OutSourcing? A thing of the past

Image

For the past quarter century, outsourcing and offshoring have been a focus of businesses and globalization. Companies in developed markets moved jobs away from their home country to company owned facilities abroad (offshoring) or to third parties (outsourcing) in developing countries. The reason was very clear, cheap labor would lead to cheaper manufacturing cost, and this would lead to more profit. Two prominent examples of offshoring include China, which is the “global product- manufacturing center” and India, “the global service provider.” However, due to the rapidly changing nature of the global economy, “offshoring” and “outsourcing” is becoming not as important as it was decades ago.

Image

Today, cheap labor is no longer the leading factor for global companies in choosing where to locate their businesses across the world. Nowadays, the emerging markets are growing too fast internally, and due to increased demand for labor, new labor laws are being created and the voices of the worker are being heard. The wage rate is rising in those countries. In contrast, wages in developed markets are starting to decline because of the depressed economic conditions for workers. New advanced technology is another crucial factor: the high efficiency and productivity of technology dramatically lowered the price and demand for cheap labor. Since labor cost is getting less important, other costs such as raw material, currency and tariffs are having a higher impact on the businesses’ choice of location.

Just as Zara’s vertical integration strategy (owning several layers in its value chain), which helped them to be 18 times more efficient than competitors. The old “de-verticalizing” idea is being partially revered with “re-verticalizing”. Companies now tend to make important parts of their product rather than buying them from third parties. This is because the close connection between R&D, design and marketing, manufacturing and assembly helps companies to respond much more quickly to market shifts and innovation. (in Zara’s case, the Fresh Fashion). In contract, the old practice of designing at home and manufacturing through offshoring slows the process of innovation, which is a critical factor in this rapid growing economy.

Image

As a result of the faster economic growth in developing markets than in developed markets, the advantage of offshoring and outsourcing are becoming smaller. Instead of “offshoring,” now many global companies are practicing two new strategies, “on-shoring” and “ re-shoring”.

On-shoring is  “creating new, additive economic efforts in emerging markets.” Companies are now trying to have a powerful new local presence, creating new R&A and other centers directly in the emerging markets. This is very different from “offshoring” where the companies export cheap products from cheap markets to expensive markets. For example, GM is the leading car-marker in China. They now sell about 20 percent worth of cars in the market, 11 assembly plants and 4 power train plants in China. This demonstrates the need to serve overseas markets.

Re-Shoring is taking overseas work back to domestic countries. Companies such as Apple, Google, Caterpillar, Ford, GE and Intel are adding plants and jobs in the U.S. The decisions are driven by the desire to integrate corporate functions for innovation since those companies are deeply rooted in their home countries. Also, “re-shoring” helps the domestic economy, creating more job opportunities for local people. 

Image

Advertisements

9 thoughts on “OutSourcing? A thing of the past

  1. This is a very organized and well-written blog. The graphs and charts you used really helped explain the new terminology you used. You did a good job of using class vocabulary and connecting this new idea of “on-shoring” and “re-shoring” to the terms we talked about in class. I think “on-shoring” speaks to the increasing global economy. Companies are realizing the economic benefits of expanding their markets internationally. I also think it its interesting how certain companies are benefiting from “re-sourcing.” This article speaks to the pros and cons of all possible options of manufacturing. It covers a lot of material in a concise and easy to understand way. The multiple ways of manufacturing show how companies need to evaluate their processes on an individual basis in order to choose the most effective method for their business. However, I thought it was interesting that while “on-shoring” and “re-shoring” have positive impacts, such as improving developing world markets and increasing domestic jobs, the main motivation for companies is completely profit driven.

  2. The idea that you present here is very interesting and gives a lot of insight into how the global economy is changing. I like how you referenced the reason why off-shoring and out-sourcing are becoming obsolete with the development of stranger markets and an increased focus on labor laws in emerging markets. This idea is very relevant to class especially since we have recently been discussing Zara and other companies and the advantages and disadvantages of outsourcing production. I really enjoyed the pictures and graphs that you utilized as this made the post far more interactive for the reader. Great Post.

  3. Good blog post! I like how you related a topic we learned in class and further expanded it through adding examples and opening up a new possibility. I think that “on-shoring” will greatly benefit American companies because it will open new markets and allow developing countries to purchase their products, however I am a bit wary about re-shoring. I read an article a very long time ago that brought up the idea that people in the U.S are unable to work in factory jobs because they don’t have the skill set.(http://money.cnn.com/2012/02/16/smallbusiness/manufacturing_jobs/index.htm) Less and less Americans go to technical schools because jobs in business and medicine are far more profitable. Since this is the case, I wonder how many people would actually be employed if companies started “re-shoring”.

    If companies were to re-shore how profitable will it be for them? Places like Foxconn are much more efficient and flexible and are able to crank out a product within days, whereas it would take weeks or even months to produce an item in the USA. Of course, I don’t agree with the labor laws in Asian factories however, if Apple or Ford’s competitors choose to remain off-shore, the competitors will have a huge price advantage because it is cheaper to be off-shore than in the USA. If companies do choose to re-shore, their prices will go up greatly and customers may not be as eager to purchase the product even though it is made in America. At the same time, Dell’s just in time manufacturing worked pretty well because companies that provided them with parts were very close to their company base in Texas. They were able to keep inventory low and had a negative cash conversion flow. In this situation, working in the USA worked for them. It will be interesting to see how the companies and economy will be affected by “re-shoring”. I would love to know your opinion of the subject!

  4. I really liked how you mentioned all different types of manufacturing in this post, from outsourcing to on-shoring, etc. To me I think that this new trend of re-shoring can be seen as a double-edged sword. I agree that one of the biggest problems in the US today is unemployment, and by companies re-shoring more jobs will become available. Despite the fact that offshore wages are rising, producing products overseas with lower costs makes these products cheaper for the American people. If companies decide to re-shore their manufacturing, products will become more expensive for Americans because of the higher wages in America, maybe to the point that people cannot afford products they once were able to. I think I still favor the side of re-shoring over outsourcing, but I thought looking at it as a double-edged sword would be interesting. Great post!

  5. This is a very interesting article about a topic that we just discussed in class. Outsourcing, as you said, has been a key to expansion by companies in the United States and other economic powerhouses. To say that outsourcing may be a thing of the past is a huge deal for the economy. There may be many reasons that these companies have started bringing more jobs domestically, but whatever the cause is, Apple, Google, Dell, and others adding plants and jobs within the US could be huge for the market. The real question that we need to ask after this article is: What are the underlying reasons that outsourcing may be smaller now than before?

  6. Great blog! The topic of outsourcing has actually affected me directly. When offshoring became popular among businesses my mother was working for IBM. One of the last tasks my mother and her coworkers did was teach the employers in India how to create and process computer codes. Soon after, he entire branch had been outsourced to India and they were out of luck. The problem with outsourcing is that although it allows for cheaper manufacturing costs it also creates an unemployment problem for the work force at home. Very few of my mother’s coworkers now have steady jobs today. Outsourcing is great in theory but it comes with a heavy price for many others. Now that businesses are realizing that outsourcing is much more difficult than anticipated, does that mean that they are going to start having a greater availability for the workforce in the US? And since it’s been so long since the beginning of outsourcing and the workforce has grown with newly graduated students, are those in the first generation that suffered from outsourcing out of luck?

  7. I like how relevant this blog post was to what we have been studying in class, it really added to my understanding of the topic of outsourcing. If it is true that outsourcing is on the decline, it may have a giant impact on our economy as a whole and more specifically the local job market in the United States. Will this cause more jobs to be kept in the U.S.? It would be a good thing if this happens, but then you have to think about how technology will influence the job market. Many jobs that were outsourced to other countries may just be replaced by machinery in the U.S. causing little influence on unemployment and the job market in the United States. It will be very interesting to see what is next in the trend of outsourcing, and how it affects the U.S. and the countries that have been relying on the jobs from outsourcing like India and China.

  8. Interesting blog post. First of all, great job relating it back to class material, you took your own spin on the ideas seen in class. The initial question about whether outsourcing is becoming a thing of the past is quite interesting in and of itself, and you’ve obviously done some research. However, I have a few questions myself. First, I don’t necessarily agree with the idea that cheap labor is no longer driving global companies anymore. I do think cheap labor is still a crucial driver of international industries, however part of the problem may be that the US has reached an outsourcing stalemate-we’ve outsourced just about all the jobs we can. Now, thats an over-exaggeration, but the like you pointed out jobs business can be more lucrative, but the traditionally “middle class jobs” have been outsourced, perhaps to capacity. Just a point to consider, but overall nice job!

  9. Great Article first of all! I believe it is true that outsourcing and offshoring is no longer what many transnational cooperation are doing now. As a citizen of Hong Kong, I visit China regularly. It is amazing to see the rate of how the economy is booming. It is quite possible that China’s economy growth will soon alter the way everything works. This makes a very important question to ask ourselves. Would it be possible in the near future that the current roles of the countries, and its workforce, will reverse? As Professor Kane mentioned in class, there are as much qualified skilled workers in places such as India then there is in many developed countries like the United States. Will there come a point where people in the developing world have to lower their wages in order to compete? what’s the effect on the economy? It is a very ambiguous future ahead.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s