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Business for Engineers: Reshoring?

If you were around in the early 1980s, you probably remember hearing the term “rightsizing.” This referred to the process of reorganizing or restructuring a business by cutting costs, reducing the workforce, or reorganizing.

Later we saw glowing projections that the US — like all First World countries — would become an “information worker” utopia. It seemed you couldn't pick up even the most pedestrian magazine without reading about the blissful work environment that was coming. Hidden behind the nice words and predictions of leisure was the ugly truth of a massive shift in income distribution.

Offshoring promised to be the white-knight savior of many businesses, offering another way to reduce costs while removing ugly jobs from our midst. And it increased profits at a time when many publicly traded companies feared greenmail (purchasing enough shares in a targeted firm to threaten a takeover, thereby forcing it to buy the shares back at a premium).

Then the economic crisis hit. Middle managers found themselves on the street alongside the employees they'd “reduced” from their companies. Recovery for many has been a tough slog through endless applications and disappointment. More recently, there has been a break in the jobs market, and it isn't all “Would you like fries with that?” unskilled jobs.

Starting in 2010, some companies began the reshoring movement. Executives, who actually understood the implications of global wages and the hidden cost of offshoring, suddenly realized that the economic tide had turned. In the UK, some businesses brought manufacturing back home based on the cost of quality that was intrinsic to many of the low-cost manufacturing locations. Rework and product failure rates, combined with the hidden corporate overhead of managing factories in the low-skill countries, led executives to begin bringing the jobs back home.

In the US, the flight of semi-skilled and unskilled jobs happened in a matter of months in many cases. Orderly transitions took a year or less. Now the reverse trend is under way — jobs are returning to the countries that shipped them elsewhere — but all is not rosy.

The quick-to-offshore jobs (both unskilled and semi-skilled) are equally quick to repatriate. Training requirements are low, and costs are minimal. But such is not the case for many highly skilled and trained jobs that found their way offshore. For example, 30 years ago, the US had a vibrant and robust consumer electronics design pool. The natural consequence of moving manufacturing offshore has been the transfer of engineering skills offshore. Today, China enjoys a talented and skilled cadre of engineers totally conversant with consumer electronics design. Some consumer electronics design occurs elsewhere in the world, but it seems that the dominant locus of such design is now in China.

Thirty years of a gradual flow of engineering jobs to China (and elsewhere) cannot be easily reversed. What took 30 years to tear down will likely take more than 30 years to rebuild. Furthermore, it may not be possible to recover the totality of skills without governmental incentives.

Why are manufacturing jobs returning? One reason is that the economics of manufacturing labor have reversed. Where once companies could move manufacturing offshore with impunity, two factors now weigh against that trend: a new perspective on the hidden cost of offshoring and the decline of wages in the US (and other countries). For many manufacturing jobs, the differential between onshore and offshore has disappeared. Part of this comes from a better understanding of the corporate overhead associated with managing offshore facilities, coupled with a decline in real wages. In essence, the unit cost per delivered unit of work has normalized. Put another way, onshore laborers are now making Third World wages (though at a higher standard of living).

Perhaps the most troubling and limiting aspect of the reshoring movement in the US has been the lack of foresight from our government. It's an easy decision for businesses to move low-skill jobs around the world to exploit wage differentials, but moving work done by highly educated and skilled people takes time and requires strategic decisions.

The US government has been encouraging the return of manufacturing jobs, but where is the impetus to return engineering jobs to their country of origin? Why is the emphasis on returning manufacturing jobs? Is it just because of the number of unemployed workers? It's time for executives and politicians to demonstrate leadership, stop wholesale shipment of the much vaunted “information worker” jobs offshore, and plan an orderly return of critical engineering jobs. At the very least, we can make sure to develop any new capacity onshore.

This article was originally published on EBN sister publication EE Times .

7 comments on “Business for Engineers: Reshoring?

  1. Daniel
    May 15, 2014

    “Where once companies could move manufacturing offshore with impunity, two factors now weigh against that trend: a new perspective on the hidden cost of offshoring and the decline of wages in the US (and other countries). For many manufacturing jobs, the differential between onshore and offshore has disappeared.”

    Henry, is it really, doubtful. I think they are not counting many overheads like transportation; logistics, support etc. maybe there won't be much difference in terms of labour payments and government taxes.

  2. Daniel
    May 15, 2014

    Henry, one more think whether US have enough manpower to support these skilled jobs. If No means again they have to hire external peoples for a higher paid salary and perks.

  3. Henry Davis
    May 15, 2014

    @Jacob companies don't intentionally fail to account for the overhead costs associated with off-shorig very often. Usually, there's an unwritten assumption that an executive's time is to be accounted for in G&A and not assciated with a specific project. The same reasoning goes for individual engineers and their managers. Unless one is working for a company that requires and enforces the daily use of task-oriented time sheets, the company is chronically under-reporting the costs associated with outsourcing.

    Workers paid on an hourly basis are much more likely to have their costs correctly associated with the offshored activity. However, most professional organizations, regardless of the country location, do not as a regular matter of course, record the minute-by-minute (or even hour-by-hour) time of every salaried employee. These costs can build up amazingly fast – and they're often hidden in deparmental budgets that do not account for tasks.

        

  4. Daniel
    May 16, 2014

    “Workers paid on an hourly basis are much more likely to have their costs correctly associated with the offshored activity. However, most professional organizations, regardless of the country location, do not as a regular matter of course, record the minute-by-minute (or even hour-by-hour) time of every salaried employee.”

    Henry, I meant in total about such expenditure and overheads. Yes you are right about account such manpower expenses because accounting is not done in project wise when peoples are working across multiple projects.

  5. Eldredge
    May 16, 2014

    I certainly remember “rightsizing” and “information worker”, as well as, more recently, the touted conversion to a “service economy”.

     I think another factor that could contribute to onshoring is the risk of loss of IP. It is difficult to price on it, but it is a real cost.

  6. Henry Davis
    May 16, 2014

    @Eldredge Loss of control for IP of all kinds is certainly a factor. I worked as VP of Intellectual Propery for a soft processor core company. It isn't just the patents that get put at risk – it's also the know-how to design a thing to begine with.  

    How big can an IP cost get? Well prety big. “Rightsized” jobs from a few decades ago led to the quick diffusion of know-how into other companies' workforce.

    The opportunity cost can be very high. Comnanies that lose busiuness to patent and copyright infringement can lose hundreds of milions or even billions of dollars in profit in a few short years.  They may prevail in court, but the lost market momentum is hard to recover. I'd say in general, unless the infringer is put out of business, there is no recovery.

     

  7. Eldredge
    May 16, 2014

    @Henry Davis – Once the genie is out of the bottle, it's very difficult to get back – even more so when the IP is divulged to foreign entities, which is often the case.

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