Global Workforce Report Emerging Markets--Expanding the Frontier
As the global options for site location broaden outside traditional offshore centers, workforce management executives face complex issues that move well beyond simple labor costs.
"We spent a lot of time with spreadsheets on labor costs," says Noberto Viera, managing director for Texas Instruments in the Philippines. "For unskilled workers, costs in China are 10 percent lower than in the Philippines. But we are looking for operators with one to two years of experience and experienced engineers. For those workers, the costs are comparable between China and the Philippines."
The Philippines now rivals India for BPO investment and leads Southeast Asia in call center growth. Vietnam successfully competes against both China and India for software development centers and pharmaceutical facilities. Bangladesh is pulling light industry out of India and China, and Turkey is beating out Eastern Europe for auto assembly.
The Philippines, Vietnam, Bangladesh and Turkey are part of the "N-11," the Next Eleven, a designation developed by Goldman Sachs in 2005 to identify a group of developing countries with the demographics and economic capability to become major economies and potential rivals to the "BRIC" nations (Brazil, Russia, India, China). In addition to the Philippines, Vietnam, Bangladesh and Turkey, the N-11 includes Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria and Pakistan.
Goldman Sachs introduced the BRIC nations in October 2003 as the four emerging markets with the scale and the trajectory to challenge and eventually overtake the U.S., Europe and Japan in the global arena. Economic growth in the BRIC nations has been far greater than Goldman Sachs originally projected and the N-11 nations have moved more squarely into the second slot for global business investment. An additional dozen emerging markets now routinely appear near the top of lists that rank countries for their competitive business environment.
As companies move beyond Brazil, Russia, India and China for the best investment opportunities, identifying and tapping talent pools becomes increasingly important in forming corporate location strategies. The strategies and the labor market criteria that companies adopt vary widely. Although the popular press continues to hype low wages as the driving force in expansion into the emerging markets, labor arbitrage is clearly a one-dimensional concept in the multidimensional world of site selection.
Sweet and sticky
Texas Instruments already employs 3,000 Filipino workers in its Baguio City assembly and testing facility, which opened in 1979 and now produces 40 percent of TI’s global output of assembled chips. The new 800,000-square-foot plant now under construction in the Clark Freeport Zone in Pampanga will double TI’s capacity in the Philippines. Production will begin in the second half of 2008. TI has similar plants in Japan, Malaysia, Mexico and Taiwan.
The capital-intensive semiconductor industry has moved out of the U.S. and into the emerging nations of Asia primarily because lower tax rates and other government incentives have reduced the cost of capital in those countries. In the semiconductor industry, the 80 percent differential in wage rates between the U.S. and emerging Asia results in less than a 10 percent difference in final costs, according to the Semiconductor Industry Association.
"Labor costs, which are a very small portion of total costs, are really not much of a factor for us," Viera says. But in selecting among the various low-cost-of-capital sites within emerging Asia, workforce issues come into play. In addition to relative wages, TI also looked at available skills and turnover rates. With the new plant scheduled to hire more than 1,000 supervisors and engineers, attrition is a concern. "For engineers, turnover in China is running 15 percent to 20 percent, compared with 10 percent in the Philippines," Viera notes.
The new TI plant is on the same scale as Intel’s new semiconductor packaging facility in Vietnam. "We looked at Vietnam, and of course the Intel plant is going up there," Viera says. "But an experienced workforce was a critical consideration for us, and there were also infrastructure issues in Vietnam."
Although workforce issues played a role in the TI site selection process, the fact that TI already has facilities and suppliers in the Philippines and a productive relationship with the government created a high level of "stickiness" and played a substantial role in TI’s decision to stay in the Philippines. Part of that stickiness stems from TI’s sweet deal with the government-funded universities.
"We will have no difficulty in filling the 3,000 positions at the new plant because we have a hiring process that begins with cooperation with 26 universities all over the Philippines," Viera says. The curriculum for potential TI candidates at these universities includes six months of on-the-job training at TI as part of the degree program. When the students graduate, they move into a six-month apprenticeship program at TI, so by the time they become full-fledged employees, they have a year of direct experience.
"On the tech side, we have 100 to 120 people moving through the apprenticeship program at any one time," Viera reports. "This number will increase dramatically as we begin to staff the new facility. All along the way, potential employees pass through a very detailed appraisal process that works like a funnel so that we hire only the best people." For production workers, TI runs a program with the government for technical training and puts new hires through six months of on-the-job training.
A strong relationship between government-funded universities and employers is not uncommon in Southeast Asia, according to Russell Huntington, director of Asia-Pacific data services at Watson Wyatt Worldwide in Melbourne, Australia. "In Malaysia, for example, many universities are government-funded and work closely with employers, and it’s a win-win situation," he says.
"We will have no difficulty in filling the 3,000 positions at the new plant because we have a hiring process that begins with cooperation with 26 universities all over the Philippines."
--Norberto Viera, managing director for Texas Instruments in the Philippines
In addition to TI’s solid relationship with the Philippines’ universities, the overall strength of the country’s education system gives it an advantage over many other emerging markets in Asia. Among recent graduates, McKinsey & Co. reports that multinationals consider 20 percent of new Filipino engineering graduates suitable for employment, com- pared with 10 percent of China’s engineering graduates. In finance and accounting, 30 percent of the Philippines’ graduates are considered suitable, compared with just 15 percent of graduates in China and India.
Like other emerging-market nations, the Philippines is experiencing relatively high labor cost increases, but Viera is not concerned about wage inflation. All wage increases at TI are based on performance. "There is some wage indexing through the minimum wage rates set by the regional wage boards, but our wages are always above the minimum," he notes.
At the existing TI plant in the Philippines, annual wage increases for employees above the operator level have averaged 7 percent to 8 percent for the past five years. The top 10 percent of high-performing employees receive as much as 30 percent, the next 10 percent average 8 percent, and the bottom 10 percent receive no increase. For operators, the average annual increase runs 4 percent to 5 percent, also based entirely on performance.
TI controls wage inflation in the Philippines by tying pay increases to performance, but other multinationals have expressed concern about rapidly rising wages across the region. "We’ve seen double-digit increases every year in a consistent pattern since the Asian economies recovered from the financial crisis in 1998," Huntington says. "What multinationals might be concerned about is the aggregate increase and the fact that some markets are becoming less competitive than others. Relative to the developed world, wages throughout the emerging markets of Southeast Asia are increasing rapidly, and any company will look at that."
Huntington notes that the use of incentive pay is widespread in Southeast Asia, led by the Philippines and Taiwan, which are more influenced by U.S. practices than other Southeast Asian nations. Watson Wyatt’s 2007 salary surveys report that variable bonuses for professional and technical workers are running 20 percent of base salary in the Philippines, 26.6 percent in Indonesia, 22 percent in Malaysia and 16.5 percent in Vietnam.
TI can afford to be relatively relaxed about labor costs because they represent such a small portion of its overall spending. But labor costs are more of a concern for Hexaware Technologies Ltd., a global IT and BPO services company based in Mumbai with 5,700 employees in 16 locations worldwide. Labor costs represent 55 percent to 60 percent of Hexaware’s total costs. Almost 90 percent of its employees are technical workers with specialized training, so attrition is also a concern.
With offices in North America, Europe and the Asia-Pacific region, Hexaware runs four state-of-the-art development centers in India and one in Germany. For its new development center, Hexaware selected Mexico. In November 2006, Hexaware acquired a company with facilities and 100 employees in Saltillo, the capital of Mexico’s Coahuila state, and is now expanding that facility and hiring on an additional 200 workers.
Hexaware’s decision to expand into Mexico was driven by its need to provide "nearshore" services for U.S. clients and by the quality of IT talent now available there. "We visited seven universities in Mexico to begin recruiting and found that the quality of the talent is very good," says Deependra Chumble, chief people officer at Hexaware. "In India, the recruiting process is long. Out of 100 candidates, we may find three that are suitable. In Mexico, out of 100 candidates, 10 are suitable. Many have studied in the United States."
Other workforce-related advantages are substantial. Hexaware is facing annual average wage increases of 17.5 percent for its India-based employees and 5 percent for overseas employees, including those based in Mexico. In addition, the company’s attrition rate in India is 14 percent, compared with almost no attrition in Mexico.
Mexico now holds 25 percent of total agent positions in Latin American BPO centers and a growing share of offshored IT jobs, according to A.T. Kearney. Compensation for IT advanced programmers ranges from $25,000 to $27,000 in Mexico, compared with $7,000 to $11,500 in India. Call center wages range from $10,000 to $12,000 in Mexico, compared with $3,500 to $5,000 in India. But despite the higher labor costs, the nearshore location and lower attrition rates make Mexico a better choice for many companies.
"In Mexico, wage costs for similar talent are about 50 percent of U.S. costs, and that was certainly a consideration, but access to the North American and Latin American markets and the language skills of potential candidates were the key considerations for us," Chumble reports.
Hexaware has discovered that Mexican candidates have slightly different training and need some skills updating, so the company currently has eight of its Mexican new hires in India for two months of training and plans to continue to bring over Mexican hires. "We are very satisfied with the results of this program," Chumble says. By 2009, the company may begin training candidates in Mexico instead of bringing them to India.
Hexaware is now looking at additional overseas acquisitions in China and Eastern Europe. Also, it will soon begin recruiting workers in the Philippines and Malaysia, who will be trained in India and then placed at Hexaware client companies in their home countries.
For most companies, labor arbitrage will remain an important part of corporate location strategies. Mercer’s 2007 salary survey for IT managers reports total average annual cash compensation of $15,470 in Vietnam, less than half the going rate in China or the Czech Republic and about one-seventh of the cost in the United States. But other forces, including workforce issues such as the long-term skills supply—and for many companies, issues unrelated to labor, such as client preferences and corporate tax rates—will shape location strategies as companies move beyond the BRIC.
Click here to download a pdf of this feature.
Workforce Management, November 19, 2007, p. 23-28 -- Subscribe Now!