The Washington Post had an interesting article highlighting how China’s outsourcing appeal is dimming in the wake of rising energy prices and a few other economic and social factors:
Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the “China price”– the 40 to 50 percent cost advantage once offered by Chinese producers.
Other factors are helping drive a flight from China: the increasing value of the Chinese currency, the yuan, vis-Ã -vis the dollar; a new labor law; the repeal of some export tax rebates; and inflation. Many companies say they are also motivated by a sense of patriotism and environmental concern.
I would also add something else from personal experience. At my first company, post-graduation, I worked in the most specialized department within IT. We thought we were immune to the outsourcing/offshoring bug that the rest of the company was catching. Well, unfortunately we weren’t. But luckily for me, I bailed out just 2 weeks before our department made the announcement that it was going to be sending jobs to Thailand.
These Thai workers were employees of our corporation, but far from integrated into our corporate culture. I won’t argue with the need to become more globally-oriented, but honestly, the company was just looking at the financial end of the deal. What they didn’t see was the pending customer dissatisfaction that would stem from communication barriers (timezone), language differences and the biggest of them all: employee retention.
The article talks about low-skilled manufacturing jobs in countries with huge worker populations from which to select. In the IT field in developing countries, experienced and skilled workers are hard to come by, and as my former company, and many others, learned, it’s hard to keep these workers when dozens or hundreds of other companies are looking for the same skill sets. When the accountants ran the numbers, I’ll bet they didn’t factor in the competition for these same resources. In the end, they’re still working in Thailand, but I’m positive that their initial profit margins are much different compared to the actual numbers they’re seeing today.
The China Numbers aren’t Adding Up Anymore
From the article:
The ripple effects have been far-reaching. The trade imbalance between the United States and China — a source of political tension for years — is beginning to right itself as Chinese exports fall and U.S. exports rise. Global trade routes are being transformed, suggesting a possible return to a less integrated world economy.
The model of outsourcing to China emerged at a time when oil was going for $20 a barrel. In the past few months, oil has been trading at about $110, and many experts say it will eventually hit $200.
This has led some companies to move production from China to northern Mexico, next door to the U.S. market. But others have chosen to relocate inside the United States.
So how much do you think companies spent to pack up their machinery and ship it across the world, only to have to ship it back or pay to build/buy it all over again? For many companies, that cost is the only thing keeping them in China (or other cheap Asian countries).
But one thing the article doesn’t mention that I think is very important is this: the United States is not the world.
Sure, our country spends HUGE amounts of money on stuff compared to the rest of the world, but recall two things:
- China and India make up a third of the world’s population
- China and India (and other countries) are coming into a lot of their own money
While the U.S. talks a lot now about frugality, saving money and retirement, the other half of the globe is swimming in newly found cash-flows that can let them eventually become the new America. They’ll find their mailboxes full of credit applications and advertisements for the latest gadgets, clothing, cars and home products, just like we did for the last 20 years. And it’s hard to tell someone with money to not spend it. That’s how America got itself into our current financial predicament.
So while America thinks it’s the center of the economic world, don’t forget that someone needs to produce products for the China and India markets, and those markets have the potential to dwarf the United States’ in just a few decades. Only companies with a majority of business based in America will bring those jobs back. I believe more and more companies will still move overseas to be closer to their emerging markets.