Advice to Companies Before Going Offshore

Global outsourcing—or offshoring—affords U.S. firms tremendous opportunities for transforming themselves by opening new markets and tapping labor forces overseas. But, while other countries represent significant opportunities for U.S. businesses, a Rice expert on international joint ventures in China cautions companies to think about their long-term competitive strategy before going global.

Global outsourcing is growing rapidly. In India, the Philippines, and China alone, annual foreign investments have reached $50 billion. “Offshoring is very hot right now, and China with its low-cost, highly skilled labor force and impressive infrastructure is one of the most popular destinations,” says Anthea Zhang, an expert in international joint ventures at Rice’s Jesse H. Jones Graduate School of Management.

However, Zhang cautions that companies without the managerial capabilities to carry out a global operation should be careful with regard to global outsourcing. A company that wants to open operations outside of the United States or outsource some of its functions to another country needs to remember that both decisions will increase its organizational complexity. “Offshoring,” she says, “should be part of a firm’s long-term strategy, not an end in itself.”

Zhang advises companies to consider their core competencies and use outsourcing to transform their companies. “If a company can be better off by focusing on what it does really well,” Zhang explains, “it should consider having another company take over its peripheral functions.”

Despite concerns that many American jobs are lost when companies move their operations overseas, Zhang believes offshoring can offer opportunities that benefit U.S. firms. For some American businesses, offshoring is a smart and necessary move to remain competitive.
“American companies aren’t the only players in a global market,” Zhang says. “If they don’t seek the obvious benefits of lower costs from offshoring, they will eventually lose their global competitive advantage. They’ll also lose their contact with emerging markets like India and China.”

Zhang contends that companies who move operations into India and China, for example, are in a better position to learn about and make contacts in those very large emerging markets. “To penetrate markets like China or India sucessfully,” she says, “countries with significantly higher income markets, like the United States, must create alternative ways to serve consumers with lower incomes and in countries with fewer capital resources.”

She points to firms such as Proctor and Gamble that have successfully built their brand images throughout China. “Proctor and Gamble has been in China for over 10 years,” Zhang says. “Consequently, the company has become very knowledgeable about China’s market and has a tremendous advantage over its competitors there.”

Zhang also cites an Indian company that has been experimenting with manufacturing a car that would cost $2,200. “Automobile manufacturers in the United States, Germany, and Japan currently couldn’t compete in India’s or China’s market at that price,” she notes. “To do so will require innovation in both products and processes, and learning about these markets may require locating in them.”

In the not-so-distant future, Zhang believes these innovations—coming as a result of global competition and outsourcing—will benefit U.S. consumers as well.