Is Labour Arbitrage Vanishing?
There has been extensive debate for some time now around the industrial trend for the past
couple of decades of North American companies offshoring work (sending work
outside of the country where the company is based), particularly manufacturing. Lately, however, the discussion has taken a hopeful turn
that companies will be moving work back to North America, or what has been
dubbed reshoring. The initial decision to move labour overseas had to do with
Labour Arbitrage – which is taking advantage of lower wages abroad,
particularly in poorer countries. Now, however, “as emerging economies boom,
wages there are rising” (The Economist).
Therefore, one of the determining factors favouring offshoring is quickly
becoming inadmissible. According to a recent article in The Economist, the pay for factory workers in China “soared by 69%
between 2005 and 2010” and have been increasing at a rapid rate of “10-20%
a year,” whereas manufacturing pay in America and Europe “has barely budged” (The Economist). Although this is a step
in the right direction for workers in developing countries, this is a sure sign
to take a step backward from offshoring, because “the gains from labour
arbitrage are starting to shrink, in some cases to the point of irrelevance” (The Economist).
Furthermore, the countries that still do offer low-wages often don’t
offer the same production quality. What is more, over the past decades, the risk of
business disruptions due to war or natural disaster has become a genuine
concern. On top of all of this, there is also the concern with the ability to
quickly respond to the demands of key markets, which the lengthy shipping time
for products does not allow; something that will be touched on a little later
in this post.
Finally, a major realization that many companies are coming to is that
offshoring hinders the necessary hand-in-hand relationship that production and
R&D hold. In the past it was believed that R&D was purely a part of the
intellectual property aspect of things, and was to be done in-house in the home
country. More and more, though, companies are finding that “manufacturing
somewhere cheap and far away but keeping research and development at home can
have a negative effect on innovation” (The
Economist). There is actually so much within the production aspect that can
shed light on R&D. Not to mention that if say Apple decided to change its
screen design at the last minute before production, its Taiwanese production
factories wouldn’t have to wake up their employees to come in in the middle of
the night to change it (yes this actually happened). One answer to this dilemma would be to
move the R&D too, but that can raise a very large threat of losing
valuable intellectual property due to theft or imitation (The Economist). If, ultimately, the majority
of production is outsourced or off-shored for North American companies, then
the selling product they actually possess is their intellectual property, so
that comes at too high of a cost to risk. This thought too will be discussed in
deeper detail later on.
Companies Moving Back Onshore: Reshoring
The result of these changes in the economic playing-field is that some
major North American companies have done the math and are noticing that
offshoring isn’t benefiting like it used to, so some of them are taking an exit off of this road and venturing in a different direction or down a different path. The next step in industry prosperity and economic
development must be to find a new way to reduce production costs,
whether that is reshoring or coming up with another solution to the problem. The Economist lists several companies
that have already brought plants and jobs back to America:
“Caterpillar, a
maker of vehicles that dig, pull or plough, is shifting some of its excavator
production from abroad to Texas. Sauder, an American furniture-maker, is moving
production back home from low-wage countries. NCR has returned production of
cash machines to Georgia [, and] Wham-O last year restored half of its Frisbee
and Hula Hoop production to America from China and Mexico.”
Other businesses that have made the leap to move business back home are
Google, General Electric, Ford, and Apple. But does a move back home really
mean bringing jobs back home? In a small regard yes, but sadly, many predict
that the offshored jobs that have been reshored will merely become automated.
So What is this I Hear about Automation?
Companies that do bring work back to North America are often doing so
with the intention to implement automation. So a return to onshore
manufacturing isn’t necessarily going to boost manufacturing job availability
on the home-front. For offshoring, the cautionary note was ‘don’t get into a
career field that can be done by someone else, somewhere else, for cheaper.’ It
seems that the new shifting industrial dynamic prompts a new cautionary adage: ‘don’t
get into a career field where a machine can do your job for free.’ In his book The Lights in the Tunnel: Automation,
Accelerating Technology and the Economy of the Future, Martin Ford predicts
that “offshoring is just the precursor to automation.” In an interview about
his book with Samson Okalow for Canadian
Business, Martin explained his thoughts further, stating that “jobs that
are being offshored are eventually going to be automated” (Oakalow). And indeed
this makes sense, because offshoring was initially a response to saving in
production costs, and what better way to save than to cut out the cost of
labour almost completely, and is this not the determining factor rendering offshoring
unprofitable anyway? An article in The
Economist speaks to this very issue, noting that offshoring is on the
decline because of rising labour costs, and notes that with “more automation
[…] labour’s share of total cost is shrinking anyway.” Martin predicts,
however, that this shift to automation won’t affect the developed countries
that are already outsourcing and offshoring, because the jobs here are already
gone; it will instead hit developing countries hardest, those that have been
benefiting significantly from offshore business. Because the rise in offshoring
manufacturing created more jobs in the service sector, Martin predicts that it
is only within this sector that automation will really have a disruptive
impact. Ultimately, the maturation process as Martin sees it begins with jobs going
offshore, and then “as technology advances, those jobs will be automated”
(Okalow).
What is Home Anyway?: Multiple Home-Based Companies to Compete for
Market Demand
I said that companies needed to think of reshoring, or to consider
another solution to the unprofitable offshoring problem. And indeed they have
put thought into another strategy that seems to be so common-sense that they should
have thought of doing this a long time ago, and indeed some companies have. It is not reshoring and automation,
although that will probably occur anyway in some degree, but is rather foreign
home-bases. This is not offshoring in the traditional sense, but is creating a
company base within another country purposed to generate businesses within that
country, targeting a specific market: it is “being ‘onshore’ in new places” (The Economist). In other words, this is
a company operating within other countries for the sake of that country and the
market is presents, not merely to exploit that market for cheap labour.
According to The Economist, “firms are rapidly moving away from the
model of manufacturing everything in one low-cost place to supply the rest of
the world.” This is because emerging countries such as China are no longer seen
as “a cheap manufacturing base” but are now seen as “a huge new market” (The Economist). Increasingly, the main
reason for multinational companies to move production is to be close to
customers in big new markets. Working from a local-base position, they can make
customized products and be able to respond more quickly to local demand.
Indeed, this is the key to being a truly international company, wading
in the water of many lucrative international markets. Siemens, the German
engineering firm, has been practicing this sort of internationalism all along.
Their chief executive Peter Löscher noted that “the ‘home shore’ for Siemens is
now as much China and India as it is Germany or America” (The Economist). He further states that “the notion of offshoring is
in any case an odd one, for a truly international company” (The Economist); in other words being an
international company shouldn’t be about exploiting workers in other countries
for cheaper labour, but expanding the marketability of the company and its
brand by accessing international markets.
Similar to Löscher, Pierre Beaudoin the chief executive of Bombardier claims that “the firm used to
focus on cost savings made by sending jobs abroad; now Bombardier is in China
for the sake of China” (The Economist).
To be fair, this isn’t really a new concept, it is colonization revisited. What
I mean by that is that just as empires started colonies in far-off distant
places to grow their empire and thus their control over larger portions of the
world and foreign affairs, so too is this shift a sort of industrial
colonization: the purpose of a foreign home-bases is to increase market exposure
and have one’s hand in a bigger piece of the pie. Being close to emerging
markets allows companies to respond to that market’s demands and cater to that
market’s needs, which can only mean an increase in revenue. It is an inflow of
cash from multiple markets without extensive shipping driving up costs and
slowing down product delivery. So, it would seem, that foreign home-bases are a
win-win.
But is it Too Late?: The North American Inability to Compete and Dependence
on Foreign Contractors
The real question though, is whether it may be too late for some
American companies to be able to compete against their emerging counterparts. Gary
Pisano of Harvard Business School notes that
even if wages in
China explode, some multinationals will find it hard to bring many jobs back to
America […] In some areas, such as consumer electronics, America no longer has
the necessary supplier base or infrastructure. Firms did not realise when they
shifted operations to low-wage countries that some moves ‘would be almost
irreversible.’ (The Economist)
As can be seen by the state of American personal computing companies,
there isn’t a strong enough presence and market anymore for American companies
to compete with their foreign competitors. For example, “Dell shut two big
American factories in 2008 and 2010 in a big shift to China, and HP now makes
only a small number of business desktops at home” (The Economist). Although there was recently some excitement over a new
manufacturing facility being built in Whitsett, North Carolina that will be
producing personal computers at ‘home’ in America instead of overseas, this
new manufacturing facility is not being built by an American company, but by
the Chinese technology group, Lenovo (The
Economist). The reason that Lenovo
is moving some production to America is the same as what I was just speaking
about above, the shift to foreign home-bases because of the desire to be close
to profitable markets. Being in the U.S., Lenovo “will be able to customise its
computers for American customers and respond quickly to them. If it made them
in China they would spend six weeks on a ship” (The Economist).
This is evidence that foreign companies are performing the same
industrial shift to employ business branches as a home-base within a host
country, allowing them to have a unique access to the market that they are
trying to target. But, what if, let’s say, the U.S. no longer has a market-base
for personal computers (having lost the majority of the market business to
conglomerates like Lenovo) then will American companies really be able to
compete?
Ultimately, if the majority of what is actually produced in America is
intellectual property, brand power, and an impeccable sales and marketing
force, how do we ensure the physical product? Do North American companies
really have the power that they think they do, and what happens if this
intellectual capital dissolves? According to Dr. Paul Craig Roberts, outsourcing
is
rapidly eroding
America’s superpower status. Beginning in 2002 the US began running trade
deficits in advanced technology products with Asia, Mexico and Ireland. As
these countries are not leaders in advanced technology, the deficits obviously
stem from US offshore manufacturing. In effect, the US is giving away its
technology, which is rapidly being captured, while US firms reduce themselves
to a brand name with a sales force. (Roberts)
We already know that foreign competitors are imposing on the market
through imitation of American designs, for example the all mighty iPhone. If
the core value of a company, like Apple, is its superior product, which is in
incredibly high demand (mostly motivated through a superior marketing force),
what happens to that company when there are 100 more designs just like it for a
fraction of the price? Obviously sales suffer, and product value decreases. As the Hira brothers (Ron and Anil) point out in their book Outsourcing America, there is “no evidence
that [American companies] will be able to outcompete local Chinese and Indian
companies, who are very rapidly assimilating the technology and know-how from
the local US plants.” In fact, the Hira brothers point out “Indian IT companies
have been consistently outcompeting their US counterparts, even in US markets”
(Hira’s), so there is nothing saying that the same can’t be true of the
technological market, and we are even seeing evidence of this now.
According to The Economist, American and European companies have made a mistake in outsourcing
as much manufacturing as they have, because this allowed other firms “a great
deal of insight into their processes” (The
Economist). After all, many outsourcing contacts and former suppliers quite
frequently turn into competitors. Samsung, for example, is a good reminder;
Samsung was once an outsourcing partner, but is now an "electronic giant" that "dwarfs its competition" (The Economist).
Another risk is
just become too dependent on foreign partners, for example, the relationship
between Apple and Foxconn. A billion dollar partnership can’t be taken lightly,
and there is no argument that the two companies are inextricably linked, and it has been so far a very successful partnership. However,
since reports of poor working conditions for Foxconn employees surfaced, this
tether may begin to closer resemble a noose. From mistreatment of employees, to
workplace violence, and even under-aged labour, this controversial partnership
runs the risk of creating a public distrust in the brand or a mistrust of the
company. The troubles being reported with Foxconn put Apple’s reputation
directly in the line of fire. When the major contribution that American
companies have to offer is a brand name and intellectual property, then an
advantageous relationship that suddenly becomes disadvantageous could mean a
significant blow to its sales, and if it is a company less stable than Apple,
it could mean a downward spiral towards the company’s dissolution.
Amanda Labelle
Sources:
“Here, There, and Everywhere” The
Economist, 19th of Jan, 2013. Web.
http://www.economist.com/news/special-report/21569572-after-decades-sending-work-across-world-companies-are-rethinking-their-offshoring.,
accessed 14th March, 2014.
Hira, Ron and Anil Hira. Outsourcing
America, American Management Association. May 13th, 2005.
“Home or Abroad?: Herd Instinct,” The
Economist, 19th of Jan, 2013. Web.
http://www.economist.com/news/special-report/21569575-companies-need-to-think-more-
carefully-about-how-they-offshore-and-outsource-herd-instinct. , accessed
14th March, 2014.
“Moving Back to America,” The
Economist, 12th of May, 2011. Web.
http://www.economist.com/node/18682182.,
accessed 14th of March 2014.
Okalow, Samson. “Technology Makes Life More Efficient, But Could It
Soon Take Your Job?: Too Much of
a Good
Thing,” Canadian Business, 11th April, 2013. Web.
http://www.canadianbusiness.com/companies-and-industries/automation-makes-life-more-efficient-and-eventually-it-will-take-away-your-job/,
accessed 14th of March 2014.
Roberts, Dr. Craig Paul. “The Offshore Outsourcing of American Jobs: A
Greater Threat Than Terrorism,”
Creators
Syndicate and Global Research. 18th of April, 2010. Web.
http://www.globalresearch.ca/the-offshore-outsourcing-of-american-jobs-a-greater-threat-than-terrorism/18725,
accessed 14th of March 2014.
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