IBM’s (IBM) Relocation To India

One of the concerns analysts have about the nature of second quarter earnings is that they are beating forecasts due to cost cuts and not improvements in revenue. Cost cuts can help margins for a brief period, but very few companies can operate without any expenses at all.

Companies that can institute permanent cuts without hurting revenue potential are relatively few, particularly among very large corporations. IBM (IBM) is one of these. It has begun to move thousands of jobs to India. That is old news, but its stellar second quarter earnings reminded both investors and IBM’s workforce that labor costs in America are still relatively high for most companies and that the population of highly trained workers outside the US is rising rapidly. Outsourcing cheap labor has been an efficient way to cut factory production for decades. Moving professional services overseas, particularly with firms that have tens of thousands of workers who need to have years of specialized training, has been very difficult—until recently.
The Administration hopes that it can rebuild the manufacturing sector of the country as a means of improving GDP growth to offset what may be a long-term slowdown in consumer spending. The cost of labor is so high in the US that it is hard to imagine how this plan will work. There is almost nothing that can be built in America that cannot be built elsewhere for less, even if the labor involves complex, technical skills.
The government might be better off abandoning the improbable goal of turning back the clock on the manufacturing sector and turn, instead, to find reasons for American companies to keep professional, technical, and engineering costs inside the US.
IBM’s second quarter revenue was down 13% to $23.3 billion. Net income rose 12% to $3.1 billion. IBM highlighted its expense control as part of its earnings announcement. “Total expense and other income decreased 19 percent to $6.3 billion compared with the prior-year period. SG&A expense decreased 19 percent to $5.1 billion. RD&E expense of $1.4 billion decreased 14 percent compared with the year-ago period.” That could be interpreted as saying that the company is sending more work overseas to save money.
IBM is headquartered in Armonk, NY, a small town in northern Westchester County, New York, a long drive from New York City. It is not near any large metropolitan area. It is not located in Armonk for any strategic reasons. If the management wanted to be in India, it could be. Revenues from the Americas were only $9.9 billion dollars last quarter. IBM’s sales in its home market are an only modest part of its overall business.
The objection, both from IBM’s employees and some parts of the American labor movement about the tech giant exporting as many as 5,000 jobs to India early in the year, is shortsighted. IBM may end up moving a much bigger part of its operations offshore because it is a reasonable means of cost reduction.

Armonk is no place for a Fortune 100 company to have its headquarters. The firm could operate from any large business center in the world.

Douglas A. McIntyre