ABB outsourcing jobs from red-hot China

By Ben Klayman

NEW YORK (Reuters) - Outsourcing from China is not something you hear about often, but Swiss engineering firm ABB (ABBN.VX: Quote, Profile, Research, Stock Buzz) said on Wednesday that it is doing just that.

While ABB's China sales will double in four years at the company's current annual growth rate, the economy is so hot there, that labor costs are rising and it is shifting engineering jobs back out of the country to save money, the company's president of global markets said on Wednesday.

"Today, Shanghai engineering cost is almost as high as the Czech Republic or Poland or Estonia," Dinesh Paliwal said at the Reuters Manufacturing and Transportation Summit in New York. "We are actually outsourcing some of our engineering work from China to India and from China to Russia."

To keep costs down, ABB would like to see the western part of China develop, he said.

Nonetheless, Paliwal said China will maintain its cost advantage for decades over Western Europe and the United States.

Demand is so hot in China -- where ABB's sales top $2.5 billion and annual growth rates have been 25 to 30 percent -- that the company's 20 plants there only serve local customers, he said.

"Our problem is we keep investing in our factories there hoping (they) will be the sourcing place for the Western world, and by they time they come on-line they are completely sold out for local demand," said Paliwal, adding that ABB will have to weigh using some of the plants only for exports.

China ranks as ABB's third largest market by revenue, trailing the United States and Germany.

Paliwal, who also holds the post of North American chief executive officer, said ABB started the year so strong that the global slowdown the company in March predicted would hit in 2007 or 2008 could be delayed.

"We did not anticipate that 2006 would be as robust as we are seeing now," he said. "This development, in my opinion, has moved or pushed the slowdown a little further back.

"I don't see a slowdown in 2006 and it's hard for me to fathom the idea that at the beginning of 2007 everything will collapse," he added. "The law of averages is that the economy cannot go on forever at that high peak, so it has to slow down or take a breather. Will it happen in late 2007 or 2008? I really cannot say."

In North America, where ABB has seen five consecutive quarters of profits after years of losses, the turnaround is complete, Paliwal said.

"We're in a growth mode," he said.

ABB's North American operating profit margin is in the low single digits compared with the overall company's 9.4 percent margin in the first quarter. Paliwal declined to specify targets or a time table for raising the North American rate, but said it would be significantly improved this year.