Two Michigan-based companies well illustrate the rich and often complicated dynamics involved in offshoring jobs and in evaluating the results of the practice. Delphi Corp., based in Troy, Michigan, is one of the world’s largest suppliers of high-tech components to automotive and other industries. Covansys Corp., based in Farmington Hills, Michigan, is a provider of technology services that has one of the largest payrolls of offshore employees of any American company in its industry.
Formerly the parts-making subsidiary of General Motors Corp., Delphi became an independent company in 1999 and, since then, has pursued a tough-minded strategy not only for remaining one of the world’s most technically advanced automotive suppliers but also for penetrating other industries with its electronic components and systems. As a result, Delphi has been successful in increasing the non-GM parts of its business to about half of its expected $30 billion in revenues this year, compared with just 20% of its revenues at the time of the spin-off. This advance has included huge new portions of business from rival auto makers in the United States as well as around the globe. But Delphi’s diversification push also has gained customers in a wide variety of other technology-intensive industries, including other transportation sectors (design and manufacture of the complex stabilization devices in Segway scooters), consumer electronics (development and production of both leading brands of satellite radios), and medical devices (manufacture of state-of-the-art electronic wheelchairs and other products).
The success that Delphi has achieved so far on its own has required vast adjustments throughout the company. Delphi has eliminated thousands of high-wage manufacturing jobs in the United States that were no longer tenable in the face of much cheaper foreign competition; and with a desire to hang on to as many such jobs as it could, the United Auto Workers union just this year agreed to a significantly lower wage structure for any new production workers hired by Delphi, a historic concession by the union. Delphi also has spread its white-collar work all over the world, establishing and expanding technical centers in China, Korea, India and Mexico, close to its global customers. In fact, more than 70% of Delphi’s workforce now is employed outside North America.
But unlike the trend in Delphi’s manufacturing jobs, the offshoring of technical work actually has served to benefit the company’s IT-related workforce in America. Since 2000, Delphi actually has expanded the ranks of its scientists and engineers around the world to more than 16,000, compared with just under 15,000 as recently as 2000. Many of these new hires are software engineers in Asia and in Mexico who, indeed, are handling coding, maintenance and other relatively mundane tasks that previously were performed at Delphi locations in the United States. But by helping Delphi control its costs while yielding work of quality equal to their American predecessors, these offshore specialists buttress the company overall. Perhaps even more important to Delphi employees in America is that, even with extensive off-shoring, Delphi has not dislocated any of its American software engineers or other IT employees. Most of these highly educated and experienced workers actually move on and up to other, higher-value-added functions that still can be performed only in North America. Such functions include mathematics-based modeling that al-lows Delphi to reduce the use of expensive laboratory equipment for testing.
“If I can take advantage of some of these lower-cost countries to do things I can’t do here in the U.S., we grow the business more easily,” says Tony Kayyod, who helps make sourcing decisions as the director of Delphi’s global engineering and manufacturing “footprint.” “I can either do two programs completely engineered in the United States, or ten in the U.S. — with some of the engineering done in low-cost areas elsewhere.”
Thus, to no small degree as a result of its offshoring strategy, Delphi, its shareholders, and its thousands of employees in Michigan are prospering. Indeed, Delphi has become a formidable redoubt of technological superiority in the heart of the old industrial Midwest.
The second firm, Covansys, handles information-technology work that is outsourced to it by local clients including auto makers and state government who simply want their data-crunching, telephone technical support and other needs handled capably and as inexpensively as possible to help them cope with cost pressures and competition. While the recent recession years battered Covansys’s finances (its revenues have remained flat to date in 2004), the company announced a transaction in April that bodes well for future growth. It landed a five-year contract with Fidelity Information Services, a unit of the giant mutual-fund concern, to become the primary provider of outsourced IT services to Fidelity. The arrangement is expected to increase Covansys’s revenues by more than five percent in 2005. Fidelity also purchased a 29% equity stake in Covansys.
The company employs about 375 people at its head-quarters in Michigan as well as more than 1,800 additional staffers at 16 other offices scattered across North America. Covansys also employs more than 2,000 IT workers in Bangalore and its two other offices in India, where they perform most of the same digital functions as their U.S. counterparts, with the same quality of results at a fraction of the cost. Covansys clients continue to specify that the company conduct more of its work in India. Two examples are PeopleSoft Inc., which recently directed Covansys to expand PeopleSoft’s development center in India, and BearingPoint, the accounting and consulting firm that contracted Covansys to help it open and operate BearingPoint’s first development center in India. About 26% of Covansys’s revenues in the first quarter of 2004 came from India compared with 15% a year earlier.
“This is a play we’ve been through before,” says Martin Clague, former president and CEO of Covansys. “It’s just in a different sector. We’ve been through it with manufacturing, with all of the gnashing of teeth and short-term protectionism here that greeted the rise of Japan Inc. But at the end of the day, economics win. And even in Detroit, many people stopped buying American cars in favor of imports. Then at the end of the day, Detroit said, ‘We have to make cars that are as good as if not better than Japanese cars.’ But many of the parts for those cars are made and outsourced overseas. And at the end of the day, the consumer has won.”