Back when I was consulting it was all about the BRIC economies. We outsourced like hell to get economies of scale. Business Process Outsourcing continues to attempt to make things seemingly cheaper. There has been mixed success with some of these business models. Where the models flopped the key flaw was the integration of people into the process, and misunderstanding of culture. To realise the ROI many companies have to tackle this issue. Companies like Nespresso have bucked the trend with manufacturing in Switzerland. Switzerland is not a cheap place to base manufacturing, but the quality, consistency and productivity has been factored into the business case. Those tiny little capsules of premium coffee lock the customer in, and they are happy to pay £4.80 a pack. In 2010 they sold 6.5bn capsules according to Bloomberg. The luxury at home coffee market is estimated to be worth £8bn, and Nespresso is still in double-digit growth but now competition is fierce.
Before we speculate on some implications for OD professional, it is important to note the new trend. Those countries that the West naively outsourced to do the manufacturing of the whole product (eeek) or components, and non-strategic fulfilment of the processes, are quickly becoming serious technological contenders. For example, take Tata Steel and Mittal Steel who bought Corus and Arcelor two of the EU’s biggest steel companies. Our political leaders like David Cameron are going cap in hand to the Chinese for help. The west is losing dominance of its own markets. At the same time China and India have the two biggest markets of their own. China sold a million cars per month in January and February 2010! There is yet again a seismic shift.
This is a game changer, for those companies and countries that want to continue to be global players.
It is Europe who is dependent on the IMF for funds, as apposed to emerging economies. It is China who has been the major investor in Africa £7billion in 2006, which is not yet tapped for its natural resources! Sub –Saharan Africa is growing with a GDP of 5% or more between 1995 and 2005. The recession cut growth, but the world bank expects it to return to 4.5% in 2010. The projected GDP for Africa 2020 is 2.6 trillion and 18.6 trillion in 2050! If China is the backer here then much like Britain built its empire, these are the foundations for the future wealth.
The political forces are aware of this change. For example, the US congress blocked the $18.5 billion purchase of Unocal by the 70% state-owned China National Offshore Oil Corporation. China has liquidity. Its cash reserves are the equivalent of 40% GDP an estimated £3.3 trillion! Watch this space!
So what does this mean for OD professionals?
- We need local leaders, and local talent for the game changers in BRIC but with the new countries, Russia and Africa. Goldman Sachs and economist Jim O’Neil defined the next 11 (N11) emerging countries and CIVETS outlined by Robert Ward: Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa. To overcome the cultural issues, understand and innovate in that market.
- Global leaders may need a different skillset, flexibility and awareness. Check out a post on learning Chinese.
- Do not just think about efficiencies of outsourcing to the East, we now need to think in reverse, and in-between. We need people that can understand and leverage the benefits of Re-financing. What can Corus gain from Tata and visa versa to be a more effective global player? Are their parts of the process that are now better suited in the West?