February 7, 2013

Re-Shoring: Has the Hemorrhaging Ended?


For two decades the US has been hemorrhaging jobs to countries where labor costs were a fraction of the American costs – Mexico, South America, China, India, the Philippines, Vietnam, Malaysia, Turkey and even Russia.

Offshoring, the practice of moving work out of the country, has devistated the American labor force. High paying manufacturing, call center, and IT jobs have been hit hard by the flight to cheaper markets. Even the medical industry has not been immune, with insurance starved patients seeking low cost treatment and surgeries in far away places like Thailand, India, and Mexico.

China has been the primary beneficiary of manufacturing jobs and India has cornered the market on IT and software development jobs.

The wind is changing. The 20-year shift of jobs from the US and Europe to China has stretched China’s labor force to the limit and beyond. The Economist cites China’s one-child policy, labor costs, worker unrest, and rising transportation costs as key factors in the move to re-shoring. War and natural disasters have also disrupted the supply chains of everything from cell phones to cars and all of their component parts.

China is experiencing significant labor problems according to a recent 14-page report in The Economist (Jan. 19, 2013). As workers demand higher pay and better working conditions the paradigm is shifting. Apple computer doubled the pay of its factory workers in China after a rash of protests and suicides. Honda increased its workers pay by 47%. Foxconn, manufacturer of over 40% of the world’s electronics for companies including Apple, Dell, and Amazon, raised salaries by 70% in 2010 as a result of labor unrest in their Chinese manufacturing facilities.

With increasing demand for skilled labor in China, quality has also suffered. Employers have had to settle for hiring lesser qualified workers and instability as more highly skilled workers move around to higher paying competitors.

There are actual costs, like labor and transportation, but there are also hidden costs to the offshoring of jobs. GE “found that it was losing too much technical expertise” in its US IT department, making it difficult to respond quickly to changing needs according to The Economist report.

Some companies that offshored IT functions learned the risks of having these essential corporate operations oceans away. Companies that offshored software development frequently suffered the loss of synergy, learning that you get exactly what you ask for… which may not be what you really want. Something gets lost in translation. Software development is a collaborative process between the customer and development teams. Teams working together in the same place can feed off of each other’s and their customer’s ideas to innovate if they are at least awake in the same time zone…

Finally we have reached a tipping point where the cost of shipping jobs across the globe is more than the cost of doing the work domestically. For the first time in decades a company is actually opening a PC manufacturing facility in America when Lenovo, a Chinese company, will start operation this year in North Carolina. Late last year Apple announced it would begin manufacturing Mac computers in the US later in 2013. These are remarkable developments.

According to the report in The Economist, “the cost benefit that China offers is quickly eroding.” Many firms “offshored too quickly and too much” and are learning the “disadvantages of distance” … “manufacturing somewhere cheap and far away but keeping research and development at home can have a negative effect on innovation.” And then there is the little problem of losing intellectual property (stealing your ideas) in places where there is little or no protection.

The American workforce has changed too. The recession has forced wages and worker demands down. “Ford brought back production from China and Mexico to Ohio and Michigan, thanks to a new agreement with the United Auto Workers.

Wages have declined and the dollar has weakened reducing the cost of American products. At the same time, the American workforce is more productive and more flexible.

Transportation costs have also made it more attractive to produce large products like appliances and furniture close to market. IKEA opened its first North American factory in Danville, Virginia in 2008.

China will remain a huge manufacturing powerhouse for its own huge consumer markets but companies have come to realize that there are significant costs to offshoring or outsourcing everything.