Wednesday, May 04, 2005

Is Outsourcing Outmoded at Dell? A Closer Look at Dell’s Global Strategy

Two recent announcements by Dell Computer have fueled concern about the increased outsourcing of U.S. jobs overseas and have raised doubts about American strength in the computer technology industry. However, careful Dell observers should recognize that the recent moves are nothing new. Last week, Dell announced that it would expand its operations in India, adding 2,000 new recruits by the end of 2005, bringing the total number of Dell employees in India to 10,000. The new workers will increase Dell’s call center and technical support resources in India and, in a move that has the potential to raise the most concern among U.S. observers, some of the new employees will fill higher-skilled jobs in software development. Also last week, Dell announced that it had opened a new design facility in Singapore, whose products will include projectors and TV sets.
Until this recent news, Dell had been touted by commentators as a company that was successfully swimming against the outsourcing current. Dell maintains several manufacturing facilities in the United States and recently opened a call center in Oklahoma City. Also, in late 2003, Dell shifted back to the U.S. some call center operations that had previously been outsourced to India. Some might have taken these facts as evidence that Dell’s strategy for the future would include little outsourcing. However, shrewd observers could have recognized that these decisions were not based on a fear of outsourcing or a long-term strategic decision to avoid it. Rather, Dell was simply keeping its eye on what would make the most sense for its business. Its continued manufacturing in the U.S., when other competitors have outsourced most manufacturing to Asia, was based on its ability to do so cheaply and on the fact that keeping the manufacturing close to its customer made sense as well. And, Dell’s Chief Executive Kevin Rollins blamed the 2003 outsourcing pullback on internal management issues and emphasized that Dell simply needed to “prioritize and refine” its global strategy.
Dell’s outsourcing moves have not been based only on a race for the cheapest labor, but have been driven also by management’s strategic assessment of where its current business is and where its planned growth will occur. Dell opened a factory in China in 1998 and has maintained a factory in Ireland as well. Unsurprisingly, the Chinese factory manufactures equipment Dell sells to its Asian customers, and Ireland supplies Dell’s European market. This highlights the importance Dell’s management places on doing things efficiently, and it views its ability to source and assemble its products near its products’ consumers as a key to that efficiency. The latest announcements continue this strategy. Over the next several years, Dell expects 55% of its growth to be in international markets. Therefore, logically, it is going to base a good portion of its facilities near those markets.
The one thing Dell management could be concerned about is the possibility that some of its decisions may get caught up in a backlash against outsourcing. U.S. legislators may impose tax or other barriers that will limit the economic benefits of some outsourcing decisions. In addition, Dell may need to worry about consumer backlash as well. However, given that Dell’s plans seem mainly focused on growing its overseas market share, rather than shifting large numbers of existing U.S. jobs overseas, it appears likely that these concerns are not significant.
Although all of this makes sense from the standpoint of Dell’s global strategy and may not mean much for the outsourcing trend, it does call into question the U.S. position at the top of the technology market, both as a producer and consumer of that technology. India, with its low cost human capital, together with China and its low cost production capabilities, are making strong inroads into the market for technology development and manufacturing. As a result of India’s recent move to ease rules on foreign investment, analysts are expecting to see up to half a billion dollars of investment funds flowing into the country. India expects economic growth at a quick clip of 7% this year fueled in part by an annual doubling of demand for office space by foreign firms, like Dell, seeking to invest in technology businesses and call centers.
So what does this mean for America’s economy? As we begin to face a flattening economic playing field, the US will face stiffer competition necessitating further investments in technology and education. Strategists John Hagel III and John Seely Brown argue that comparative advantage is moving away from structural factors such as natural resources towards how quickly an enterprise can build its distinctive advantage for innovation, which they argue is the only sustainable edge. Technocrat Bill Gates ways in, in typical techie style stating: "Training the work force of tomorrow with the high schools of today is like trying to teach kids about today's computers on a 50-year-old mainframe…Until we design them to meet the needs of the 21st century, we will keep limiting - even ruining - the lives of millions of Americans every year."” Perhaps Mr. Gates’ comments are a bit extreme but he does highlight an important question. How will US firms and the US workforce find ways to compete in an ever more competitive global economy?

David Korb, Gregory Shade, Matthew Thornton

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