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New "Giant Sucking Sound:" Big Blue Services and Software Jobs on...

A Passage to India

Services to Follow Manufacturing Jobs Exodus

PHOENIX, July 22 - Remember the "giant sucking sound" of American jobs heading south?  That's what the former presidential candidate Ross Perot said would happen if NAFTA (North American Free Trade Agreement) were implemented.  

The "south" Perot was talking about was Mexico.  And NAFTA was (mostly) about manufacturing or "blue collar" jobs, which account for less than one-fifth of the U.S. payrolls.  

Ten years later, however, American "white collar" workers face a far greater threat.  It is a "giant sucking sound" of American services jobs heading south... all the way to India.  Services (including software) account for nearly three-quarters of all American jobs (see the chart).  

Services were thought to be the future engine of job creation back home.  Yet they are now also on "A Passage to India" [title of the E.M. Forster's (1879-1970) book, written in 1924], according to a front page Business Day story in today's (July 22) New York Times.Book Cover

Two IBM executives speaking to Big Blue employees around the world in a March 2003 teleconference said that "IBM needed to accelerate its efforts to move white-collar, often high-paying, jobs overseas even though that might create a backlash among politicians and its own employees," the Times reported. 

During the call, the IBM executives said that three million service jobs were expected to shift to foreign workers by 2015, and that IBM should move some of its jobs now done in the United States, including software design jobs, to India and other countries, the Times reported.

Nor is IBM alone on the latest "Passage to India."  Microsoft, Oracle, EDS, Accenture, Cap Gemini Ernst & Young, Unisys, BearingPoint Inc... were also among the passengers, to mention only some leading IT vendors.

Oracle, for example, plans to increase its jobs in India to 6,000 from 3,200, while Microsoft plans to double the size of its software development operation in India to 500 by late this year. Accenture, a leading consulting firm, has 4,400 workers in India, China, Russia and the Philippines, the Times said.

Electronic Data Systems (EDS), for example, has predicted it will have 20,000 employees providing offshore IT services in various countries by the end of 2004, according to the Dow Jones report.

All in all, about 450,000 computer industry jobs could be transferred abroad in the next 12 years, representing eight percent of the nation's IT jobs (per Forrester Research, an independent market research firm).

What's the sudden attraction of India?  Christopher Columbus set sails for it six centuries ago "only" to discover a new continent - America.  Are the global IT providers also looking for some new heretofore undiscovered treasures?

No, it's not the riches of Taj Mahal, nor a splash in the holy Ganges river, nor many other of this country's resplendent cultural and tourist attractions.  It's its cheap labor.  And well educated.

"You can get crackerjack Java programmers in India right out of college for $5,000 a year versus $60,000 here," a Forrester analyst told the Dow Jones Newswire today (July 22).

Some IT firms are almost entirely based on the offshore model, the Dow Jones report noted. Wipro Ltd. and Infosys Technologies Ltd. are based in India and provide services to U.S. companies. Cognizant Technology Solutions Corp. is based in Teaneck, N.J., but has most operations in India. 

As a result, employment in India's IT services and software industries jumped 24% to about 650,000 in March from a year earlier, according to Nasscom, an Indian trade group.  

The offshore specialists have put pressure on the more established U.S. IT- services firms. Under competitive pressure to offer lower prices to clients, American firms say they've had little choice but to move some IT work offshore, the Dow Jones report said.

Mexico Yesterday, China Today, India Tomorrow

Of course, we've heard such arguments before, including two years ago, when China's entry into the WTO (World Trade Organization) was being discussed.  And 10 years ago, when NAFTA was being debated. 

It was November 1993.  Perot and former vice president Al Gore were facing off in a nationally televised debate on the pros and cons of free trade.  The Clinton administration, then it its first year, was eager to to please its globalist masters, and push through Congress its first major international trade legislation.  And did.

NAFTA passed.  Wall Street cheered.  Main Street mourned.  At least its non-stupefied citizens did who had not yet been anaesthetized by the globalist media.

Congress passed, too... on a chance to do something good for America for a change.

But there were some honorable exceptions.  Senator Fritz Hollings of South Carolina, for example, was one of them.  Although a Democrat, he voted against the Clinton administration on "free trade" issues.  Hollings said that "free trade," beginning with GATT and NAFTA, equals foreign aid, according to the Senator's web site:

He (Hollings) contends that U.S. agreements have done nothing more than encourage American companies to relocate abroad and take the jobs with them. This has resulted in a drastic erosion of America's manufacturing capacity and, ultimately, the loss of hundreds of thousands of well-paying jobs for middle America.

South Carolina's textile communities have been especially hard hit, having lost nearly 60,000 textile jobs since the passage of NAFTA. Hollings argues for better enforcement of existing trade laws, improved efforts to leverage the lucrative U.S. market for more competitive agreements, and a longer-term vision for the U.S. economy, which includes a strong manufacturing sector and efforts to protect the American jobs.

Yet it was all "much ado about nothing."  Or close to nothing.   Unfortunately for Main Street America, even the well-meaning senators like Hollings have a blind spot.  They equate American jobs with manufacturing jobs (emphasis added by Annex).  Yet as we have been saying since a decade ago, more than 72% of American jobs had been already in the services sector (see Annex Bulletin 93-53, Nov 12, 1993):

NAFTA or Bust?

Gore said that free trade would help increase the U.S. manufacturing base.  That's sheer nonsense.  The U.S. manufacturing jobs are headed the same way as were the agricultural ones more than a hundred years ago.  It's a one-way trip into oblivion.  No trade agreement will stop it anymore than the Luddites prevented the British industrialization by destroying some of its textile factory equipment between 1811 and 1816.  It was an act of desperation, perhaps understandable considering the low level of computer penetration back then.  But for the Clinton Administration to argue our manufacturing job losses can be reversed - with or without NAFTA - is either irresponsible or just plain stupid.  Just consider the following statistics.

At the turn of the 19th century, the U.S. manufacturing and farm workers accounted for over 73% of the total U.S. job market.  Today, they represent less than 22%.  By the turn of the 20th century, their share is likely to dwindle into the single-digit range.  And even the biggest and the most successful industrial corporations are no exception. 

The FORTUNE 500 industrials' employment, for example, has been declining since 1979.  Their share of all U.S. jobs has been dropping ever since 1969!  The downsizing is actually accelerating in the 1990s.  In other words, the loss of manufacturing jobs is an irreversible, technology-driven trend, just like the move from the farms to the cities was a hundred years ago.  It's the "Third Wave," as Alvin Toffler put it in his 1980 book of the same title.  Administrative deals such as NAFTA, from which multinational companies will benefit the most, can only affect the rate of decline, not the ultimate outcome.

 From Piece Work to Brain Work

Which brings up an interesting anachronism.  As economic power incumbents, the leaders of multi­national industrial companies still wield the greatest political influence in our society.  Yet, that's like having had the farm heads preside over the industrial revolution!  To be sure, many industrials are trying to transform themselves into service businesses, where most of the new wealth is being generated these days.  Already 72% of all U.S. jobs are in service activities.  And small and medium size companies are leading the growth.  

But, transforming a manufacturing company into a service business, a task which Lou Gerstner at IBM is facing among other top executives, is no smaller a challenge than was to have remade "Elmer the Farmer" into a "City Slicker."  A century ago, progress was made by turning farm labor into piece work.  Today, the challenge is converting piece work into brain work.

The industrials who are prepared to act like an amoebae, splitting themselves up into many smaller business units, each catering to a particular group of customers in a discreet market, have a chance of making it.  Those who don't, will probably have to look for their reserved plots in the "Jurassic Park" of the 21 century.

(An excerpt from Annex Bulletin 93-53, Nov 12, 1993)

Not a Permanent Loss

Of course, shifting work around the world is not a new phenomenon.  Multinational companies have been doing it for decades. Nor is the latest trend a guarantee that India will remain a programmer's Mecca forever. 

Hungary and Israel, for example, used to be the "India's of the 1980s."  Remember the "goulash communism," a term coined for Hungary's newfound "capitalism," while this country was still under the Soviet yoke?

As the once cheap labor force got richer, however, the Hungarian and Israeli programmers, among others, discovered that the grass is greener on the other side of the fence - in the West.  So many skilled software developers upped and left their home countries in pursuit of higher salaries in America and Western Europe. 

But while "free trade" assumes unrestricted movement of money and goods around the world, there is no such thing when it comes to "free labor movement."  Most countries have more or less restrictive immigration laws, designed to protect the interests of their indigenous work force.  

Up to a point, of course.  For, lowering the domestic labor costs can be just as attractive to employers as is exporting jobs overseas, if not more so.  Enter immigration.  

Even if that Hungarian, Israeli or Russian programmer does not get an American or a Western European IT job on the first try, he/she will help lower the wages in those markets by merely competing for it.  Which is why we have seen an unprecedented explosion of immigration from third world countries in the last several decades.

But that's a topic for another Annex Bulletin... 

Meanwhile, let us hope that the sometimes volatile Indian political landscape, including occasional nuclear saber-rattling between Pakistan and the world's largest democracy, remains stable long enough for the western IT companies to cash in on their plans.  Otherwise, the latest "Passage to India" passengers may end up like some on the "Ship of Fools" J [by Katharine Anne Porter (1890-1980), first published in 1962].  

IBM, for one, should remember what happened with its investments in the former Soviet Union during a thaw in East-West relations in the 1970s, when the former IBM CEO (Tom Watson, Jr.) was the American ambassador to Moscow.  (The money went down the drain after the USSR invaded Afghanistan in late 1979). Or perhaps that's a page from history the Big Blue would rather forget?

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports on IBM, check out... 

2003 (IBM):  "On the Nose, But No Cigar" (July 16), "A Paler Shade of Blue," (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), “Start of a Real Turnaround?” (Jan 17).

2003 (Global): "Exodus from Equities" (May 27), "Money CAN Buy Longer Life" (May 6), "Global Investments Plummet" (Jan 23)

A selection from prior years (Global): Greed Bites Back (Nov 29, 2002)Salomon/Gutfreund: Wall Street Casino (June 21, 2002)"From a Nation of Producers, to a Nation of Gamblers " (June 23, 1999), "When Will Wall Street's Bubble Burst?" (1998), "Wall St.'s Conquest of America" (1998),   THE GREAT AMERICAN HOOVER (1997)

A selection from prior years (IBM): “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use appropriate  keywords.


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Volume XIX, Annex Newsflash No. 2003-09
July 22, 2003

Editor: Bob Djurdjevic
Published by Annex Research, Inc.

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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