Carpe Diem

Labor Arbitrage is Disappearing for Outsourcing Manufacturing to China and Services to India

I’ve reported recently (see posts here and here) about the Boston Consulting Group’s prediction of a pending manufacturing renaissance in America because the labor arbitrage gains from manufacturing products in China are starting to shrink and will eventually disappear.  Cost advantages for manufacturing are starting to shift back to America because of rising wages in China, along with rising prices there in general and an appreciating currency. 
A story in today’s Washington Post is predicting the same erosion of labor arbitrage for outsourcing service-sector jobs to India:
“India’s outsourcing giants — faced with rising wages at home — have looked for growth opportunities in the United States. But with Washington crimping visas for visiting Indian workers, some companies such as Aegis are slowly hiring workers in North America, where their largest corporate customers are based. In this evolution, outsourcing has come home.

Tata Consultancy Services, for example, is ramping up its North American presence in major deals with Citibank, Dow Chemical and Hilton Worldwide. It plans to hire more than 1,000 Americans in 2011 and to base 10,000 of its 185,000 global employees in the country.”
MP: Wages are increasing 11% per year in China and by 10% in India, which means that labor costs there are doubling every 7 or 8 years if those wage increases continue.  Wages in the U.S. are rising by only 1.9% annually and at that rate it would take 37 years before wages would double here.  At some point, the labor arbitrage advantages for China and India have to disappear.  BCG predicts that “Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America.”

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