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Offshore Outsourcing: Short-Term Gain or Long-Term Disaster? Part 1: Case Study

  Article published in DM Direct Newsletter
July 9, 2004 Issue
 
  By Russell Ruggiero and Rex Brooks

Offshore outsourcing is currently a hot topic and will undoubtedly be a key political football for both Democrats and Republicans regarding the upcoming Presidential election. Return on investment (ROI) is the outsourcing mantra. However, its short-term benefits may be outweighed by a serious long-term pitfall, which indicates the fundamental shifting of IT prowess outside United States boarders. This article will explore critical issues relating to offshore outsourcing that include: a) Is American business too concerned with short-term gains, rather than long-term market share and job stability? b) Is the United States about to lose another key industry to foreign competition? c) Will short-term strategies lead to a drain of domestic IT talent? d) Will China, India and Singapore become the future IT superpowers? In addition, this report will touch upon consumer needs and demands within the United States during various twentieth century economic time periods that interrelate to offshore outsourcing.

An Unenviable Track Record

Products and services are directly related to consumer needs and demands. A case in point: The American film camera industry. During the early 1930s, Kodak produced a number of conventional 120 film cameras such as the Six-20 that were intended to meet consumer requirements for reasonably priced and simple to use folding cameras.

However, there were a number of events taking place on the European continent that would greatly influence the needs and demands of the American camera consumer during the pre-war era. In Germany, various camera manufacturers planned on creating the most technologically advanced and best performing products of the time to prove their photographic know-how to the world markets. Massive R&D by Contax and Leica created 35mm product lines that were superior in key areas (e.g., ergonomically, optically, reliability, etc.) compared with offerings from Asia and North America.

Realizing that innovation was needed to maintain market share, Kodak set out to partner with and/or acquire a prestigious German camera manufacturer. Being too strategic in nature, Contax and Leica were not realistic targets, but Kodak was able to acquire the reputable German camera manufacturer Nagel Camerawerk in 1932. Subsequently, within a year, Nagel began the undertaking of a new camera, which would leverage German resources (e.g., labor, manufacturing facilities, materials, etc.) to produce 35mm cameras with the Kodak name that would be marketed both within and outside of the United States. In 1934 the Kodak Retina was launched, which boasted a moderate price, decent optical quality and revolutionary new features such as a daylight-loading cassette.

The Six-20 and Retina enabled Kodak to broaden photography's appeal to a far-reaching audience during the depression era, which was not an easy feat in view of the difficult economic climate. As a result, the company gained complete domination of both products (e.g., camera, film, accessories, etc.) and services (e.g., enlargers, paper, chemicals, etc.) in the United States from 1930 to 1945. These were good times for both the American camera industry and Kodak, but the company decided to take a short-term mass-market approach rather than invest in R&D for medium to high-end photographic offerings. This flawed product strategy would result in numerous missed revenue opportunities and debilitate the firm's position as a major manufacturer of serious photographic equipment.

American troops stationed in Europe during WWII came in contact with fine German 35mm range-finder cameras such as the Contax 11 and the Leica 111c, which offered outstanding image quality in an elegant and efficient package. Hence, an important seed was planted that would lay the foundation for future events. Shortly after 1945 the United States experienced a sustained period of economic growth. This fertile economic landscape fostered two important events that included 1) A rapid population increase or "baby boom" and 2) An increased demand for new products and services. The vigorous economy was responsible for an expanding middle class. Job growth and disposable income enabled this important segment of the population to purchase a plethora of high-cost goods such as homes, cars and luxury items. Photographic equipment was one such item. Expanding families aspired to photograph their new additions to share with relatives, friends and acquaintances. As a result of the aforementioned needs and demands, photography experienced explosive growth in the United States during the post-WWII era. Kodak continued to sell low-to-moderately priced products such as the Kodak 35 during this time period, but consumer needs and demands were shifting toward higher quality photographic offerings. Unfortunately, the German camera industry was both mired by pre-war rudimentary production methodologies and debilitated production facilities as result of Allied bombings. These drawbacks ultimately led to low output and high prices, which severely curtailed the widespread adoption of German cameras worldwide in the mid-to-late 1940s. On another continent, a new war was brewing that would change the course of photographic history.

The Korean War (1950-53) era witnessed the fundamental shifting of powers within the photographic landscape. During this time period Kodak remained focused on low-to-moderately priced products such as the Kodak Medalist II, while German manufacturers such as Contax and Leica continued to target the high-end portion of the photographic market. Enter the rejuvenated Japanese camera industry. While American and German camera manufacturers adhered to pre-war production methodologies, Japan took a far more visionary path. The Japanese camera industry lay in ruin after WWII and had to be completely rebuilt. The goal was to create high quality products that could directly compete with offerings from Contax and Leica, but could be purchased at a lower price.

Accordingly, the Japanese camera industry realized that new production processes and techniques would be required to achieve these lofty goals. Automation would allow for greater numbers, while life cycle management would maintain consistent quality throughout the manufacturing process. In addition, sizeable R&D in the areas such as optics and metallurgy would be required to maintain consistent product performance and reliability. A new wave of Japanese 35mm range-finder offerings led by the Nikon S (1951) and Canon II (1952) would turn the entire industry on its ear. These cutting-edge offerings were easier to load, advance and rewind, while being more reliable, optically comparable and less expensive than their German counterparts (essentially pre-war designs with minor upgrades). The Nikon S and Canon II proved that Japan could build products equal to or better than anything Germany had to offer. Professional photographers jumped on the Canon and Nikon bandwagons and played an integral part in promoting these excellent products. Many images from the Korean War were taken by professional photographers using Japanese cameras and published in popular magazines (Life and Look) that were viewed by millions around the globe.

Japanese camera manufactures such as Canon, Minolta and Nikon built strong distribution networks in the United States after the Korean War to sell their products to the general public. The formula of high quality and low cost would firmly establish Japan as a major photographic player in the United States during this critical time period. Not to be outdone, Kodak and Leica fought back. In 1954 Kodak brought out the fine Retina 111c with interchangeable lenses and Leica introduced the fabled M3, considered by many to epitomize the zenith of 35mm coupled range-finder photography. The Kodak Retina and Leica M Series cameras were gallant efforts, but these types of "Old World" offerings would be delegated to niche product status because of a more technologically advanced design called the single-lens reflex (SLR).

Throughout the 1950s the majority of medium-to-high priced cameras marketed and sold in the United States were of the range-finder type. However, Exakta a small German manufacturer offered a 35mm camera called the Varex V that boasted a radical and advanced single-lens reflex (SLR) design. This new design allowed the user to look at the subject through the actual lens mounted on the camera body rather than a fixed viewfinder as in the case of the range-finder. Unfortunately, Exakta did not successfully capitalize on its "first-to-market" advantage because of a combination of archaic production processes and an extraordinarily complex design. Poor reliability and high prices plagued German SLR manufacturers (e.g., Contax, Exakta, Zeiss, etc.) throughout the 1950s, which severely limited adoption among the professional ranks. Demand for product extensibility and reliability was growing, and those needs would be satisfied by a plethora of technologically advanced offerings from Asia.

In 1959, a milestone event occurred with introduction of the Nikon F system. This imposing 35mm offering was comprised of various components that included bodies, lenses and a wide-range of accessories (e.g., finders, flash units, motor drives, etc.). The superior quality and extensibility of the Nikon F system was a perfect match for the demanding needs and requirements of both the professional and advanced amateur. The Nikon F body was not only the most versatile camera on the planet, but also the most reliable, and would put to rest the circumspect quality of Japanese photographic equipment once and for all. Reports of 500,000-1,000,000 exposures taken by a single F body are well known throughout the professional ranks. The capabilities of the Nikon F system would be fully exploited during a new conflict brewing on the Asian continent.

The Vietnam War (1965-1973) era enabled Japan to become the undisputed world leader regarding SLR offerings. During this time period, Kodak focused primarily on low-end products such as cartridge cameras that were easy to use and inexpensive. Events such as the New York 1964 Worlds Fair were to be quite profitable, but this short-term strategy would prove to be a grave mistake over the long term for Kodak. While Japanese manufacturers such as Canon, Minolta, Nikon and Pentax were releasing technologically advanced SLR product lines at breakneck speed, Kodak could only offer the Retina Reflex III (1961-64), which was both antiquated and unreliable. As result of focusing on short-term ROI, Kodak allowed the Japanese camera industry to gain complete control of the SLR market share in the United States and the world. The Vietnam War would be the ideal proving ground for Japanese camera prowess, and Nikon would lead the charge.

The environment in Vietnam presented very difficult working conditions for press photographers because of its inhospitable climate, which was exacerbated by pollutants generated by various methods of transportation (e.g., buses, jeeps, helicopters, etc.). The Nikon F body utilized gaskets in between the chassis and the top and bottom plates, which proved to be highly effective in keeping out moisture and grit. In addition, the shutter was made of a new space-age material called titanium that offered incredible durability compared with popular cloth variants. Regarding image capture, the extensive array of high quality lenses (wide angle to super telephoto) enabled press photographers to capture greater range of battlefield and non-battlefield subject matter. A large R&D budget combined with modern production facilities produced a product line that would star on several fronts. It was not only popular among the professional ranks, but also on the big screen as evidenced by Francis Ford Coppola's Apocalypse Now, where Dennis Hopper makes use of numerous black and chrome Nikon F bodies throughout the movie.

While Nikon dominated the high-end of the SLR market, other Japanese manufacturers that included Canon, Minolta, Olympus, and Pentax were producing low-to-mid priced offerings that proved to be very popular with servicemen stationed in Asia at the time.

As a result, a new wave of Japanese photographic products hit American shores through an artery created by servicemen returning from active duty.

In 1971, Canon released the first genuine challenger to Nikon with their new F-1 system. This 35mm high-end offering supported an incredible array of lenses and accessories, which were far more extensive than the original Nikon F system. The most important breakthrough of the new Canon F-1 system was a meter housed in the camera body rather than in the finder as in the case of the Nikon F. This feature permitted the user to change finders, while keeping important metering capabilities. Cutting-edge designs combined with advanced materials would provide the foundation for the forthcoming "electronic revolution" in photography.

Canon broke new ground with inclusion of microelectronics with their A-1 offering in 1978. This moderately sized 35mm SLR enabled the user to select a number of automated exposure modes that included aperture preferred, shutter preferred, program, manual and flash. For the first time ever, an SLR camera could set the aperture, shutter speed or both with input from the user. Automation made it easier for the user to take properly exposed pictures, which increased the attraction to these types of photographic offerings. The "electronic revolution" that begun in the late 1970s would help support the expanded needs and requirements of baby boomers, which now included the ability to capture high quality images of both domestic and international travel destinations. Travel was to become the new "buzz" of the baby boom generation from the late 1970s onward.

While long distance travel was nothing new, it was limited to a relatively small segment of the population. During this era an important series of events would lead to explosive growth in mid-to-high end SLRs that included a) Increased competition among airline carriers, b) New and improved air routes to popular destinations, c) Greater disposable income by the baby boom generation, and d) Increased access to credit cards. Baby boomers now had the ability to fly to a destination of choice at a reasonable rate, while capturing high quality images on technologically advanced SLRs, with the swipe of a piece of plastic. Hence, the subsequent birth of a new type of American consumer.

From the late 1970s onward, the travel industry would be an important economic driver for the United States economy, and photography would play a key role. For example, it was common for many families to purchase clothes and accessories (e.g., film, sun glasses, swimming trucks, etc.) before a planned vacation. Upon their return, these families would have their spent film processed into prints or slides, which would be very beneficial to domestic industry players such as Kodak. More notably, United States banks would earn a very attractive rate of interest on unpaid credit card balances used to pay for such items as airline tickets, hotel stays, auto rental and meals. The photographic needs and requirements of the both amateurs and professionals were changing because of automation, which reduced the drudgery of setting basic tasks such as aperture and shutter speed, while allowing the photographer more time to compose subject matter. Better handling (e.g., faster, lighter, more feature laden, etc.) offerings were growing in demand, and the Japanese camera industry would deliver the final blow, which would guaranty the domination of market share into the new millennium.

Minolta took automation to a higher level with a groundbreaking new design called the Maxxum 7000 in 1985. This was the first 35mm SLR to combine auto focus (automatic focusing), auto exposure (e.g., aperture preferred, shutter preferred, program, manual, flash, etc.), auto advance and auto rewind in a compact camera body. In addition, an entirely new lens product line was introduced that leveraged both a mechanical as well as electronic interface to the camera body, which housed the CPU and main memory. Better bidirectional communication between camera body and lens made auto focus possible, while improving overall exposure accuracy. The user now had 35mm camera with the capability to auto load, auto focus, set the exposure and rewind the film in one unified offering. The Maxxum 7000 and its stable mates (5000 & 9000) were very popular with amateurs and professionals alike. Other leading Japanese manufacturers such as Canon, Nikon, Olympus and Pentax followed Minolta's lead and also created auto-focus product lines from the mid-1980s onward.

While Japan dominated 35mm SLR market share, the German camera industry would be undergoing a mini-renaissance led by pre-WWII icons. Contax (now owed by Kyrocera of Japan) produced a cutting-edge 35mm SLR called the RTS II in 1982, which was penned by Porsche Design. The RTS II was a professional grade manual focus SLR that utilized advanced microelectronics housed in a robust camera body, along with a superb collection of Zeiss lenses. While Leica produced a first-rate line of manual SLR cameras (R Series), the manual rangefinder cameras (M Series) would still be the company's most sought after product offering. The M6 range-finder introduced in 1984 incorporated a highly accurate spot-meter, which broadened this products appeal among advanced armatures and professionals alike. Nonetheless, these two German icons would continue to grab only a minimal market share and delegated niche status. From the mid-1980s changes in the conventional film camera space were more evolutionary, than revolutionary. Notable developments include a) Nikon N90 (1990): A 35mm auto-focus camera body that allowed certain functions to be controlled or downloaded to a Sharp palm sized electronic organizer, b) Minolta 9xi (1994): A 35mm auto-focus camera body with a shutter capable of speed up to 1/12,000 of a second, c) Canon EF 300mm f/4 IS USM (1997): A super-telephoto lens that provided support for image stabilization.

Today's modern conventional film cameras incorporate powerful CPUs for processing instructions and enough main memory to store user preferences, much in the same way as a handheld wireless device (e.g., PDAs, smart phones, Tablet PC, etc.). In addition, modern 35mm SLRs such as the Canon EOS 3 and Nikon F80 serve as the core platforms for their digital counterparts (Canon EOS-1D and Nikon D100). Regarding digital format, Kodak has made great strides in transitioning into this new area of photography. Products such as the Kodak EasyShare line of digital cameras cater to the needs and requirements of amateurs, while products such as the Professional DCS Pro SLR/c and Professional DCS Pro SLR/n target the high end of the photographic market. However, it is important to note that a majority of core components (e.g., bodies, lenses, accessories, etc.) used in the current Kodak product line are made offshore by major Asian manufacturers. For example, Canon of Japan makes all of the lenses made to fit the Professional DCS Pro SLR/c. Likewise; Nikon of Japan makes all of the lenses made to fit the Professional DCS Pro SLR/n. With approximately fifteen percent of the current digital market, Kodak has done a respectable job in establishing itself as a major market player regarding this new medium.

The American film camera industry is now a shadow of its former self, and three main factors are directly responsible for the demise that include: 1) Poor business judgment on the part of domestic manufacturers such as Kodak for misinterpreting the needs and requirements of the baby boom generation during the post WWII era; 2) Excellent market timing by the Japanese camera industry regarding R&D in design, optics, metallurgy and production life cycle management since 1945; and 3) The offshore outsourcing of core components to Asian and European manufacturers since 1934. In a nutshell, America has lost a lucrative industry now heavily dependant on microelectronics to companies based out of Asia and Europe.

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For more information on related topics visit the following related portals...
Outsourcing.

Russell Ruggiero is a senior IT analyst. He is the acting chairman of HumanMarkup.org. Ruggiero has authored more than 150 articles and reports for well-respected firms that include Gartner, Inc. and Source Media. He may be reached at rrugg55041@aol.com.

Rex Brooks, president of Stabourne Communications Design, has pursued an extensive and wide-ranging career in advertising art direction, corporate identity and graphic design. His ongoing interests have included the applications of computer technology in his field and applying concepts from the fields of psychology, sociology and advertising in the area of semantics and semiotics for the purposes of improving communications in digital information systems. This led to his involvement with OASIS in the HumanMarkup Technical Committee helping to create the Human Markup Language. He is the cofounder of the Content Development Working Group of the Web 3D Consortium and Humanmarkup.org, Inc. and serves as vice chair of the OASIS HumanMarkup Technical Committee. He is also actively serving on the OASIS Web Services for Remote Portlets and Emergency Management Technical Committees. You can reach him at rexb@starbourne.com.

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