OEMs Can Run, but They Can't Hide from Outsourcing-Driven Wage Increases

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It's a pretty basic economic equation: As jobs increase, so does the demand for qualified workers, followed by the wages companies must pay to attract those workers.


For some time now, we've been hearing that rising wages are making India less of an automatic economic win for companies offshoring there, since it reduces the value of labor arbitrage. Indian providers are employing a number of strategies to offset wage increases, including seeking workers in rural areas of India and in lower-cost countries.


A popular destination for Indian firms like Tata Consultancy Services is China. As those firms and multinationals like Microsoft and Oracle increase their investments in China, however, it's inevitable that wages there are going up -- pretty darn rapidly, according to this EMSNow piece.


The author says that labor costs in China took off "like a rocket" in 2006, quadrupling from the previous 3 percent to 5 percent annual increase to 16 percent. While this is stabilizing somewhat, he still foresees a 10 percent to 13 percent growth in 2007. This will put China on a parity with Malaysia and Thailand, and will likely make Vietnam Asia's biggest bargain in terms of labor costs.


Because of the increasingly interconnected economies of all Asian countries, wages throughout the region will probably rise, the author believes. His advice: North American OEMs may want to look at Mexico, while Western European companies should consider Eastern Europe.


Of course, as outsourcing continues to apply upward pressure to wages virtually around the globe, companies may decide to stop chasing low-cost labor and focus on the more strategic advantages of outsourcing.