“When Offshoring Backfires”

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Readers may know that I have strong feelings about offshoring. There is plenty of evidence that the case for offshoring and outsourcing are considerably overdone. First, direct factory labor is only a small part of the total wholesale cost of manufactured goods, typically 10% to 15%. While offshoring clearly reduces those costs, there are offsets: increased managerial/coordination cost, greater transport and inventory financing costs. I’ve had some executives in different lines of business tell me their company decided to outsource/offshore despite the fact that the business case was not compelling. Second, offshoring increases risk, particularly the risk of getting stuck with inventory you can’t sell.

This VoxEU article does a nice job of looking at the tradeoffs between cost savings and customer responsiveness.

By Xiaole Wu, Ph.D candidate in Operations & Supply Chain Management, and Fuqiang Zhang, Associate Professor of Operations & Manufacturing Management, Olin Business School, Washington University. Cross posted from VoxEU

As the global economic downturn grinds on, more companies are acknowledging that labour costs aren’t always the most important factor when deciding where to build their next factory. This column argues that, in times of recession, some companies find that bringing their business home can give them a competitive edge.

While politicians argue strategies to create jobs in the faltering global economy, the debate around offshoring has intensified. Once considered a clear competitive advantage in the fast-changing global market, manufacturers rushed to replace domestic labour forces with lower-cost workers in emerging markets. By 2002–03, about a quarter to half of the manufacturing companies in Western Europe were involved in offshore production (Dachs et al 2006). And by 2008, more than 50% of US companies had a corporate offshoring strategy (Minter 2009).

Recently, though, many of the perceived offshoring advantages have been called into question. First, the sourcing costs from emerging economies have been rising rapidly. For example, as of mid-2010, many Chinese firms were facing labour shortages and were forced to boost wages to attract qualified workers (Plunkett Research 2010). Second, the global commodity price index has risen significantly (Archstone Consulting 2009). This has led to more expensive transportation costs, particularly as a result of higher oil prices, as well as higher production costs. Third, the economic recession that started at the end of 2007 has had a severe impact on the market. Consumers are more cautious in spending, and firms are seeking new strategies to retain customers (Dodes 2011).

So it should not come as a surprise that more US manufacturers are ‘reshoring’, ’onshoring’ and ‘backshoring’. General Electric announced last year that it is moving some of its appliance manufacturing from China to Louisville, Kentucky. NCR Corp. is pulling all of its ATM machine production from China, India, and Hungary back to a facility in Columbus, Georgia, in order to customise products and get them to clients faster. In their announcements, these firms emphasised that by being closer to the market, they can better understand the market and are able to respond quickly to market changes.

Finding balance

As these industry examples illustrate, the tradeoff between cost and flexibility can be quite involved and difficult to evaluate. It now appears that the labour-cost benefits gained from offshoring might not be sufficient to cover the lost flexibility under many circumstances. So before making any sourcing decisions, firms at the crossroads need to understand the business environment as well as the competitor’s sourcing strategy. The purpose of our recent paper (Wu and Zhang 2011) is to investigate the underlying factors that affect the sourcing trend and provide insights to firms on strategic sourcing decisions in a competitive setting.

Our paper studies a two-stage sourcing game in which competing firms could choose between sourcing internationally (call this the efficient sourcing strategy due to low production costs) and sourcing domestically (call this the responsive sourcing strategy due to short lead times). We first identify the point of equilibrium between the two sourcing strategies. Then we examine how that equilibrium shifts based on key parameters. We find three key factors that influence a shift from efficient sourcing to responsive sourcing: consumer demand, market size, and supplier costs.

Consumer demand

All things being equal, when demand is relatively stable, most companies look for the lowest cost option, which usually translates to offshoring. As demand fluctuates, though, as in the recent recession, companies need to respond faster to shifting consumer sentiments.

Onshore suppliers give companies greater flexibility because they don’t have to deal with overseas transportation, which means they can place orders much closer to the selling season. As a result the firm can have a better forecast of demand information. It also gives the firm more time to understand the needs of the customer and integrate the updated product specification required by the customer into the production at the last minute.

Because the major benefit of sourcing from a responsive, or onshore, supplier is to obtain more accurate demand information, that advantage disappears when there is no demand uncertainty. At that point, the competitive advantage rests solely on cost efficiency. This implies that for products with highly predictable demand, offshoring is still a useful strategy.

Market size

After that, firms need to consider market size. Companies targeting smaller markets need to stick closer to home because competition is more intense and the firms’ selling quantities are low. That makes accurate demand information more valuable because being able to respond quickly to their customers outweighs additional manufacturing costs. This may partly explain why the backshoring phenomenon became prominent during the recent recession.

Middle-market companies can benefit from diversifying their sourcing strategies by balancing the lower cost of offshoring with the increased flexibility of using domestic, or onshore, suppliers to fill short-term needs. Larger markets, though, mean bigger orders, so companies will use efficient, or low-cost, sourcing whenever possible.

Supplier cost

Finally, any change in supplier costs can affect sourcing decisions. Naturally, when an offshore supplier’s price rises you would expect to find more companies preferring the convenience of domestic suppliers. What we found, though, is that when there is an equal cost increase for both domestic and offshore suppliers, more companies still place greater value on being able to respond quickly to their clients. The rising cost of commodities and the commensurate increase in backshoring by US companies is an example of this phenomenon.

Makers of innovative products in markets where tastes change quickly will value supply flexibility and are more likely to “backshore”. But for companies that rely heavily on low manufacturing costs, backshoring will decrease, although the countries from which they source may change. As wages increase in China and other developing economies, businesses will seek lower-cost manufacturing sites elsewhere.

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  1. tyaresun

    It has been monkey see monkey do for a lot of companies. It was considered the smart thing to do. All the forward looking big companies were doing it. The media was talking about it.

    Who wants to spend the time to do the numbers when a long list of smart companies has already run the numbers and decided.

    1. alex

      I agree the herd mentality plays a big role, but it’s not necessarily the company management that’s primarily responsible. Stock analysts and other genyuses can also pressure publicly traded companies (or those that hope for an IPO) into following what the Masters of the Universe know is the smart strategy. So much for the economist’s fantasy of independent companies following independent strategies and the winners emerging in an evolutionary fashion.

      I’d be particularly interested if Yves (or a poster with similar insight) could comment on this.

    2. justanotherobserver

      I can tell you that someone I know works for a large company – and they offshored their IT. Projects are still late and still over-budget, but they are paying less per unit hour.

      That’s really all they are looking at as far as I can tell, because it’s certainly not helping them get work done.

      The only thing that would do that would be to fire a bunch of managers in charge of those projects, the same managers who off-shored in the first place to try and ameliorate the costs of their badly managed projects.

      But monkey-see, monkey-do is indeed a large part of the problem. Management by trendiness.

  2. Economics Considered

    This whole exposition incredibly leaves out two hugely significant factors.

    First is a ‘herd’ effect or ‘lemming’ effect (although that is a myth, everybody ‘understands’ what it connotes). In other words, because some companies started to do it, others felt they must also do it (whether they made an economic analysis or not). Likely many of the first offshorings indeed made economic sense. But it is most highly likely (as IS supported in the article) that much of the eventual offshoring did not make bottom line economic sense. But the initial herd effect eventually turned into habit. It became the accepted industry practice to do it as a matter of ‘standard practice’. Anyone who has been in industry likely has seen innumerable examples of companies implementing ‘improvements’ because the upper management had a ‘vision’ that this was a ‘good thing’ – when extremely simply math evaluation exposed the stupidity.

    All one has to do is look at how universally big box companies source from overseas to get an idea that they almost certainly don’t even check for US sources anymore. There is ample evidence that US suppliers can still compete or beat international procurement – and yet try to find a single Made-in-USA item anywhere in Walmart. The retailers have totally brainwashed themselves.

    Can it be reversed ? Given the inertia of human behavior, it will take an enormous sledge hammer to even get them to think about it.

    Second, this article leaves out the enormously crucial situation where China, especially, is simply by government policy blackmailing US companies by requiring that they purchase from China or even build factories AND in many cases gift China with technology – just in order to be allowed to sell into the Chinese market. Of course these international companies HAVE NO SELF-INTEREST WHATSOEVER to not simply go along with this. And given the corruption of the federal government that allows them to hold profits offshore and then periodically repatriate them for a pittance (or NOTHING) in the way of taxes, our government is providing enormous incentives for them to do this – thereby destroying US jobs and US wealth.

    We have a government that is not only so incredibly dumb (and likely incredibly corrupt) as to allow China (and other Asian countries) to prey on us this way, but they are hugely venal in actually incentivizing it.

    Welcome to the feckless modern United States of America.

    1. Dave of Maryland

      China’s a sovereign country. It can set any terms it likes. I seem to recall a similar sharing of technology when they partnered with the Soviets 50 years ago. If I were Chinese, I would positively insist my government get tangible results from letting foreigners in.

      The real question is why western countries are so eager to betray their own national interests, in giving away their competitive advantages. It can only be that trade is the oldest, purest form of greed there is.

      Tariffs are the solution and if they can’t be had nationally, they can be had locally: Occupy Wal-Mart!

      Fried food is as good as cocaine? I never knew. Pass me that bucket of KFC ! That’s an American Chicken in there, I know it! Eat American! It just might be all we have left.

      1. justanotherobserver

        they are not betraying their own national interests, they are advancing the interests of the 0.1%.

        That’s a feature not a bug.

    2. RBHoughton

      Am I missing something? A great part of the profit of trade sticks to the producer and the intermediaries.

      In domestic trade both advantages are retained in the national economy; in foreign trade we lose the producer’s share to the foreign country.

      The only people who want more foreign trade are banks, insurers, shipping companies, and those wholesalers and distributors of imports. They are all putting consumer retail prices up to twenty times cost and they want it to go on forever.

      I will not believe that domestic producers cannot compete.

  3. F Libertarians!

    This article also leaves out the fact that, because the purpose of offshoring is to reduce labor costs, the net effect for society is that worker wages in countries that lose those jobs are kept stagnant forcing workers in those countries to rely more heavily on debt while interest on outstanding that debt compounds, and prices rise. As the U.S. is currently learning, that is a recipe for economic disaster! Second, the economics profession needs to cut the crap and just tell the truth that the reason behind offshoring is to maximize short term returns for shareholders and bonuses for CEOs while everyone else gets screwed over. Put that in your damned journal articles!

    1. digi_owl

      Basically, Present wages are future revenue sources. Then again, neoclassics ignore time and confuse stocks with flows…

      1. run75441


        Understanding the argument, it is not about Direct Labor Costs. It is about Overhead and the absence of Overhead. You really have o be careful in how you articulate on the issue otherwise they will pick you apart on the difference.

        There is another side to this argument and Martin Ford details it perfectly. The coming wave of computerization which eliminates the need for labor. Sandwichman articulates a solution in working fewer hours coupled with higher productivity gains and at the same wage.

        1. digi_owl

          Would not all “overhead” sooner or later end up as someones wage? And if one take automation far enough the economy ends up being firms trading with firms, and the percentage who happens to hold shares in said firms. The rest will survive on the goodwill of those firms and their shareholders. Hello neo-feudalism?

          1. run75441


            No, it is strictly direct labor used to manufactured the part or product. Indirect labor is not so much what I am discussing. It is strictly those other costs which are pretty much non-existent in Asia.

          2. digi_owl


            But they do, only behind the bill from the sub-contractor (who may even get some of that as a bill from a sub-sub-contractor).

            It is just not itemized on the spreadsheet of the company accountant any longer, but is has not vanished in a puff of smoke.

    2. Constantine

      The way I see it, as a retailer, is that there are two types of Made in China strategies. 1) Companies based in the U.S. that affix their name on products made to their specifications. 2) Chinese based companies that copy the technology and create their own products.
      As a retailer, I refuse to carry the latter product. I try to source my products from the U.S. first, then Europe. When companies evaluate off shore strategies, I never read or hear about the one topic that completes the whole picture, taxes paid on the wages of American workers, which feed back into the loop.
      For example, the bridge section on the Oakland bridge, where the only criteria considered was the cost. Instead of hiring American workers, the contract was given to the Chinese.

      1. alex

        “the Oakland bridge, where the only criteria considered was the cost”

        And the initial cost estimates were a low-ball. They encountered a lot of quality problems that raised the cost. At one point something like 60% of the welds were being rejected because of poor quality. The company doing the inspections was criticized for being overly strict, and the problem was ultimately “solved” by switching to a different inspection company.

        1. Jeff

          And consider that the steel is being made in the
          People’s Liberation Army Shipyard Number One. Tens
          of thousands of dead Americans lying in cemeteries
          who fought those Commie bastards back then.

          Meanwhile the new bastards partially in charge of
          deciding the bids, the toll authorities in
          San Francisco Bay, have bought a surplus U.S.
          Postal building from a hustler reseller that hands
          Mr. Hustler hundreds of millions of profit and that isn’t taking into account the asbestos and seismic
          upgrading that will have to be done. Their shiny
          new headquarters near all the trendy restaurants will
          eventually be finished.

          Bridge tolls continue to shoot up, Mr. Hustler gets
          his hundreds of millions of swag from borrowing money and flipping the building, American factory
          workmen are living in poverty and it will have
          taken almost a quarter of a century to rebuild the
          Oakland Bay Bridge which was originally built in less than about five years.

          Every steel man that I know who used to work in
          fabrication has vowed that they will blow through
          the toll plaza on the new bridge if and when it’s
          ever finished and refuse to pay the toll.

          Get Caught?

          Toll takers jobs are being eliminated too in favor of cameras that take a picture of license plates if you
          do not have an automated transponder. Mud on plates or “plastic bags that got caught on the front bumper” negate their efficiency.

          1. Susan the other

            It’s impossible not to be angry about the way the US accommodates China at the expense of our own labor force, safety standards and manufacturing. And what do we get in return? Probably China’s version of most favored nation. Our big stupid corporations get to set up shop over there directly to have a chance at selling to that enormous population. But Catch 22: China keeps labor costs down so it isn’t as profitable as an American might think. And Catch 44: China has simultaneously killed the American consumer. What’s a big stupid corporation to do now?

            I take exception to your comment about those lousy commies we fought. Please keep in mind that we invaded them – in no uncertain terms.

          2. Jeff


            You’re thinking Vietnam, I’m thinking Korea.
            Which we did invade as well..

            The Vietnamese have invaded us in a way.
            In California the easiest state license to obtain
            is cosmetology. Vietnamese women have taken over
            the nail salon business here.

  4. sasori

    I was convinced a while ago that offshoring was at least in part a political/social engineering measure, aimed at the reduction of large (unionised) skilled workforces in the country of origin, and the political dangers (to the elites) that come with them.
    But I had no idea that it wasn’t necessarily cheaper, sweet juggalo jesus! kalceki was basically right.

    (p.s. i really love this site and will 100% donate as soon as I have a disposable income too speak of)

  5. fiscalliberal

    One factor to be discussed is the efficiency of the engineering and production staff. Since Sputnik we have been graduating technical people and they go into design not having experience in the manufacturing processes.

    I am retired now, but I used to say, engineering makes the product feasible and consulting manufacturing will get the cost down and reliability/quality up. Post WW II GE often sent engineers to manufacturing plants for 6 month rotations before going to design engineering. They further supplemented this with internal education programs which heavily involved product and manufacturing engineering. That formulated teams of people who could address new products.

    In short a production phase of high cost or unreliability is much more costly and eats into profits. Another thing is your senior management team has to be populated with engineering and manufacturing people, to allow reasonable expectations versus just cutting cost.

    A final comment is the quality of life for your people. Red eye flights from either coast in the US were bad enough. Now 12 + hours of flights overseas are wearing on people and families, especially just before the holidays. The traveling person shows up at the family event and goes to sleep from exhaustion.

    This mindset of cheap costs goes further into the national philosophy when then evolving to not paying the bill and huge unsustainable national deficits. We have migrated to the thinking that we can fight wars and fund medical (Medicare part D) with out paying the bill. We need to remember Clinton had the deficit to near zero. Then George Bush took over and he did not want to pay for wars of opportunity. Since then Obama has been unable or unwilling to make the needed course corrections. On both sides of the political parties, the insane are in charge.

    One just has to ask – where are we going?

    1. Foppe

      Clinton had 0 deficit because Greenspan was blowing bubbles, not because of sustainable policy choices he made. And by doing so/letting Greenspan do so, he created a raft of instability that would show up down the road..
      In other words, that “mindset of getting things for free” was not something you can attribute to citizens, since it was just something that the Party of Wall Street liked: that is, it allowed both parties to lavish public money on private enterprise, and then start to argue for “responsible” cuts to “unsustainable” public spending once the deficit had become big enough for the “irresponsible government” and “the government is like a household” spin to take hold.

      1. run75441


        Clinton made an agreenment with Greenspan to maintain taxes, or increase them, if the Fed would keep interest rates low. It worked.

        1. Foppe

          Hm? So after Reagon went from 70->30, and Clinton went 30->40, taxes were “high” again? Or am I missing the point?

          1. run75441


            Explain. I wish to answer you correctly and coherently. Clinton’s tax increase was not the same as Reagans.

    2. alex

      “Since Sputnik we have been graduating technical people and they go into design not having experience in the manufacturing processes.”

      Since 1957? No, but certainly in the last 20 years.

      I’m a dirty hands engineer who is old enough to remember when engineering and manufacturing were often co-located (or at least in facilities that were within easy commuting distance). It meant manufacturing problems could be solved early, generally before they became big problems. Contrast that with things that are manufactured without engineering support/oversight and then shipped on a slow boat.

      I can also say that what I learned in the early years of my career that way was invaluable. Engineers younger than about 40-45 have mostly not had the opportunity to gain that valuable experience.

      I worked in places where it was common for engineers to go down to manufacturing. There were often standing orders that solving manufacturing problems took priority over new design work. Some large companies had a policy that when a new product went into production the design engineers literally moved their desks to production for a few months while production problems were ironed out.

      BTW, my area of engineering (electrical) is probably less affected by the separation of engineering and manufacturing because of industry-wide standardized manufacturing processes, and it’s still a problem. It’s even worse for mechanical and other fields!

      1. marc fleury

        wow, quality feedback from old-timers. Thanks! I come from the software background and was completely BURNT by outsourcing to china. After a selection process weeding out 30 companies we went with these guys. The it became a rotating door, as soon as the guy was competent enough he would move on, we only had junior talent, I have NEVER seen such SHIT code.

        It was so bad, that I decided to completely cancel the operation and bring dev back to europe. I would rather have 3 top level europeans that 20 clowns that can barely speak. Sorry if it sounds non PC but the whole outsourcing of higher functions is just not working right now.

        1. LAS

          I’ve had similar experience using off-shore software teams in India.

          They were not bad people. I interpret the experience somewhat differently. I felt that the folks in India were always just going through time-consuming, unhelpful motions to cover their ass and had no interest in project success. In fact, they personally realized absolutely no benefit from project success versus project failure so it really was a matter of indifference for them.

          Shifting gears …

          Also, I’ve learned from primary consumer research that US consumers do not desire stuff be made in China or other overseas countries. Generally they are entirely indifferent about it, but sometimes actively negative toward it, depending on the item. In 100,000 or more consumer interviews, I cannot recall a single instance of a consumer asking for it.

          In fact, drug and food manufacturers with ingredients from Mexico, China, must downplay this fact to consumers. Some of their US consumers would be very upset to know the source of ingredients they are putting in their mouths or their children’s mouths.

          Powerful retail & corporate interests ardently desire off-shoring for the purpose of concentrating profit margins by taking advantage of different economic conditions enforced by political boundaries on human beings.

          The root of the off-shore initiative is in this country among the oligarghy. Their capital can flow over political boundaries while working people in various countries are trapped and exploited. Working class people in both importing and exporting countries are exploited.

          Maybe, I’m a dangerous radical but I see all professionals in this country subject to the “Bridge Over the River Kwai” problem. We’d like to show our stuff doing good work, like building a bridge the best we can, but we forget sometimes that the entity reaping the most advantage from it is the enemy and not the people we’d really like to help.

          We are doomed to a period of civil strife until the economy is reorganized such that benefits are more evenly distributed.

          1. Jeff

            “Some of their US consumers would be very upset to know the source of ingredients they are putting in their mouths or their children’s mouths.”

            Walmart is now selling food grown in China.

            Want some melamine with that? Lead? Cadmium? PCB?

            We expect as much from race to the bottom Mall Wart.

            Whole Foods is also selling highly priced “organic” that comes from China. Their Spinach and California Mix is stamped “Product of China”.

            Organic comes in various strengths.
            The strongest and most thorough is Oregon Tilth.
            Oregon based companies and others that choose to
            use it, like many of Costco’s outstanding organic
            products, are certified by Oregon Tilth.

            Next is CCOF, or California Certified Organic
            Farmers. It covers many Calif. companies and is
            much better than what is light years further down
            in quality, which is
            “USDA Organic”, a national label that is still far
            better than conventional, (the government was going to allow irradiated food, sewage sludge fertilizer,
            etc. until hundreds of thousands of public comments
            of outrage from citizens made them back down).

            Finally, the weakest organic standard is
            “Quality Assurance International”.
            This is a set of middlemen that hires foreign
            inspectors to “guarantee” that food has been raised to exacting organic standards. Plenty of bribing and
            so called inspections of stuff that turns out to
            be toxic garbage but with the QAI stamp of approval.

            Whole Foods uses them to “guarantee” that their
            Chinese raised produce is ‘organic’.


      2. Dave of Maryland

        It’s what I remember from selling cameras in London 30 years ago. A hot new camera would arrive (cameras back in those days required film and had lots of moving parts) and after six months you’d conclude that one in ten was factory defective. The first Olympus black clamshell had a red shutter button that wouldn’t work (I forget the exact name). That was an assembly line problem, probably a simple one. It would have been better if those cameras had never left Japan and the problem stayed local, where it would have been cheap to fix.

        Then there were cameras with incomplete designs. The first Nikon F3’s had a backup manual shutter release that, when combined with the motor drive, fired the shutter at nearly twice its rated frames/second. Guys were doing that and burning up the camera.

        And cameras with unreliable parts. Olympus OM-2’s, an early auto-exposure camera, had meters that conked out after exactly 24 months. It was an expensive repair, and always at the customer’s expense. (Unrepaired, the camera was useless, as were all the accessory lenses you had bought as well.)

        Engineers study assembly lines because no matter how good the prototypes, there are problems of scale when new products are mass-produced. Problems that turn up in one of ten, or even one in 100, that need fixing. You cannot separate design engineers from manufacturing from the final user. They’re all in it together.

    3. justanotherobserver

      It is my claim that we we did not lose, and really are still losing, to the Japanese in automobiles due to the american worker, but do to the american engineer.

      I do believe this is a problem in that american engineers are not taught to design-in quality.

      the Japanese produced quality vehicles with american labor for many years. I believe it was due to superior engineering.

      With MBAs running the companies I think engineers in this country are forced into a cost-at-any-cost mindset.

      1. alex

        “It is my claim that we we did not lose, and really are still losing, to the Japanese in automobiles due to the american worker, but do to the american engineer.”

        American cars starting going down hill when the car companies stopped being run by engineers and started being run by sales, marketing and finance types.

        1. SidFinster

          Beancounters. Look at wonders of GM manufacture like the Olds Diesel or the Turbo Pontiac 301 engine, to give two legendary examples.

          There was nothing fundamentally wrong with either design, except Accounting concern with keeping costs down. As a result, little things like a water trap (in the case of the Olds) and a knock sensor (for the Pontiac) were left out, leading to vast numbers of warranty claims.

          Then there are the sorry stories of the Vega, the Pinto and many more….

  6. LucyLulu

    One has to wonder how much political risk also is a factor. There was an article a while back (sorry, unable to find link) about the Chinese refusing to allow American companies in China to lay off workers or cut wages in response to falling demand in effort by Chinese government to maintain employment levels. Therefore, the US companies were concentrating their cost-cutting measures (i.e. layoffs) domestically to compensate. Other reports spoke of Conoco Philips having an oil leak off the coast of mainland China, quite small in comparison to the Moncado spill in the Gulf. COP had a joint venture with a Chinese company, 49% COP -51% Chinese. The Chinese government is claiming it is the worst spill in Chinese maritime history and COP had taken inadequate measures to clean up spill (COP claims differently, initial spill 3200 barrels, 90% cleaned up, and that ongoing leaks total 2 liters/day) and has shut down 231 producing wells in the Penglai oil field. There are reports however that clean-up has been hampered by COP being required to use Chinese companies for the clean-up, who have less technically advanced resources. Links below.

    The higher labor costs companies must pay in the US could be seen to include a form of insurance against greater losses by unfriendly foreign policy decisions.



    1. Foppe

      The exposure to political risk is also a consequence of incompetent, self-serving management decisions; I’m sure it serves as an excuse for management to cut even more jobs, but it certainly isn’t an “uncertainty”.

      The higher labor costs companies must pay in the US could be seen to include a form of insurance against greater losses by unfriendly foreign policy decisions.

      Certainly, but this argument would only be recognized (and actually found fairly obvious) in more or less healthy economies; right now, it would just be ignored whenever it’s convenient, as the primary aim is not to act sustainably, but just to maximize corporate leadership bonuses. IOW: they don’t care.

  7. Jack E Lohman

    Let’s not forget the “greed” of CEOs and their willingness to pay off politicians to alter the rules so off-shoring can be done more easily (read: NAFTA, CAFTA and Obama’s agreements with Columbia, Panama and South Korea). That our politicians would take bribes to make this all happen is the major problem. Take the money out of the political system with public funding of campaigns and you’ll see mismanagement clear up overnight.

    Jack Lohman

  8. allcoppedout

    I’m sure you know this is only part of the argument Yves – though one that needs more attention. The US and UK share that our manufacturing has been decimated several times over, and some of the reasons for this were heavily political and about gerrymandering the electorate, smashing union power and the rest. Immigration to low-level jobs has also played its part.
    Retailing (which I personally abhor)is ruling the roost, so consumers get little benefit (and lots of debt) from ‘manufacturing cheapness’ – the system is kept highly ineffcient to generate profits – one can imagine being able to but directly from manufacturers. Underlying this is a recognition that huge numbers of jobs in retailing, including much of financial services is broadly not necessary. There is, potentially, a much more efficient business model – I buy mostly through internet intermediaries and in principle even these could go.

    Your argument as outlined is basically BPEST – an old standard taught since the ‘dawn of time’. There is more skill in the woman on the sewing machine than in most derivative bankers. The problem is that we have ceased to value real work and capital development in directing this to common good. We need to pay properly for work and this is what has been collapsed. In removing this we have created all kinds of on costs in welfare,pensions and poverty.

    Somewhere in all this there is a pretence that we can somehow compete by upgrading our labour force through education – when the real truth is education is actually painful and useless for those who can’t hack school – which includes at least half of the undergrads I teach.

    I’d go as far as to say the structural problem is leaving things to business people and their motivations.

    1. run75441


      I thought I was the only one beating this silent drum:

      “There is more skill in the woman on the sewing machine than in most derivative bankers. The problem is that we have ceased to value real work and capital development in directing this to common good. We need to pay properly for work and this is what has been collapsed. In removing this we have created all kinds of on costs in welfare,pensions and poverty.”

      When TBTF and Wall Street and Credit cards can make greater profits in tranched CDOs, CDS, naked CDS and credit cards rather than Labor intensive investments, why would anyone invest in Labor??? It is pretty obvious the Financial sector of this nation has grown exponentially due to the is emphasis and the battles waged with Larry Summers and Greenspan by advocates such as Senator Dorgan and Brooksley Borne. Productivity gains are skewed to oher investments. Productivity gains have been skewed to Capital since the eighties as shown by Spencer here: http://www.angrybearblog.com/2009/11/productivity-growth.html

      The Growth of the Financial Sector: http://www.bis.org/speeches/sp081119.htm

      Credit Cards and Interest Rates: http://en.wikipedia.org/wiki/Marquette_Nat._Bank_of_Minneapolis_v._First_of_Omaha_Service_Corp.

  9. Jeff

    Well Mr. Wu, as far as “consumer demand” goes,
    there’s one thing that you are not taking into
    account and that is the sentiment that

    “If we aren’t good enough to make it, then we
    aren’t good enough to buy it.”

    Any company that starts manufacturing overseas
    becomes suspect and gets treated with hostility
    scorn and ridicule. When something that we buy
    that is made overseas breaks or fails, we go out
    of our way to return it and demand our money back.

    There are lots of companies still manufacturing here.
    Seek them, patronize them and favor them.


  10. Ray Phenicie

    Besides the China connection and the herd mentality I have another theory about why offshoring was done to the extent it was when it made no economic or financial sense (pun intended. This theory centers loosely around the philosophy that the average American worker (outside middle and upper management levels) is overpaid. We saw clear statements to this effect earlier in the year in Wisconsin as the Koch brothers’ (billions made from manipulating our commodities market so we all pay higher prices for raw materials used to make everything from bread to shoe soles) campaign against teachers, nurses, and public safety workers. It’s a known fact that a few extremists on the right will drive the country into peonage in attempts to prove an ideological theory correct.

    The idea is if enough Americans saw enough jobs disappear into the horizon, they would meekly accept the few crumbs that were offered in the resulting desertification of the economic and financial scenery. So far, I’d say the process of making this ideology walk and talk as been very successful, again, with the likes of the Koch brothers putting up guys lie Herbert Cain . . . or Wal Mart forcing its workforce to pay higher premiums for health insurance. . . or. . . .

  11. Jeff

    And the corresponding need to flat tax the newly poor
    workers that are left here to pay for the subsidies of the old rich.

  12. rotter

    “increased managerial/coordination cost, greater transport and inventory financing costs.”

    but these are the areas where its easy for a grifter to find a fatty niche and thrive (until the host is dead). Its much harder to skim from the labor. They quit, or complain or otherwise fight back.

  13. rotter

    “Second, the global commodity price index has risen significantly ”

    due largely, especially recently, as it has been explained on this blog, to speculators. Hurrah capitalism!

  14. The Outsourced One

    The firm I worked at began the outsourcing of their IT development work in the fall of 2001. Their stock price at the time was just under $20.00 per share. Stock price today, around $12.50.

    However there was an article in the WSJ around 2008 that mentioned that the CEO convinced the board (which he chaired) to pay him over $600,000,000.00 in special dividends, stock and option grants between the 2001 and 2008 recessions.

    Their website still has some of the same bugs on it that it had when I was laid off.

  15. VoiceofCitizens

    We outsource to China for one reason: they absorb the “mold fees” – in the US we were quoted $40K for a single mold to make 25 cent (retail) products.

    1. run75441


      $40,000 is cheap and a fixed cost. 2 cavity? The margin between here and there is what should be considered along with the the demand for the part, the numbers of cavities, weight of part, cycle time, and Labor content (which is zip on an injection molding machine).

      Yu have to be careful in china as to what you buy as the tool could be a piece of crap, have multiple slides, or need to be returned to China for repairs in which case will require greater costs.

  16. run75441


    I am impressed.

    As I believe you know, I am one of the few who has been beating the Cost of Manufacturing; the costs Labor, Overhead, and Materials; and subsequent knee jerk reactions by companies to attack the cost of Manufacturing and what it means to the US in resulting infrastuctural costs “Drum.”

    Briefly and to the others; it is not Direct Labor costand neither is it Material cost for which this battle being fought. It is the Overhead which companies choose to escape overseas and avoid only to return to sell their wares in the largest Consumer Market globally. We speak of OSHA, EPA, OT Laws, Child Labor Laws, unemployment compensation, workmans compensation, healthcare, vacation, pension, 401K, unions, Social Security, etc. It is the overhead companies wish to escape which is ~30% of the cost of manufacturing as compared to Direct Labors unburdened ~10%. The result of companies leving this country is an increase of infrastructural costs borne solely by human taxpayers. The Peterson Foundation and the Koch Brothers are leading this charge to disenfranchise Labor.

    Der Spiegel has outlined the loss of manufacturing jobs in the US sine the nineties http://www.spiegel.de/international/business/0,1518,grossbild-1062396-527289,00.html 4 million jobs lost in a decade. Much of which is due to the failure to implement productivity improvements in manufacturing by companies such as Levis. It was easier to whack Labor as the cost f doing so is minimal. This comes as we pay out to shareholders rather than reinvest.

    Yves, you caught my attention. If you need me to review anything; I can assist. This throughput analyst is excited by what you wrote. Thank you for taking this cause up.


    1. digi_owl

      Thing is that sooner or later that overhead will show up as cash in the pockets of customers walking the retail shelves looking at products.

      1. run75441


        and show up as hidden costs to the economy as a result of the Unemployed and Not In Labor Force.

  17. John Fry

    Outsourced 3 times since 1998 in electronics manufacturing.
    Xycom 1999 – Siemens Medical 2003 – Honeywell Security 2007

    Sure glad I saw this coming in the 80’s therefore no rescue needed in my neck of the woods. My favorite poet said –

    Some truth there was, but dashed and brewed with lies,
    To please the fools and puzzle all the wise.

    I’d agree with Bill on the overhead cost reasoning but add pure laziness on the part of management and owners who could not handle the rigorous daily requirements of doing a job well. The flaky management I’ve experienced over the years is worth a book. Every new fad, every new paradigm, paralleled a lack of attention to fundamental detail.

    And then the asset stripping. One of the above in the latter stage looked like a traditional mafia bust-out.

    Our situations had nothing to do with organized labor and if anything, the competition in-house was fierce and at the same time we cooperated we also held each others feet to the fire. Floor-level techs and engineers proved our mettle daily so skill level was not a factor in outsourcing.

    The last two outsources were buyout situations so there’s an element of planning where the parent company has cherry-picked R&D or software in advance over the manufacturing operations it intends to dump asap. One even admitted after we proved our numbers versus their chosed future job-shop that it was simply a flow-chart consideration from above – aka – another lie, but it was amusing they felt compelled to formulate it that way. Manufacturing was not their core competency was how they put it. WTF??? Is that the same Siemens that makes just about everything?

    I have doubts about the matrix of skilled labor, values, capital and technology – which has been so thoroughly disassembled in the US – ever being put back together. I sure hope we can stay out of the cottage industry abyss.

    1. different clue

      I saw a simpler version of that poem quoted by Charles Walters of Acres USA once . . .

      “truth there was, well laced with lies,
      to baffle the fools and fool the wise.”

  18. Horatio Parker

    I’m surprised that no one has mentioned making the world safe for capitalism as a motivation to off shore.

    Not only do we undercut labor at home – we sabotage Communism.

    1. Ray Phenicie

      I take it your comment was somewhat cynical but in actuality, the Truman administration started with the Marshall plan and high ranking officials (Commerce, Pentagon, Congress) instituted an unofficial Marshall plan for the Pacific rim; we live with the child of that plan today. And yes, the explicit idea was to keep Asia and the Pacific nations tied to American Commerce.

      How well they succeeded in destroying American society many of them will never know but as a commander in the Viet Nam war was quoted as saying “we had to destroy the village to save it from the enemy.”

  19. my experiences with outsourcing software development

    My experiences with offshoring / outsourcing software development — via contractors — have been very negative. (I would expect different outcomes from setting up shop directly in the host country and hiring direct.)

    I was personally involved in two attempts. In one instance, because I believe in giving everyone (regardless of nationality / ethnicity) a chance to contribute and to earn a good living, I bent over backwards to train offshore developers to fill positions on my team. (We needed the help desperately!) It was a disaster. In another instance, I closely watched a foreign-born colleague attempt to accomplish the same thing with resources from his own country. It was a disaster.

    Politics. Poison. Frustration. Here are some notes on my more recent experience:

    – To facilitate communication with offshore staff, the offshore contracting company placed onshore liaisons at the client facility. Though these liaisons vary in their productivity and communication skill, the contractor charges more for each of them than the newly demoralized Americans (some of whom are) actually doing good work. There go some of your savings. And now you’ve told your locals you don’t pay them what they’re worth. (I was working late and checking emails early, to do my liaison’s job because he demonstrated he couldn’t remember much of what we’d ask him even after getting responses from him writing.)

    – The liaisons were “salesmen”. They weren’t there just to help with communication. They helped manage perceptions within the client (my employer). Based on what I saw, I believe they steered the better offshore resources work to my bosses’ projects and gave my team the duds. That way, they can later claim the “solution” is to offshore more of my team and me. (They don’t even have to think that far ahead, consciously. That’s simply what’ll happen by them caring more about my bosses’ projects than mine.)

    – The onshore liaisons provided limited resumes that didn’t fit our most basic needs. (Isn’t one of the goals of offshoring to draw from a big pool?) And once the head liaison heard my questions in the first telecon interview, it seemed he coached his next candidates to answer my questions. So, I had to spend time changing your questions to outguess the liaison who was hired to help my company.

    – Even though MBA’s tout contracting in part because it’s easier to fire contractors than employers, firing a non-performing contractor brings the focus on you, the onshore manager, for slowing down the offshoring effort. Even though I was personally working early and late hours in order to overlap with the staff in the other time zone, the chief liaison persuaded my boss I wasn’t communicating well enough with their staff. I had to “build up a case” not unlike the case I built up to fire a non-performing local.

    – After going through several duds and finally hiring/training a truly good developer onsite, the good developer went back offshore and became a different creature. Didn’t sign into instant messenger, ignored many emails, and replied to emails maybe once a day to make a very brief statement (e.g., “need help”) except for maybe one every other day Was the contractor making this one good developer work simultaneously for other customers? That’s my suspicion.

    – Over 2 years, we struggled to complete a number of milestones. In order to complete our work fast enough to meet various deadlines, my local staff and I ended up doing everything ourselves because the offshore pace was glacial. So all that effort spent “training” went to waste.

    – I wasn’t allowed to recruit locals here in the US (to “compete” with the offshore option), because the goal was to offshore.

    – For a SINGLE QA position, over the course of a single year we went through FIVE resources. (Changes in liaisons and QA staff.) How many times am I going to orient a new liaison or train a new QA staff member about our product?

    – My team succeeded despite these obstacles.

    As for my earlier experience closely watching a colleague offshore a project? HA! A team of 8 offshore staff were on track to complete in 10 months what I — upon seeing their glacial pace — did by myself in 5 months.

    General suspicions:
    – A good portion of the best-educated offshore talent came to the US during undergrad/grad school — and stayed. Who are you hiring overseas?

    – Too many people in low-wage countries turned to software development for the money (e.g., pays better than a medical degree, because medical services cannot be as “easily” delivered remotely) and not because it interests them. What do you think happens then? People who lack internal motivation to write elegant, maintainable code and to think about solving customer problems holistically produce crap. Just as you can bring a horse to water but can’t make them drink, you can try to teach “best practices” but they will not learn. Why not? Because they’re just not interested.

    – Talented offshore staff will hop from job to job in order to earn more and more of the money they truly deserve. That means — after you train anyone good and they learn some new, somewhat more useful technology — they’ll leave their present employer (your offshore provider) and thus no longer work on your project. To add insult to injury: because it’s difficult to assess technical talent and because the “rising tide lifts all boats”, even the relatively untalented staff find newer and better jobs — again often before they actually contribute anything after you’ve trained them.

    1. run75441

      my experiences:

      I do not do software.

      On one PCB, we spent $180,000 to get PCB on time to supply our customer. The problem(s)? I had 5 idiots trying to direct the manufacturer, the manufacturer would not run the new and the old board concurrently, they do not fully understand English, and we changed direction in a short period of time. hemanufacturer changes talent one a year.

      I now have local company talent who communicate with our R & D in sales and engineering. I have 13 million PCB to award worth roughly $10 million. I now have a chance.

  20. foo

    The irony is delicious.

    Yves is writing this on a taiwanese computer- motherboard, using chinese/malay made intel processors, using a korean or japanese LCD or CRT monitor (that is, ALL of them are) and japanese CD-ROM drive or even a DVD drive. I also presuming Yves wears clothes (most are made abroad) and wear nikes, reeboks, converse or any other brand of shoe (ALL are made abroad). I also presume Yves own a TV/Microware/DVD-Player/CD-Player (all are made abroad). Yves probably owns a car (nissan, honda, toyota are all japanese owned) and even GM makes many cars in Mexico and other places.

    Software offshoring/outsourcing is about .00001% of trade deficits and FACTORY closings. 6 million people have lost their FACTORY jobs and 40,000 factories have closed in the USA since 2001.

    Not a single one was because of outsourcing. Not a single one was because “software” or “call center” outsourcing to India as the term has come to mean.

    It was because of factories in China. These are not “outsourced” in any way.

    Our priorities are wrong. Manufacturing should be brought back to the USA. All crappy grunt jobs like finance (which adds no or negative value as we have seen this past decade) and grunt work SHOULD be outsourced immediately, since grunt
    work adds no value to the country. Manufacturing does !

    1. wunsacon

      >> The irony is delicious.

      What “irony” is there about not having much choice than to buy buying items manufactured abroad? That’s “irony”? Okay…

      >> Not a single one was because of outsourcing. Not a single one was because “software” or “call center” outsourcing to India as the term has come to mean.
      >> It was because of factories in China. These are not “outsourced” in any way.

      Not sure what Clintoneque word games you want to play by saying “as the term has come to mean”. But, then again, I’m not even sure what planet you’re from.

  21. dugsdale

    I’m really surprised that (as far as I know) no reporter (or even a student looking for a nifty MBA thesis topic) has created actual case studies comparing offshoring savings (or not) in select specimen companies: IT, manufacturing, whathaveyou. It would be SO interesting to see how the costs balance out, and where the savings (if any) goes. (Of course, there’s the question of what offshoring actually costs HERE, in terms of closed factories, lost payroll and property tax revenue and so on, which is why the idea of individual case studies appeals to me, incompetent though I am to create them).

  22. Kaleberg

    Actually, outsourcing isn’t just an international thing. It’s part of the overall managerifying and dumbing down of business. Look at Boeing outsourcing the 787 and trying to substitute contract law for engineering expertise. Look at Walmart deciding it doesn’t care what it stocks in its store; that’s someone else’s job.

    We stayed at a modest hotel that had outsourced its housekeeping, and the hotel management had no control of the order in which rooms were cleaned leaving them with lots of clean rooms and angry customers in the lobby waiting hours for the rooms THEY had booked to be cleaned.

    One outsources at one’s peril.

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