Offshoring and the Global Marketplace
Offshoring has taken on new meaning in recent years. The Web, electronic file transfer, advancements in foreign technology and faster, better ways to communicate globally have all stirred the waters of opportunity for tapping the American marketplace from overseas. A global marketplace has swelled beyond what many expected.
For some, this means greater opportunity, savings and growth. For others, it means the promise of more jobless Americans, more abandoned factories, more unfair labor competition.
For many book publishers, specifically, it means more options for manufacturing books cost-effectively. It means new options for digital content creation, design and editorial. It means increased profitability, growth and possibly the hiring of new American staff.
For many book printers, it has meant profit margins squeezed dry by competing for fewer print jobs left on American soil.
For many employees of both publishers and printers—executives included—it has meant a lingering concern for their jobs and families.
With more and more foreign products and services landing on America's shores, the debate over offshoring is picking up speed, and book publishers have a lot of questions. How does the book-publishing industry fit into the global marketplace? Is controversy and negative public reaction a risk for all publishers who source any part of their operations overseas? Are any overseas companies and countries fair game for publishers to explore? Does global sourcing or offshoring really mean more American layoffs?
This special report will answer many of the questions facing the industry as it teeters on the edge of the global marketplace.
Overseas: The Only Option for Complex Four-Color Work?
Traditionally, the book-publishing industry has relied on foreign companies for manufacturing complex four-color work, and those books that can withstand the longer productions schedules that shipping overseas requires.
"Almost all of our four-color work is done overseas," says Sandy Grebenar, vice president of design and production for global publisher Harcourt Trade. She is responsible for the selection of both domestic and overseas printers for all adult and children's trade titles. "We've used Asian vendors for many years. The main benefit of having the children's material printed overseas is the cost structure. Some products couldn't be done at all in the United States, or we just couldn't afford to do it here because of the large amount of handwork involved," she says.
At Time Warner Book Group, the majority of children's titles are produced offshore as well, as are most coffee-table, lifestyle and art books, says Milton Batalion, senior vice president of production and manufacturing for Time Warner Book Group. "We also occasionally print four-color adult trade books overseas if we have the time," he says, noting that the extra time involved is usually around six to eight weeks.
Batalion says that for Time Warner's products, a number of major benefits support the cause for printing in Asia and Europe. "We require press proofs, and it's very expensive to pull press proofs in the United States. … Another benefit of printing in Europe is the quality. There is a great printing tradition in Europe. You almost can't find that level of craftsmanship here in the U.S., and if you can, it is so astronomically expensive," he explains. "And, there is a much larger choice of printers available in the Far East and Europe than in the U.S."
The cost savings is not often refuted by U.S. printers. "Regarding the four-color, juvenile market, the publishers [who report cost savings] are correct. You cannot get competitive pricing from U.S. manufacturers for several reasons: currency, wages and working conditions, and the environment," says Chuck Nason, president, Worzalla Publishing Company, a book manufacturer in Stevens Point, Wis.
Global strategy and technology consulting firm Booz Allen Hamilton explains in its white paper, "Business Process Offshoring," that "offshoring is driven by the dramatic wage-cost differential between Western 'onshore' economies and the economies of South and Southeast Asia, and Eastern Europe. Labor savings alone—depending on the nature of the work and the skill level required—range from 40 percent to 70 percent."
But Ken Coburn, a print broker with 45 years of experience in the industry in the United States and abroad, says that more is involved than wages. "What is generally not understood is that the lower cost of many products offshore is not directly tied to labor rates."
"[Not often considered] is the ratio of labor and materials to a job, and the fact that materials offshore are priced considerably less than here, even when they are the same materials. Presses in Hong Kong cost a lot less than the same model here, and paper which is 79 cents/pound here is 39 cents in Asia," Coburn explains.
His work at a government printing office in Greece, and in print management and expansion for the United Nations in Southeast Asia exposed him to the global economy and international cost structures. "The low wages or long hours of some countries are usually conjoined with high inefficiency rates to make the … cost higher than an efficient higher-paid country. Sri Lanka is more expensive than the Philippines, and [the Philippines] more expensive than Thailand, and Thailand more expensive than Hong Kong—all of this in extreme reverse ratio to their wage rates," he explains.
Fueling the Swell
While most book publishers source work to Europe and Asia, even countries as far offshore as Australia are meeting with some interest or at least some open minds. Nearly 25 percent of American publishers expressed an interest in obtaining information on Australian book printers and their capabilities, according to a study by the Australian Trade Commission, of 75 key U.S. publishers.
The annual print budget of those who indicated an interest was estimated at more than $330 million, giving another country a taste of what the American marketplace has to offer. "The book-exporting opportunities identified by this snapshot study of American publishers is greater than the turnover of the entire Australian book-printing industry," said Hagop Tchamkertenian, manager of industry and commercial policy for the Printing Industries Association of Australia (which commissioned the survey), in a report on PrintNet, an online resource for the organization.
Some in the United States may be cringing at the thought of turning more work overseas, but according to Coburn, the road leads both ways. "The United States is both the sender and recipient of work from other countries. This is bound to increase in both directions. We already do substantial work for Mexico, and some for Japan, the Carribean islands and Venezuela," he says. "[Resistance from American printers] is a major deterrent to our not benefiting in this international trend. [They] are looking [at] offshore as a problem rather than an opportunity."
According to market research firm NelsonHall, the value of global outsourcing contracts for services and goods is expected to more than triple from $200 million currently to $640 million by 2008.
Many seem to share Coburn's opportunistic view. Four out of five executives reported that they believe global sourcing is good for the global economy, and 58 percent said global sourcing was either very positive or somewhat positive for their companies, according to a survey of 7,300 executives from companies worldwide, by business consultancy McKinsey & Company, as reported in The New York Times.
Some major printing companies in the United States also share Coburn's view and have set up or expanded offshore facilities to serve a growing demand from book publishers. "We have seen an increasing interest in our customers exploring the Far East as a source of supply, particularly for complex, short-run, four-color sheetfed book product, as well as specialty items for use in educational kits, calendars and book-plus product for trade publishing," says Dave Mead, senior vice president of sales and marketing for Banta Book Group, which operates 40 print-service facilities in North America, Europe and Asia.
Benefits to Publishers
Banta is an example of an American company that sources work globally to provide cost-saving advantages to its U.S. clients. It set up an office in Hong Kong five years ago, which provides logistics coordination, pricing and on-site quality control. The advantage of this type of arrangement, says Mead, is that "our existing infrastructure and project management capabilities for foreign sourcing appeals to most publishers who do not have an established relationship in the Far East, do not have resources to monitor the work in progress, or do not have expertise in the logistics of shipping, customs, order-handling or specifications for manufacturing in the Far East."
The incentive for most book publishers who opt for Banta's global services, says Mead, is the "cost benefit for foreign sourcing … in projects that have a high labor component to the manufacturing process." For products produced in high quantities using processes that can be fully automated, "there often is not enough unit cost savings in the Far East to cover the added cost and time of the freight involved," explains Mead.
Another book manufacturer to go global—Phoenix Color in Hagerstown, Md.—did so in 2002, by setting up an onshore/offshore operation to provide publishers with the benefits of offshore manufacturing, but with the comfort of working with an American company. An American facility was set up in Rockaway, N.J., and an office in Asia. The Rockaway facility handles all prepress for domestic and Asian manufacturing; but, if a project is slated for Asian manufacturing, prepress is billed at Asian prices. Electronic files are created at both locations, which is another benefit to customers, says Sam Gallucci, COO Rockaway/Phoenix Asia. "Files in both locations allow you to have blended print runs, domestically and in Asia," he says.
Another advantage for publishers who work with American-based companies that source globally rather than work directly with foreign manufacturers is that customer service, estimating and billing is often handled in the United States.
Working with an American company also avoids another challenge that publishers who outsource offshore themselves sometimes face: international time zones. For example, Gallucci says, "Phoenix Color's sales and customer service teams provide … service and instant communication during EST business hours."
However, working with a foreign company directly doesn't mean the inconvenience of international time zones either, especially in today's global marketplace.
Impelsys, an offshore electronic content production and processing company, launched its services for educational publishers in the United States in 2001. The company's primary production facilities are in Bangalore, India, which provides cost savings in the production process. However, its office in New York City ensures a familiar and convenient work environment for American clients, says Impelsys founder and CEO Sameer Shariff. "We can hold the customer's hand through the whole process, while the production is done offshore, so our customers don't have to get up at midnight to call someone overseas," explains Shariff. "Our office is open 24-7."
A Changing Marketplace Demands New Sources
Despite the convenience offered by its New York office, Impelsys considers its real advantage to be its offshore production facilities in India, where 90 percent of its staff is located. "Our model allows management and maintenance of Web site content, production of CDs and creation of other digital components with cost savings of up to 50 percent," says Shariff. "Publishers are struggling with how to create revenues from Web products, and we're seeing that if we can leverage global resources, you can have a lower cost structure. So, it makes sense that these products can be more valuable."
Impelsys counts companies such as Reed Elsevier, HarperCollins and McGraw-Hill among its client list, so some major companies are seeing an advantage in outsourcing some business processes beyond book manufacturing.
"Publishers are no longer book providers. They need to distribute content in multiple platforms," says Shariff. This is creating a new need in the marketplace, he says. "The digital side is growing, and publishers need to create products. Technology is changing so fast, they need partners to help them stay on top of it."
One American company, Fairfax, Va.-based TechBooks—one of the first in the book-publishing industry to use an offshore model—launched its first overseas effort in New Delhi some 16 years ago. It opened an office in London late last year. Today, the company, which provides pre-manufacturing services—from editorial and design to digital content services—to publishers, employs 2,100 and serves many of the top publishers worldwide. Last year, TechBooks was ranked as the fourth-largest business process outsourcing (BPO) firm in India in an Auto Data Network Orbit survey of BPOs.
TechBooks' model is largely based on what TechBooks Senior Vice President Mark Witman refers to as the "India Advantage … a highly educated, English-speaking work force with a high degree of technical competency at a competitive wage structure."
While quality and costs have always been a primary concern, Witman says, today, "there is significant pressure for lower and lower prices with high quality standards and faster turnaround times."
The possibility of significant cost savings is enough to inspire many publishers to sign on for the next overseas expedition.
Negative public opinion
No matter the reasoning, most publishers are aware that any overseas journey likely portends a certain amount of peril. Companies like Harcourt seem to escape much, if not all, negative backlash from printing overseas due to the nature of what they're printing; many companies are not so lucky. "There has been a lot in the news lately about jobs moving overseas. But Harcourt Trade represents a product line that doesn't lend itself to U.S. equipment. We have odd trim sizes, low page counts, our print runs usually aren't very high," says Grebenar.
But the air surrounding the issue of offshoring is sometimes bitter, especially of late. A recent article in The New York Times stated, "Globalization is having a bad year. Unions do not like it. Politicians … rail against it. As each monthly employment report confirms the anemic pace of job creation … more members of Congress talk about obstructing it."
Some reports, however, may suggest the tides will be turning in the future. According to a July 21 article in The Times of India, "After a year of decline and slowdown, BPO deals are picking up steam. More than 20 outsourcing global projects, each valued over $1 billion, are under active consideration according to U.S.-based Technology Partners Inc. (TPI), a consulting firm that tracks pending outsourcing deals on a quarterly basis."
Another potentially big negative for sourcing overseas is that it can wreak havoc on your employees, and as a headline in CFO magazine stated, "It's a public relations nightmare." The CFO article explained that "there is no longer a clear limit to the level of job function that can be outsourced overseas." In fact, according to a survey the magazine conducted, almost 50 percent of respondents (CFOs at American companies) indicated "most of the jobs that moved overseas paid $50,000 or more before being outsourced."
But as Shariff says, "Going offshore is not new in publishing. … And we're not going into companies and saying, 'Eliminate 30 jobs, and we'll take [them] offshore.' Many of these projects are already being outsourced." On the digital side, he adds, these are new projects that need to be created by new resources.
There is also significant concern over some countries' labor practices. "The average Chinese worker in a book-manufacturing facility is making 60 to 75 cents per hour. The work force is from 8 to 80 years old, and they work 12-16 hours per day," says Worzalla's Nason. "Tough to compete with those statistics here in America."
A Closer Look at Overseas Employment
But those who run overseas facilities say the picture is not black and white. "Yes, offshore companies pay low wages compared to U.S. wages. But if you take the wages in the context of the local market, these wages are market or above-market wages. So the employees of these companies are making a good living," says Shariff of his experiences in India.
As for the working conditions, he says, "In our sector (technology/
publishing), the working conditions are good, sometimes even at par with developed countries like the U.S. and Europe. … For printers, I am positive that it is not bad because the leading printing companies in India are reputed companies that publish major magazines and books." Especially with the attention being paid to the international labor market, partnering with a suspect company overseas can be a major risk.
In China, questionable labor practices has certainly been a topic of concern. Many of the deaths and accidents reportedly occur in coal mines and fireworks factories. However, China's overall workplace safety has been notoriously poor. For comparison sake, in the United States, the Department of Labor's Census of Fatal Occupational Injuries reported a fatality rate in 2002 of 4.0 fatal work injuries per 100,000 workers; in China, this figure was reported as 11.1 fatal work injuries per 100,000 Chinese workers (an International Labour Organization statistic, according to an article in Asian Labour News, Jan. 10, 2004).
American companies, however, that are aware of the issues facing China's work force, often take extra care to ensure that any foreign company they partner with has respectable, safe working conditions and fair wages, if not a bit strenuous by many Americans' standards.
Banta, for example, hired a manager of its Hong Kong office with 25 years of sourcing experience in the Far East and who is a native of China. "We have visited about 20 of the major printers in Hong Kong and mainland China, and work with some in South Korea as well," explains Mead. "The wages are pretty much standard from company to company in Southern China. They average about $125 (U.S.) a month, based on 12-hour shifts, six days a week."
Weekly, that figure would average out to about $31. But dollar conversions vary greatly as you compare wages internationally. The weekly minimum wage in Australia is $321.53 (U.S.). In Thailand, the minimum wage (in many provinces) is 170 baht a day, which translates to just over $24 (U.S.) per week, based on a maximum six-day (48-hour) work week. In the United States, the federal minimum wage is $5.15 an hour, or $247.20 for a 48-hour work week.
In China, "The business model is [also] quite different than the U.S., however, in that employees live in dormitories on site and have room, board, meals, sometimes medical facilities and transportation provided by the company," says Mead.
"As far as working conditions, many of the plants are quite sensitive to the employee conditions, and their U.S. and European customers' perceptions of it. The plants are quite modern in many cases, and working conditions similar to what you would find in the U.S.," he says.
For any publisher or printer considering outsourcing globally, many suggest researching any potential partners thoroughly and visiting the facilities.
Another consideration some environmentally conscious book publishers may overlook is foreign sustainability efforts. "U.S. manufacturers spend hundreds of thousands of dollars to comply with environmental issues—China spends next to nothing," says Nason.
The Global Market Is Here
The debate will continue to rage over the benefits vs. damages brought to U.S. companies by offshoring. American publishers will continue to weigh both sides as well.
But there is little debate that globalization is here and its effects are being felt in most industries. "Global book publishing is following the trends of globalization in general. The merger and acquisition activity of the last decade or so has created publishing houses that are no longer American, but rather multinational corporations with little loyalty anywhere in the world. They will manufacture their products where they can get the best price. Short of a major global disaster, this trend will continue," says Nason. "Worzalla and other U.S. manufacturers are fortunate that a significant amount of volume has stayed because of delivery and non-economic reasons."
This may be the only point where opposing perspectives agree. "Globalization is here to stay," says Coburn. "[It would be] easier to stop the Atlantic from pouring into the Pacific than to stop the ebb and flow of commerce."
- Noelle Skodzinski
- Carribean islands
- Eastern Europe
- Fairfax, Va.
- Far East
- Hagerstown, Md.
- Hong Kong
- New Delhi
- New York City
- North America
- Rockaway, N.J.
- South Korea
- Southeast Asia
- Southern China
- Sri Lanka
- Stevens Point
- United States