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Jonnybegood

Wage Inflation

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At the moment wage inflaton is being kept low here due to low cost labour from Eastern Europe and cheap imports from the Far East.

But can/will this continue? I previously worked for a large engineering company and much of the work we undertook was done by our own employees, Then we hit hard times and a restructure was required.

To save money we took the decision to outsource much of our work to contracting firms who cost much less, this was good and lasted approx 4 years (Fixed contract period) then we went back to the negoiating table to agree the next contract and put it out for tender.

However this time around we found the contractors prices had increase far greater than employing our own people, it was time to hand things back and knock the outside contractors on the head, However in the those short 4 years much experience was lost and the company never recovered fully, it was a bitter pill to swallow.

I see something very similar happening now, the cheap labour from Eastern Europe will not last forever, once they force out the higher wage demands of many they will then in turn demand an increase themselves.

Cheap imports from China, will they last forever? or will prices start to increase once higher wages demands in these countries start to increase.

Will it be cheaper not to employ Eastern Europeans and to buy from Europe instead of the far east leading to higher wages within the UK.

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Short-term gain, long-term pain.

Indeed, cost reductions from outsourcing are generally transient. Short-term savings may be achieved, but in the medium and long-term it locks in exposure to much higher cost inflation.

'As 'China effect' reverses, inflation threatens':

http://www.telegraph.co.uk/money/main.jhtm.../cninfla107.xml

Gordon Brown had the good fortune to be Chancellor over a golden decade as the industrial revolutions of China, India and emerging Asia supplied us ever cheaper manufactures.

In this miracle world, we have had 5pc global growth for five years -- the best since the Second World War -- without overheating.

Known broadly as the "China-effect", it has held down goods inflation. The rich West has been able to indulge in housing booms and credit sprees without an ugly knock-on into CPI inflation.

The game is now up. Industrial wages on China's eastern seaboard have jumped 50pc over two years, while salaries in Bangalore have risen so much that software companies are outsourcing back to Europe.

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Offshore outsourcing exposes a company to three independent risks.

1. Currency movements make contracts priced in the offshore currency or an intermediate currency more expensive than budgeted. Some Indian outsourcers price in US dollars or Euro's in preference to Stirling.

2. Wage inflation in the offshore country runs at a higher rate than the native country exposing the client business to unforecast higher costs.

3. The offshore company becomes a competitor or gains contracts with competitors raising the possibility of indirect IP transfer.

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Offshore outsourcing exposes a company to three independent risks.

1. Currency movements make contracts priced in the offshore currency or an intermediate currency more expensive than budgeted. Some Indian outsourcers price in US dollars or Euro's in preference to Stirling.

2. Wage inflation in the offshore country runs at a higher rate than the native country exposing the client business to unforecast higher costs.

3. The offshore company becomes a competitor or gains contracts with competitors raising the possibility of indirect IP transfer.

What if a majority of companies outsourced to (for example) India, then years down the line a war occurred with them?

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