In a recent article, published in a special report by The Economist, it was claimed that the outsourcing of jobs and contracts overseas has begun to reverse. In the 1980's, large (Western) firms began off-shoring a substantial portion of their labor, with the idea being that they could offset their high labor costs by sending work to countries where labor costs were much lower. For over two decades the strategy was highly successful, but now many of the firms that sent work overseas are rethinking their positions. There are several reasons for this:
- Wages in China and India have steadily increased by 10-20% every year for the last decade, as opposed to the fact that manufacturing wages in America and Europe has hardly increased at all.
- Alternatives to China and India, such as Vietnam, Indonesia and the Philippines still offer fairly low wages, but they could never hope to have China's scale, efficiency and support chains.
- This has been a noticeable trend for several years. In 2010 an Economist's Free Exchange blog published a post called, "China: The End of Cheap Labor?"
- Firms have also discovered the disadvantage of distance, particularly due to a slow by steady rise in the cost of shipping goods across the sea. Not to mention the fact that any of these supply chains could easily be disrupted by natural disasters and wars (or giant sea monsters).
- Firms have begun to move away from the model of producing everything they need in one location to supply the rest of the world. China is no longer seen as a low-cost labor hub. Rather, it is now seen as a major emerging market, and any MNCs that do move their production there are doing so to be close to a new and massive market.
- "Companies now want to be in, or close to, each of their biggest markets, making customized products and responding quickly to changing local demand"
Perhaps owing to China’s perpetuated prominence as a low-wage country, it surprised me to hear that such a sizably labor-abundant country is no longer the choice for multi-national corporations to sink their production into. But that is beside my point. Granted, I think much of the new shift in production planning is due to companies considering other factors than wages, such as “transportation costs and new markets” as above had mentioned. Despite this, it seems that a considerably large percentage of companies would simply take their production elsewhere, like to “Bangladesh, Vietnam, and Cambodia […] for cheaper, labor-intensive goods” (China: The End of Cheap Labor?). There may be rising transportation costs as well as a new desire to concentrate production in one region, but if other countries are still providing cheap labor, MNCs likely would not want to spend more money than need be in their production if there is a viable, cheaper option.
ReplyDeleteIt surprises me little that MNCs from the West, most notably the USA, are beginning to err on the side of caution with China. Economic reasons aside (cost of labor, transportation costs, etc), I believe that national security has played a large part as well. An increasing number of American policy-makers, businessmen, and average consumers are becoming weary of our dependence on China's labor force. Such feelings have been exacerbated by leading politicians--especially Romney during his presidential campaign. Perhaps, then, it will be good in the long-run that outsourcing in China is slowly decreasing. In the short-term, MNCs will definitely face monetary losses.
ReplyDeleteAfter reading through this post I came across another article from the Economist , The Best Since Sliced Bread, which highlights a lot of the key issues brought up towards the end of this post. Benjamin stated that "developed countries will have to compete hard on factors beyond labor costs. The most important of these are world-class skills and training, along with flexibility and motivation of workers, extensive clusters of suppliers and sensible regulation", and this is something I would agree with, and is seen in this other article. The Best Since Sliced Bread, discusses how giant emerging- market firms in developing countries are continuing to advance everywhere. Schumpeter, uses GRUPO BIMBO to showcase how a Mexican baking giant is venturing abroad, invading and buying foreign markets. In 2009 GRUPO BIMBO bought part of Weston Foods for $2.3 billion, becoming the biggest baker in the United States. Two years later it bought Sarah Lee’s American baking operations for $960million. In the past month it has been in a battle over the famous Hostess Brands’ bread business, as that once-iconic and now-bankrupt United States company.
ReplyDeleteThe article goes on to say that these emerging- market companies in the developing world are starting to be more competitive because they are sharpening old skills and acquiring new ones. And in the process they are reconfiguring entire industries. They are advancing on all fronts against their Western rivals and are seeking a lock on other developing economies. The article uses Chinese contractors control of 37% of Africa’s construction market as an example. They are pushing into the rich world too, Alibaba has been buying e-commerce sites in America. They are forging alliances with each other as well. Such as the ones Naspers, a South African media group, has with Russian and Chinese internet firms.
I find it interesting that there are so many reasons to stop looking for cheap labor abroad on top of the stigma of outsourcing within our country. There has been a rising negativity throughout the nation towards outsourcing in general, many citizens believe it would be best to keep labor and production within out nation. This general negativity could be a reason that the government is looking for more reasons to bring production back to the states. It think it is very important to look at all factors of production such as transportation costs opposed to just looking at the labor costs in order to find the best location to produce goods.
ReplyDeleteAgreeing with what Margaret said above it is important to bring labor and production back to the United States. Having goods produced in the US can improve the general quality and efficiency of the services delivered. I think slowly American companies will begin to reduce outsourcing. The CEO of Apple, Tim Cook. announces plans to manufacture Macs in the US. Apple in investing $100 million to make this move and with a struggling unemployment rate, Cook hope this will create many new jobs in America. This can reduce transportation costs as well as improve the quality of the products.
ReplyDeleteAt the end of the day, it is all about the money i.e., short and long term ROI.
ReplyDeleteMarkets are working as they are correcting and cost differentials are decreasing. As a result, companies are now considering other factors like, time to market, control, responsiveness etc...
More jobs will come back to the U.S. when market forces drive them back.
Also, as the Chinese economy progresses, the U.S. will have a larger market to sell into.
Everybody “should” win in the long run.