In the 1990s, the controversial trend of outsourcing business processes to foreign markets usually involved jobs that required limited skill sets. But today, dramatic increases in skilled labor in developing nations such as China and India are drawing more and more technically-skilled functions to lower-cost regions. And while jobs are often lost domestically, the financial benefits to American companies are dramatic.
Wireless chip maker RF Micro's (Nasdaq: RFMD) announcement yesterday that it will move its high-volume chip testing functions from North Carolina to Beijing, China, is a great example of exactly why this is happening. While the company noted that the move will "reduce cycle time, better serve its customer base, and improve overall profitability, RF Micro will also spend $1 million now to save an estimated $3 million to $3.5 million each year.
For a small cap like RF Micro, that kind of money makes a big difference, especially since the company has been struggling lately with slowing growth. While RF Micro counts globally diversified players Nokia (NYSE: NOK) and Motorola (NYSE: MOT) as customers, the bulk of its revenue comes from customers that manufacture in Asia, so keeping operations close by is a benefit as well.
Since companies such as Broadcom (Nasdaq: BRCM), Qualcomm (Nasdaq: QCOM) and Texas Instruments (NYSE: TXN) are always a threat to RF Micro's position in the wireless chip market as well, standing still is not an option. To better manage growth, the company is making acquisitions and looking for greater process efficiency, aiming to become more responsive in both periods of rising customer demand and increasing inventory.
Hot on the heels of the transition move, RF Micro also announced it will be producing its latest radio chip for cellular handsets in Beijing at a significant cost advantage to earlier generations of the product. For investors, that means higher margins and more profit from each sale.
With a stock that has sunk more than 60% in the past six months, value investors and market skeptics may want to revisit RF Micro, since it's currently priced at a mere 12 times earnings. If the company can catalyze meaningful efficiency in operations and capture more volume with its latest generation of solutions, margins will snap back into line, making the stock look like a bargain.
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