compensation costs in US dollars for production workers in manufacturing in 2002 across a range of industrialised market economies. In Dollar terms, hourly employment costs in Germany are way out of line with most its main trading partners and the Dollar has depreciated against the Euro since then. An intriguing recent assessment of Germany’s predicament is here:

  5. Yes: German companies have relied on various combinations of high productivity, good product design and quality or a monopoly position for their product line in international markets (eg printing machinery, some machine tools) to offset the disadvantage of relatively high employment costs. Germany has a healthy surplus on its current balance of international payments, which is more than can be said of America or Britain.

    The problem now is that the offsets are no longer sufficient to sustain a high level of employment. Because Germany is locked into the Euro, the policy options of allowing its national currency to depreciate against other currencies to improve competitiveness or cutting interest rates to suit national conditions are no longer available.

    Instead, the medium term focus has to be on cutting back – or slowing the rise of – employment costs, and doing whatever can be done by government to increase productivity in business, improve product design and quality and defend whatever monopoly positions German companies can maintain against increasingly fierce global competition. In the short term, the government is using fiscal measures to boost internal demand, which is why the size of the ensuing budget deficit has breached the Eurozone’s Stability and Growth Pact – the Pact limits the maxiumum budget deficit to 3% of GDP.

    The problem with the solutions, and the time those will take to work through, is that the electorate doesn’t like some of the solutions so the governing party has been punished in recent local elections. However, it is not clear that anyone else has a better set of policies.

    As best I can judge as a distant spectator, the governing Social Democrats party is partly the author of its present political misfortunes. In the early 1990s, with a strong position in the Bundesrat, the second chamber of the German parliament, the Social Democrats sought successfully to thwart the efforts of the previous Kohl government to reform the state welfare system. Besides that, in the mid 1990s, Lafontaine, then party chairman, went around making speeches saying the solution to Germany’s already highish and rising unemployment was bigger and more wage increases, and that at a time when Germany’s employment costs were relatively high by international comparisons. The effect was to stoke up expectations as to what a change of government would achieve. The mismatch between those expectations and the reality of a Social Democrat government has generated a credibility problem.

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