Opinion: Outsourcing offers more advantages than cost savings

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July 8, 2005 – Technology and the communications revolution have enabled an integrated world economy and have unleashed hypercompetitive enterprises around the globe. As a result, a company located in Singapore or Malaysia can compete viciously with a company located in the United States. Electronics and semiconductor manufacturing is an example where this has already happened.

A critical mass has been created in Singapore, Malaysia, Taiwan and China that allows electronics manufacturers in the region to achieve competitive advantages in cost and also in access to funding and tax incentives and, in some cases, technological capabilities that are no longer viable in the U.S.


See the “counterpoint” opinion to today’s column on Smalltimes.com on Monday.


A case in point is MemsTech, a manufacturer of MEMS devices founded by myself and two other Americans that has operations in Singapore and Malaysia. MemsTech enables fabless companies in the U.S. and other parts of the world to design and develop MEMS products. The reason MemsTech chose to start operations in Singapore was that it was funded by AKN Capital, a Malaysian venture capital firm, and the success of the business plan required operations to be located in Singapore. I believe that in the global economy in which we live we are going to see more of this type of operational style where the customer, operations and supply chain will all be distributed around the globe.

MemsTech, like other companies using this model, can leverage several critical components due to its location. These include timely investment and access to seed capital, skilled labor, MEMS graduate engineers, established semiconductor support infrastructure, political stability and low cost financing to expand production capacity, all derived by strategically locating in Singapore.

By outsourcing components that tie up tangible assets like manufacturing, customers can focus on improving the performance of intangible assets like processes, brands and information systems. In addition, the existence of companies to which they can outsource lets customers benefit from dynamically managing their supply chain.

For instance, when Hewlett-Packard started making ink jet printers in the 1980s, it set up both its R&D and manufacturing divisions in Vancouver. HP wanted the product development and production teams to work together because ink jet technology was in its infancy, and the biggest printer market was in the United States.

However, when demand grew in other parts of the world, HP set up manufacturing facilities in Spain and Singapore to cater to Europe and Asia. Although Vancouver remained the site where HP developed new printers, Singapore became the largest production facility because the company needed economies of scale to survive. By the mid-1990s, HP realized that printer manufacturing technologies had matured and it could completely outsource production. By doing so, HP was able to reduce costs and remain the leader in a highly competitive market.

It has been argued that outsourcing of critical technologies marginalizes national security. However, it is important to point out that the Department of Commerce has an effective export control policy designed to prevent national security from being threatened. Although such policies can sometimes stifle the free flow of commerce and the development of innovative products, these controls are necessary as long as there is conflict in the world. But I believe it is not necessary for business leaders to pontificate about national security. We should leave it to the experts whose full time job is to manage such concerns.


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