Another Variation on Outsourcing, and Security/Reliability

I've mentioned the concept of insourcing - when outsourcers outsource back to the country of the client company. But the web of what outsourcing means has become more complicated, according to this story in the New York Times:

In May, Tata Consultancy Service, Infosys’s Indian rival, announced a new back office in Guadalajara, Mexico; Tata already has 5,000 workers in Brazil, Chile and Uruguay. Cognizant Technology Solutions, with most of its operations in India, has now opened back offices in Phoenix and Shanghai.

Wipro, another Indian technology services company, has outsourcing offices in Canada, China, Portugal, Romania and Saudi Arabia, among other locations.

And last month, Wipro said it was opening a software development center in Atlanta that would hire 500 programmers in three years.

It had to happen. You can't keep piling work up in one corner of the world because of inexpensive labor and expect those costs to remain low. Demand has kicked up, and supply will follow. So the outsourcers try to find cheaper labor, or workers with specific skills not available at home.

However, this should create some additional concerns for the corporations that are outsourcing the functions. Every layer of removal, particularly to a different time zone, complicates management of the process. Every additional stage opens another security front to prevent loss or attack. Additional complication means greater chance that the function will falter or fail.

Of course the outsource vendors will say that there is no difference and that they are in complete control. But that would be like trusting a food ingredient provider that outsourced its own manufacturing to China, in light of the problems that have appeared in that sector. It may be that things are fine, but the company will need to spend the time, money, and attention to be sure that is true - and all that has to get factored into the costs of "saving" the money.

Mattel Admits to Scapegoating China on Product Problems

According to the weekend Financial Times, Mattel had to apologize to "the Chinese People" last Friday. The company had been blaming its series of toy recalls this year on Chinese contractors:

The apology was in stark contrast to recent comments from Robert Eckert, Mattel’s chief executive. In testimony to the US Senate last week, he suggested that the fault for the group’s recent product recalls lay with outside contractors. “We were let down, and so we let you down,” he said.

The story that Mattel had told involved the presence of lead paint, but the vast majority of recalled units - 18 million - suffered from design flaws.

In a later statement, Mattel said that some reports had “mischaracterised” its comments and said it had “apologised to the Chinese today just as it has wherever its toys are sold”. But the statement made clear that it was also apologising to the country and its reputation over the magnet-related recalls.

Oh, what a mess Mattel has made. Just a month or two ago, the company was receiving accolades for its prompt attention to the problems and its handling of the public relations crisis. Guess they can toss the good work out the window - it was nothing but misdirection. I can remember at one point seeing the numbers involved in one recall and wondering why the bulk seemed to be about design problems, but I didn't follow up on that, and shame on me for doing so. But where were the reporters who were actively following the story for their news organizations? There appears to be a numbers phobia in the business press, which is disturbing considering just how much of business is related to and described by numbers.

China Becoming Patent Giant

According to WIPO, the UN's intellectual property agency, China has become the third largest filer for patents behind the US and Japan, as the BBC reported. China has for some years become the manufacturer of first resort for many companies around the world. But that's a low profit type of business. The country is moving up market, so to speak:

China knows it cannot bet its future economic success on low wages alone. Other countries are already cheaper.

I can remember a few years ago speaking to an executive of a global consumer electronics company who was working in China. He said that people had no idea how quickly the country had advanced and exactly what was going on there, that to see it for yourself was a stunning experience. It still makes me wonder how many businesses and countries still write off China as a source of cheap labor and manufacturing, where there is little interest in intellectual property and where the chief capability of interest is copying what has already been done by another. How long will it be before the west faces China as a powerful competitor on all levels? Look how long it took to recognize - not just intellectually, but emotionally - Japan and then South Korea. We may all be in for a rude awakening.

Counterfeiters Going One Better?

I've written a number of times in the past about product counterfeiting, and one of the big concerns is that the knock-offs can be dangerous, and have been proven so on occasions. But I've heard from experts who say that the products are getting better. Now we see an example where maybe the counterfeiters and knock-off experts are taking a few steps ahead of the original product. According to Popular Science, a Chinese company, Meizu, has effectively knocked off the iPhone, calling its product the miniOne.

A few days before Apple's launch, an online video surfaced depicting a sleek new product called the P168 [watch the video below]. The phone came in a black box, marked with both the iPhone and the Apple logos. The video showed the phone being unpacked and operated (the start-up screen also featured the Apple branding). There were features that the iPhone didn't have, such as the ability to operate on two different networks at once; six speakers; and, addressing a major prerelease complaint about the iPhone, a removable battery. I asked my translator if she could find one on the street. They weren't available in Beijing—yet—but a few weeks later, a friend discovered one in Guangzhou. The manufacturer of the P168 wouldn't comment for this story, but the hardware was real, and it worked.

Given the many public complaints about the iPhone, perhaps it's time for US companies to start copying the copiers.

Big Toy Recall Underscores Business Danger of Outsourcing

As the New York Times and other outlets have reported, Mattel is recalling something like a million toys because a Chinese contract manufacturer had used lead-based paints. That follows other companies' recalls of products made in China: food, toothpaste, tires, and another set of toys. What is particularly disturbing for business, as well as for consumers, is that Mattel had a supposedly sophisticated set of safety checks and was dealing with a vendor it had used for 15 years.

For years experts have said to outsource non-core processes and functions because that way companies could focus on where they could make the most difference to their businesses. However, how do you define a core competency? If you can't ensure that suppliers will do what you need, perhaps manufacturing is something that should be core. If you can't operate without certain types of information technology, maybe keeping at least the capability of doing that work should be core. I can understand wanting to save money, but the savings aren't as astronomical as many think when the risk is something like this.

Chinese Tires Show Outsourcing Bounce-Back

According to a New York Times story:

Federal officials have told a small New Jersey importer to recall 450,000 radial tires for pickup trucks, sport utility vehicles and vans after the company disclosed that its Chinese manufacturer had stopped including a safety feature that prevented the tires from separating.

This is a prime example of the dangers of outsourcing, with importing often being another face on the same situation. I'm not suggesting that it never makes sense, but too many companies are short-sighted in considering the business trade-offs. They look at the unit price and forget little things like quality control that can cause government agencies like the National Highway Traffic Safety Administration to force them into a full recall. Management of Foreign Tire Sales of Union, NJ apparently suspected a problem for two years before telling anyone. People have been killed in accidents allegedly caused by the tires. Anyone want to guess whether corporate management and board will become defendants?

Chinese Amusement Park Uncannily Like Disneyland

For those in business who want to believe that the Chinese government really wants to end copyright infringement, look at this article in Hong Kong paper The Standard. On web site Japan Probe there are more pictures of characters and even a setting or two that might be suspiciously familiar. There's also a video that includes the president of the state-owned part claiming that the characters are originals, not rip-offs. Oh, and that odd little character isn't Mickey Mouse - it's a cat with really big ears. At least, that's what they say.

Whether you have sympathy for Disney or not, such a government-controlled enterprise should give any business manager second thoughts about moving any serious enterprise to China ... unless they think that their intellectual property - from product designs to methods of manufacturing and trademarks - are so unimportant that they might as well be given away.