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Program
09:00
09:10
Perspectives on Globalization
Diana Farrell, Director of the McKinsey Global Institute
09:45
10:05
10:25
10:30
Meeting Adjourned
Upcoming Events
March 15
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Perspectives on Globalization
Diana Farrell
Director, McKinsey Global Institute
Perspectives on Globalization
GLOBALISERINGSRDET
Denmark is ready
for globalization
- April 2005
Outsourcing
strengthens Denmark
- July 2005
Globalization is
ethical and useful
- June 2005
Low income
countries create new
jobs in Denmark
- November 2005
Thousands of
office jobs are
moving abroad
- May 2005
Globalization
creates more
Danish jobs
than it
destroys
- October 2005
Product
specialization
Entire
production
process
completed in a
single location
and trading
finished goods
Value chain
disaggregation
Different
components
manufactured in
different
locations and
are assembled
into final
product
Value chain
re-engineering
Processes
redesigned
to capture
further
efficiencies/
cost savings
New market
creation
Firms offer new
products at
significantly
lower price
points and
penetrate new
markets
2 Product specialization
Auto
Retail
Chevrolet TrailBlazer
(Dayton, OH)
e
ad
r
T
Wal-Mart
Pontiac Aztek
Ramos Arizpe, Mexico
Mexico
Wal-Mart
Brazil
Specialist
production
MPU design
fabrication
Border zones
production
Desktop final
assembly
Source: McKinsey Global Institute
Specialist
production
Mouses and
key board
Specialist
production
DRAM production
Specialist
production
Semiconductor
design/production
Services example
4555% saving
100
6065
510
4555
57
1015
Original
base
Additional
management cost
Task/process migration
Offshore
location
cost
3035
New cost
Process
Task
reenginee- reenginee- base
ring
ring
Task level Process level
improve- improvements
ments
Supply
current
Supply global
opportunity
Demand
Quantity
Source: Interviews; McKinsey analysis; McKinsey Global Institute
Significant
market growth
opportunity if
global cost
opportunities
captured
8.6
0.6
3.8
Ireland
3.6
Canada
Eastern
Europe***
0.3
15
CIS**
24
Russia
India
Israel
12.2
0.5
0.3
3.4
Philippines
Mexico
China
0.1
South
Africa
0.4
0.1
Australia
Thailand
India
* The import of services as IT development, call centers, back office to Denmark during the period Jan. 2005 Oct. 2005 used as a proxy for offshored services market size
** CIS (Commonwealth of Independent States) includes Russia, Ukraine, Belarus, Kazakhstan, Kyrgyzstan and Moldova
*** Includes Poland, Romania, Hungary, Ukraine, and Czech Republic
Source: McKinsey Global Institute; The Emerging Global Labor Market; Denmark Statistic; McKinsey analysis
-1.00
0.93
0.52
0.45
USA
France
0.30
0.05
0.07
Re-employed workers
0.58*
0.57
Total
0.50
0.93
1.00
Germany
0.36
0.36
0.05
0.03
1.14
1.00
0.44
0.34
0.85
0.73
1.00
Note: Earlier McKinsey studies put Germany at 0.80 cent per Euro (company savings of 0.49 and value of reemployment at 0.29)
* Reemployment rate: T. Eriksson, R. Ibsen, J.Li og N.Westergrd-Nielsen: Globalisering og beskftigelse
Source: How Offshoring of Services Could Benefit France, June 2005, McKinsey Global Institute; McKinsey analysis
1.00
4.4
3.9
3.5
2.9
2.5
2.0
1.8
1.1
0.9
0.5
19.8
24.4
27.3
30.5
21.3
29.8
19.0
21.8
23.8
24.6
Unemployment
rates, 2004
Percent
GDP growth,
19902004
CAGR, percent
5.4
4.6
2.0
2.3
1.7
2.0
2.0
2.2
1.0
2.8
2.4
3.0
9.5
9.7
6.4
4.5
4.4
7.2
4.6
5.5
1.7
26.2
France
2.0
27.0
Belgium
2.0
27.4
Sweden
2.0
Finland
2.0
Denmark
2.0
Austria
UK
28.8
27.9
29.6
2.2
29.8
2.4
Spain
US
Source: OECD Annual National Accounts; McKinsey analysis
27.7
2.8
3.0
22.5
36.4
US
Denmark
Japan
France
UK
Germany
60
80
100
120
Labor productivity*
Competition
drives
innovation
and diffusion
Company
operations
Shift to higher value added goods
in portfolio
Scaling
Increased
productivity
1.6%
27%
69%
Other sectors
62%
31%
11%
GDP, 2004
Export sectors
comprise ~10% of
the economy and
contribute with
more than 30% of
the overall
productivity growth
~30% of the
economy is not
exposed to
competition (public
sector)
Productivity gain,
CAGR
* Defined as sectors with ~50%+ export share: agriculture; chemicals, plastic & rubber; food & drink; metal products and textile
Source: Groeningen Productivity Database, Feb 2005; McKinsey analysis
140
120
120
Export-driven manufacturing
Average
Japanese
productivity= 69
100
80
63
60
Domestic
manufacturing
and services
40
20
0
10
20
30
40
50
60
70
80
90
100%
Quartile**
0.3
Most productive
6.2
1.0
2nd
4.2
1.2
2.4
2.2
3rd
Least productive
-1.6
Least productive
companies in the US are
eliminated; those in
Europe are not
* Weighted average of European countries for which data were available; Finland, France, Netherlands, Sweden, and UK
** Aggregated data for manufacturing sector
Source: Economic and Social Institute (ESI); Vrije Universite it Amsterdam; McKinsey Global Institute
US
France
Germany
-20
-10
+10
+20
106
Shooting ahead
Catching up
Automotive
Fixed telecom
Road freight
+6
14
+4
Banking
Productivity
growth
19922000*
relative
to the US
45
Mobile
telecom
Mobile
telecom
12
Banking +2
Fixed telecom
Electricity generation
Electricity distribution
Apparel retail
Food retail
-2
Electricity distribution
Automotive
Apparel retail
Food retail
-4
Electricity generation
-6
Lower
Falling behind
Losing ground
Lower
Higher
Productivity level 2000** relative to the US
24
Public consumption
Percent of GDP, 2003
Denmark
growth
27
Netherlands
25
France
45 = US level
24
Finland
22
UK
21
Germany
19
Poland
18
Japan
18
Ireland
16
US
16
27%
30
Public
sector
Private
sector
27%
7.1%
73%
73%
2004
2015
48%
Increase work
incentives & labormarket flexibility
Encourage
economies of scale
where productive
Improve public
sector productivity
3 = applicable
2 = not applicable
Europe Denmark
Lack of leniency
Mild sentences for breach of competition laws
Lack of personal liability
2
2
3
3
3
3
3
Restrictive laws on lay-offs
High income taxes reducing work incentives and 3
increasing informal economy
2
3
Simplify/harmonize regulations
Local planning regulations for retailers
WWW.MCKINSEY.COM/MGI
Diffusion
Scaling
Productivity levers
Examples
5. Consolidate to better
leverage scale
retail banking
Consolidation of road freight industry
Consolidation of US wholesale pharmaceutical industry
Overhead
1520%
Procurement
Service
operations
3040%
4055%
100%
Data does not support idea of investment in R&D and IT being a silver bullet
for growth and productivity
OECD Countries
US industry sectors
8.0
0.20
7.0
0.15
6.0
0.10
"New Economy"
Non IT story
5.0
0.05
4.0
0.00
3.0
-0.05
2.0
-0.10
1.0
"No story"
0.0
0.0
0.2
0.4
0.6
0.8
Average government spend in R&D
in percent of GDP, 19912003
-0.15
-0.20 -0.10
"Paradox"
0.00
0.10
0.20
0.30
0.40
140
120
Other non-business
services
Private households
Construction
Hotels &
Restaurants
Printing & Publishing
Utilities
Other
Renting & Leasing
business
IT Services
Food & Drink
services
Legal, technical &
Finance & Insurance
Electrical machinery excl. High Tech advertising services
100
80
Real estate
Mining
60
Telecom
Transport services
40
Agriculture
20
0
0
10
20
30
40
50
60
70
80
90
100
Source: Groeningen Productivity Database 2005; McKinsey analysisAverage size of sector 19902002, percent of total value added
Questions
Agenda
1. What is the evidence of offshoring effects
on the Danish economy?
2. What are the new business models of
offshoring?
3. Future issues: Will Danish MNCs - and the
Danish economy in general - benefit from
offshoring in the long run?
Offshoring terms
.
Re-location to
Home country
Foreign country
Ourselves
Onshore
sourcing
Captive
offshoring
Strategic supplier
(Insourcer)
Onshore
outsourcing
Offshore
outsourcing
Operator
N
RGI
PRIMARY ACTIVITIES
MA
SUPPORT ACTIVITIES
(Back-office activities)
Sales
US Subsidiary
Sales
Germany
Norway
Denmark
USA
M&S
Norway
HRM
R&D
Manufacturing
IT
India
China
Ansatte i Danmark
Ansatte i udlandet
150
100
50
1986
1990
1996
2002
10000
8000
6000
4000
2000
0
1980
1982
1984
1986
1988
Employees in Denmark
1990
1992
1994
1996
1998
2000
2002
2004
Higher Education
Percentage in age group 45-54 years
Ireland
Japan
Korea
USA
Finland
Norway
Belgium
Sweden
UK
DENMARK
Germany
Hungary
Poland
Malaysia
China
0
10
20
Pct.
30
40
50
Higher Education
Percentage in age group 35-44 years
Ireland
Japan
Korea
USA
Finland
Norway
Belgium
Sweden
UK
DENMARK
Germany
Hungary
Poland
Malaysia
China
0
10
20
Pct.
30
40
50
Higher education
Percentage in age group 25-34 years
Ireland
Japan
Korea
USA
Finland
Norway
Belgium
Sweden
UK
DENMARK
Germany
Hungary
Poland
Malaysia
China
0
10
20
Pct.
30
40
50
Conclusions
1. So far, offshoring has had a modest, but
positive (income) effect on the Danish
economy also in terms of job creation if
offshoring to Denmark is included.
2. The new business model of offshoring is
global value chain configuration
requiring new, global mindsets of managers
and employees (the champions are to be
found outside DK).
Conclusions (cond)
3. The Danish MNCs are likely to benefit from
offshoring also in the long run - but the
national Danish economy as a whole will
probably not
- because human capital in Denmark is
relatively expensive (subject to high taxation)
and is becoming relatively scarce (the
proportion of the Danish population with
higher education is not increasing)
Panel Discussion
Pete George
Nordic President, Computer Sciences Corporation (CSC)
Ragnar G. Norddahl
Artech-TCS (Tata Group)
Thank You!