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Is Outsourcing Dead (or Just Napping)?

My father, when sizing up global matters over a martini or two, used to say “the pendulum always swings back.”

I think of that when we discuss the nature of outsourcing and offshoring today. For years, the pendulum swung to the side of the argument that embraced key benefits:

  • Labor-cost reduction
  • Proximity to emerging markets
  • Occasional tax or currency benefits

Now, the pendulum swings back the other way, at least partly. Bolaji Ojo pointed this out several weeks back when describing the insights he got from the famous McKinsey report. (See: Why Manufacturing Matters & Where Best to Do It.) He wrote:

Until I read the McKinsey report, I had been wondering if I wasn't mistaken in disagreeing with the massive, decades-long transfer — or outsourcing, if you prefer — of Western production activities to the Far East and Easter Europe.

Another data point
Then there was Gary Pisano’s articulation nearly four years ago, in which he argued that the further away manufacturing is from R&D, the more difficult it is to stay competitive. That's because designers can learn best from peeking over the shoulders of their manufacturing counterparts to see what's working and what isn't on the line.

Where's the pendulum today? Avnet Velocity vice president and EBN community member Wade McDaniel is going to give us a clear sense for that Tuesday morning (February 19, 8:00 a.m. PT). That's when he'll present his view of the state of outsourcing during a 60-minute webinar that I'll host.

McDaniel, a 25-year supply chain veteran, has an excellent perch from which to offer his assessment. I hope you join us Tuesday. Here's a link to the webinar information.

In the meantime, what's your take? Where is the pendulum on the outsourcing offshoring clock?

55 comments on “Is Outsourcing Dead (or Just Napping)?

  1. _hm
    February 15, 2013

    Pendulum is indded coming back. But there are many improtant lessons to learn at very high cost of people's misery. This time all concerned must learn new lessons and do not repeat history again. This is very encouraging news.

  2. mfbertozzi
    February 16, 2013

    @_hm: I personally believe you have outlined the right point; maybe it is not the matter of dead or napping, but it is the time to evaluate what the history within different sectors has brought in terms of positive or negative results achieved, at large.

  3. Ashu001
    February 16, 2013

    Brian,

    Your father is a very-very smart and experienced Man!

    Everything in life (and Economics is nothing different) tends to go in Cycles[Up and Down and Up again].

    Outsourcing falls in the same Boat.

    What Smart Observers would have noticed is because Energy Costs have fallen Dramatically in the US in last two years,And Wages are basically stagnant in the US.

    Also,we learn that for Just In time Manufacturing it now means R&D has to be very close to Manufacturing today.

    All this plays right into the return of Manufacturing Jobs back to the US.

    Let's bring the Jobs Home!

     

    Regards

    Ashish.

  4. Ashu001
    February 16, 2013

    Hm,

    Not so sure. The reason why Outsourcing must moved to China and Back to the US now is Economics.

    It no longer makes Economic sense to Manufacture many Products in China today(because Costs have escalated out of Control).

    That is why Manufacturing is coming back to the US Today.

     

  5. Houngbo_Hospice
    February 16, 2013

    It is indeed time to evaluate what different industries have achieved or gained with outsourcing. We know that many industries such as the electronics industry have benefited greatly from outsourcing due to the cheap labour in Asian countries such as China and India. But it is clear now that things are no longer what it used to be in those countries as workers are asking for better wages and compensation. 

  6. Houngbo_Hospice
    February 16, 2013

    “All this plays right into the return of Manufacturing Jobs back to the US.”

    Can we say that US economic glory days are still ahead? Does this mean that we should not crown China just yet? 

  7. SP
    February 17, 2013

    I think outsourcing is just napping. It will never die as long as Dollar has an comparatively higher edge on other currencies. Beause the bottom line of outsourcing lies there. Also the time difference when there is night in US its day in Asian countries so ina 24 hrs timeframe you can get done double of your work. So the time difference is always going to be there so manufacturing and other low end R&D work or maintenance work will always be outsourced

  8. Ashu001
    February 17, 2013

    Houngbo,

    I am not sure how familiar you are with the Global Electronics Supply Chain.But the fact of the matter is that India is not really a Big Cog in the Wheel.

    China,Taiwan,Japan,South Korea,Malaysia,Thailand and Singapore matter much-much more here.

    Rising Wages as well as Rising Energy Costs and Increased Protectionism all play a big role in Bringing back Manufacturing to the US.

     

     

  9. Ashu001
    February 17, 2013

    Houngbo,

    I am not sure how familiar you are with the Work of the Hedge Fund Manager-Hugh Hendry.

    He regularly lists the Reasons why more and more Manufacturing will have to return back to the US.

    Let me highlight them once again for you.

    1)Energy Costs-While China has to import most of the Crude Oil,Natural Gas(&increasingly Coal) that it consumes ;The US is more or less entirely self-sufficent in these Resources today.

    2)Pollution-If you have been to Beijing recently you would have noticed the Terrible Smog levels there;the major reason for this is that Car owners are increasing very,very fast and majority of the power Stations run on very Dirty Coal.In comparison most of America's Power is being shifted to run on Super-Cheap and Plentiful Natural Gas(because of the Shale Gas Boom).Also,more Americans are seeking to reduce the Miles(and Gasoline Consumption) because of the Recession as well as because Owning and Driving a Car is no longer a Fad in America.

    What this does is two things-Makes Americans more receptive to Manufacturing coming back onshore than in China and keeps our Current Account Deficits Low.

    3)Wage Costs and Demographics-Today Wage Levels in America are more or less stagnant for last three years while Chinese Companies have had to Raise Wages by Double Digit Rates every year .This means the Gap between American and Chinese Wages is closely very fast especially if the current Trend is maintained.Also,Demographics in China are terrible as the Number of Working Age Chinese has now Peaked and the Decline is gonna be Swift and very rapid Going ahead.In contrast,America will continue to see lot of Growth coming primarily from Immigration.

    4)Better IP Protection and Legal System-Self-Explanatory.

    5)More Flexible Economy ,Labour Laws and Dynamic Private Sector-Again Self-Explanatory.

    5)Geopolitics-The Chinese are surrounded with Enemies or Failed States.When you have a Neighbour like North Korea who needs Enemies???

    WHat this means is that the Chinese will have to spend more and more on Security Threats(real and percieved) in the coming Years.

    In contrast,America could very easily disengage from the Middle East and Europe and cut the Militiary Budget by 30% or so over the next Decade.

     

  10. Mr. Roques
    February 17, 2013

    Great insight! How about language? It hasnt been a limitation to go to China but is a complication that companies rather not have. Also, what about time difference? Managers having to wake up at 2am for a meeting has to be very tiresome.

  11. Ashu001
    February 17, 2013

    Mr Roques,

    Yes that bugs quite a bit(at the personal level) but at the Corporation Level its not that Big an Issue.

    Business has to be done and will be Done No matter what the cost is to people running the Business themselves.

    If they Burn Out-Hire someone Else.

     

    Regards

    Ashish.

  12. Daniel
    February 17, 2013

    Brain, we have to admit one thing that outsourcings are not that much attractive with those older days. But still there is no doubt that outsourcing has scopes because of various reasons. The major attraction is pooling of low cost manpower and process in Asian countries.

  13. Susan Fourtané
    February 18, 2013

    Mr. R, 

    Language is not a problem anymore in international business. I believe there is not one person working internationally that doesn't speak English, which has been the international language of business communication for more time than what I can remember.  And just in case there are several translation apps available in the market to assist anyone. 

    There is one mobile app with which you can speak to the device in English and it will simultaneusly translate what you say in the language to choose, let's say Chinese. Your business partner then replies in Chinese and you hear English. I just don't remember where I read about that a week or so ago. 🙁 There was a demo video, too. Maybe you heard about it? 

    I think at this point we have all adapted to work virtually in different time zones. So, instead of waking up at 2 A.M. for a meeting you might choose to stay awake until then, and go to sleep after the meeting. And well, rarely someone is going to have meetings at 2 A.M. every day, right? 🙂 

    -Susan

  14. rohscompliant
    February 18, 2013

    “A man who thinks is a man who drinks” Your father is a smart man. Yes, in my side of the business I do see some ODM & OEM's moving some of their mfg'ing out of China and back into the states. But I really do not see the pendelum swinging all the way back…….not until the POTUS & his administration adopts a 'pro business' attitude……..I think I have better chance of winning the lottery.

  15. mfbertozzi
    February 18, 2013

    @h_h: that's right, it is the reason I've mentioned within my previous post and I agree also in considering different regions, as per your thoughts. It would be great to write down a book for reporting from abroad, major experience and results achieved by adopting outsourcing paradigm, but maybe it takes time and as more the time goes ahead as more the market changes needs, ways to run and profits.

  16. Brian Fuller
    February 18, 2013

    @Jacob, I agree to be sure, but as automation continues relentlessly in factories all over the world, labor becomes less of a cost. Pick-and-place machines today have replaced most (and mostly feminine and small) fingers… The question then is how much longer will low-cost labor be a luring factor? 

     

  17. FLYINGSCOT
    February 18, 2013

    I reckon we are seeing a small swing back mainly due to times being hard and unemployment being high.  Once the recession abates and things pick up we will be right back chasing the lowest cost suppliers.

  18. Anna Young
    February 19, 2013

     Ashish, I agree for businesses location, it has to make financial sense. It's clear that manufacturing in China or India is losing its cost edges. Wages are creeping up in China whilst (as you noted) US wages have come down. Considering all other factors too i.e. the complexity of the global logistics, customers' perception and many other factors have all added to businesses considering returning manufacturing to the US. Yes the Pendulum will swing! How far will it swing?

  19. Ashu001
    February 19, 2013

    Anna,

    That depends entirely on Politicians and Lawmakers.

    If they don't do anything stupid(like Obama's latest plan to raise the Minimum Wage to $9/Hour) and revoke Obamacare in its entirety soon;I fully expect Most Manufacturing in China (which is uncompetitive there and is currently looking at options like Malaysia,Laos,Vietnam and Cambodia to instead come home to the US.

    I would like you to read and refer to an Interesting Old Opinion from the New York Times on this issue.

    http://www.economicpolicyjournal.com/2013/02/hot-new-york-times-right-minimum-wage.html

    Highly,Highly Recommended!

    This is the No.1 Reason why Unemployment in Europe(especially amongst the Youth) is High today!

    European Labor has priced itself out of the Global Market.

     

    Regards

    Ashish.

     

     

  20. Anna Young
    February 19, 2013

    Thanks for the link Ashish. Wage related issues, retraining/education all makes absolute sense. I hope the politicians and law makers as you mentioned will do what is right to attract manufacturing to the US in that area.  Europe on the other hand is crippled by huge austerity measures cuts. Until the governments in Europe comes to their senses, I don't see much activities in our labour markets.

  21. Ashu001
    February 19, 2013

    Anna,

    Europe has two BIG Problems.

    One is the One Size fits all Currency Area called the Euro-This is the Big reason why every country has to Toe the German Line of Austerity Measures as a way to Recovery.

    The Second is the European Parliament-I have never seen a more parasitical ,Meddling and Useless Bunch of Politicians anywhere in the world!!![And that is saying something!!]

    The Faster the Europeans get rid of the European Parliament (or astleast stop paying them Salaries and Benefits-This will ensure only those who Genuinely care about Eirope will attend it);the faster Europe will move towards Recovery.

     

    Regards

    Ashish.

     

  22. Taimoor Zubar
    February 19, 2013

    @Ashish: Europe also has to worry about countries like Spain which are in deep economic crisis and are causing a burden on other countries. They're the reason Europe's growth is hampered.

  23. Taimoor Zubar
    February 19, 2013

    “I reckon we are seeing a small swing back mainly due to times being hard and unemployment being high. Once the recession abates and things pick up we will be right back chasing the lowest cost suppliers.”

    @Flyingscot: I agree. If manufacturing in China moves back to the US, the Chinese companies are not going to shut down or sit idle. They will come up with ways to compete further and bring about more efficiency. Eventually we may see the pendulum swing back to the other side.

  24. Taimoor Zubar
    February 19, 2013

    “The question then is how much longer will low-cost labor be a luring factor?”

    @Brian: I don't think the cost reduction is just because of labor in the case of China. In most cases, the cost reduction has come about because of large scale manufacturing and thereby achieving economies of scale.

  25. Ashu001
    February 19, 2013

    Taimoor,

    Spain's Stupid mistake is to be still stuck inside the Eurozone (inspite of the fact that its clearly not working for them)and especially the Euro Currency Union.

    If they simply leave the currency Union and get their own currency[Similar to the situation of the British];their situation will improve by between 30%-60%.

    You need to take drastic action and that can only happen when people get sufficently angry.

  26. kilamna
    February 19, 2013

    I generally look for a 'follow the money' link. Since most western management are bonus'd based on quarterly or annual performance they will optimize those metrics. In tech (specially semiconductors) we know that a cutback in R&D will be disastrous some years later, perhaps as early as the next cycle, or the following one.  If CEO et al bonuses, specially if heaviily weigheted with stock awards which can only be cashed 10-15 years after the award, we would see a more responsible set of decisions. Top management being rewarded on quarterly or annual perfromance is asinine. I can see a machine worker being so short-term linked, sales people too.

    Outsourcing is not dead. But accounting for it must also be long-term. Once something is outsourced an organization starts diluting its jewels, and heads twoards hollowness, eventual 'death'.

     

  27. Susan Fourtané
    February 19, 2013

    Ashish, 

    A change of currency would be super expensive for Spain. That would be a bad allocation of resources. Instead, with that money they could solve some social issues. 

    -Susan

  28. Ashu001
    February 19, 2013

    Susan,

    You need to think this through clearly.

    If Spain does abandon the Euro and move to the Peseta;the Biggest advantage they will have is that they can inflate and devalue their massive Debt Burdens instantly[Held primarily by German and French Banks].

    Of course they would have to resort to Capital Controls (like in Iceland) initially but teh Economy would actually recover much faster and start booming.

    What you are making the mistake of thinking that the New Currency will be valued the Same as the Euro.

    It won't.

     

    It will probably end up as 0.5 Euro.

    That will make a massive change to Spain's current terrible Economic Predicament.

    They will be entirely in control of their Own Economic Situation than having to Keep Begging Germany,Finland,Luxembourg and Holland for Loans.

     

  29. Taimoor Zubar
    February 19, 2013

    @Ashish: This is precisely what other Euro members have been telling Spain to do. And since they're the ones funding Spain's debts, they do have the right to dicate policies.

  30. elctrnx_lyf
    February 20, 2013

    The companies shall not reward individual managers or product teams to make decision on outsourcing. Instead it should be a centralized team should make decision on what needs to be outsourced. This makes the organization successful and sustainable in the long term.

  31. Anna Young
    February 20, 2013

     Ashish, I hear you. However, the complex situation in the Eurozone as you're aware is not about the single currency alone. Each countries e.g. Greece, Spain etc. have its own peculiarities and at the same time share challenges of dealing with the consequences of sustained large deficits and a protracted banking crisis. I think what is needed is an overall effective plan for European economic governance. The tools are readily available. Europe has the capacity to fix the Eurozone, if all the leaders can work together.

  32. syedzunair
    February 20, 2013

    Taimoor:

    Is it only Europe that is being bogged down by countries that are having difficulties? Or is it a worldwide trend where the giants are bailing out smaller countries?

  33. syedzunair
    February 20, 2013

    tech4people:

    I think coming out the Euro would be their worst mistake. If they come out they will have nobody to save them. If they cannot perform well with the Euro what guarantee do they have that would perform well on an independent currency?

  34. syedzunair
    February 20, 2013

    Susan:

    A change of currency would be expensive as well as unfruitful. The allocation of resources would be a problem and so would be surviving without the help of the European giants. 

  35. Susan Fourtané
    February 20, 2013

    Ashish, 

    You probably know better. This is your strong topic, not mine. I didn't say that the peseta would be valued as same as the euro. I just said it would be expensive for Spain to change currency again now. Also, it's like giving a step back. And what if it doesn't work? Should they come back to the euro or what? 

    -Susan

  36. Susan Fourtané
    February 20, 2013

    Syed, 

    I think it's worldwide, not only Europe. But Ashish likes to be against Europe. 😛  

    -Susan

  37. Susan Fourtané
    February 20, 2013

    Syed, 

    I agree with you. I also think it would be a mistake if Spain comes out from Eurozone now. But as I said earlier, this is not my strong topic. I don't even know why we are discussing about this here. :/ 

    -Susan 

  38. Susan Fourtané
    February 20, 2013

    Syed,

    Yes, expensive and unfruitful. I agree again. 

    -Susan

  39. Ashu001
    February 20, 2013

    Syed,

    Even if they do leave the Euro,The IMF will be their to support them!

    Don't worry about that issue!

    Right now,the Spanish Economy is on Death Bed.

    Drastic Solutions are essential and this is one which has the Highest chance of working-Look at How Iceland is rebounding after it Defaulted on the Debt it owed to Britain and Holland!!!

     

  40. syedzunair
    February 20, 2013

    Susan:

    Probably, true.

    Ashish, must have his reasons for not agreeing with us. I am sure it has nothing to do with the place. 

  41. syedzunair
    February 20, 2013

    Susan:

    It seems like it. I wasn't good with economics either. Let's rest this one here. 

  42. syedzunair
    February 20, 2013

    Susan: 

    Yet again, we are in agreement. 

  43. syedzunair
    February 20, 2013

    tech4people: 

    Yeah, it seems like everybody is counting on the IMF to bail them out. 

    Their economy is on the deathbed and I agree they have to take drastic measures to revive it. What I had in mind was to somehow churn up the wheels by manufacturing or the service industry. Is it possible? Or have they gone to the point that inflating currency is the only solution?

  44. Susan Fourtané
    February 20, 2013

    Syed, 

    Yes, I know. I just changed the smiley to a 😛 

    -Susan

  45. Ashu001
    February 20, 2013

    Syed,

    In case you Don't know this-

    One in Three Spanish Residents of Working Age DOES NOT have a job today.

    Also,

    More than One out of every two Young Spanish Citizens DOES NOT have a job today.

    And if you thought the Government would be in a position to help them out by Giving them Unemployment Insurance or somehow Generating more Jobs-You thought wrong.

    Why is that?

    Because of their Insurmountable Debt Burden of the Spanish Govt.

    Debt that is denominated in Euros and owed to German and French Banks.

     

    If they do Default on their Debt and move to the Peseta,that would mean that their Debt Burden would fall by more than 40% today!

    Which immediately frees up resources for Growing the Economy.

    Of course they have to do it in organized fashion with Backup from the IMF like how Iceland did it.

    But it would work for Spain.

    Spain would be booming again within 2 years of this happening as Exports would soar dramatically and the Service Sector would pick up too.

    The time for this drastic decision is today.

    Otherwise Spain will see the Mother of all Revolutions probably marked by Tremendous Bloodshed to achieve the same Target-Devaluation.

     

  46. syedzunair
    February 21, 2013

    tech4people:

    You may be correct. Like, I said earlier I am not a pro on economy and financial policies. 

    However, what clicks me is that they can't produce any jobs today because of the burden on them by the banks. If the shift to the Peseta their debt would fall? You are saying that the Peseta would be a currency valued higher than the Euro?

  47. Ashu001
    February 21, 2013

    Syed,

    No the New Currency WILL FALL against the Euro.

    Let me give you an example-Let's say Spain's Debt held Externally by Banks in France and germany is 100 Billion Euros.

    The way they would tackle the situation is by first ;Annoucing Aggressive Capital Controls[To prevent any Money from Exiting Spain];then they would re-introduce The Peseta as the Currency in which all our Debt which was previously denominated in Euros will now be Denomiated and repaid in Pesetas(which will start trading in Global Market on 1:1 with the Euro).

    Instantly,there would a be a rapid Devaluation of the Peseta in the Market of close to 40%-50% or so.

    Which would mean 1 Euro would become worth about 2 Pesetas.

    This will instantly HALVE the Debt they have to repay (in terms of Euros).

    Of course,there will be Negative consequence of such a drastic move.

    1)Spanish Inflation (on Imported Products) would be much higher.

    2)Spain would lose access to Global acccess Temporarily and be totally Dependent on IMF Aid in the Interim period.

    3)Banks in Germany and France will see massive Losses as well as some Banks will fail;this could also end up putting the very existence of the Euro under threat.

     

    But the impact on Spain's Economy (to be freed off all that Debt) would enormous.

    The Spanish Government would be free to not only Print its own currency but also to Lend money wherever it sees fit(as against now where Germany and France are calling the Shots).

     

    This Debt Burden(on Spain)needs to be wiped out sooner rather than later.

    Else Spain will never Grow again and the Human tragedy will continue to escalate out of all proportion.

     

  48. Daniel
    February 25, 2013

    Brain, would you think that labour costs are the only factors, NO. There are different other costs like working cost/running cost and various other overheads like tax, availability, transportation etc can make the process tidy.

  49. Mr. Roques
    February 25, 2013

    How much does closeness to other suppliers affect the decision? If you had the same factories and (trained?) staff from China (with the same costs) in the Western Hemisphere.

  50. Susan Fourtané
    February 26, 2013

    Ashish, 

    I don't think the peseta will be values as the euro. I just think it's expensive for a country to change currency again. Well, as I said, you know better about these issues. 

    -Susan 

  51. Ashu001
    February 26, 2013

    Susan,

    I heard your rationale out the first time.

    What you are missing out is on the GIGANTIC Debt Burden that the Spaniards and Italians have taken on(not to mention the Greeks) which have no hope of Paying back.

    Austerity is NOT Working.

    Atleast that's the conclusion from the Italian Elections.

    To get an Idea how crazy the Debt Burden of the Italians and Spaniards is today.

    Check this chart out from the ECB themselves.

    http://www.ecb.int/press/pr/date/2013/html/pr130221_1.en.html

    This is Debt which just the ECB holds.

    Then you have the French,German and Dutch Banks….

    Now you know why the Euro has collapsed in the last two days!!!

    Now even the French Industry Minister wants to Devalue the Euro…

    I feel sorry for Taxpayers in Germany,Finland,Holland,Luxembourg and Austria.

    You guys are gonna lose .LOSE BIG in the coming Debt Restructuring Process.

     

    Regards

    Ashish.

     

     

     

  52. Susan Fourtané
    February 26, 2013

    Ashish, 

    Oh, well. I am one of those tax payers. 🙁  But you know what? I have some other more important personal issues to take care of and solve instead of solving the economy of Spain. 

    -Susan

  53. Ashu001
    February 26, 2013

    Susan,

    So sorry nobody asked you before handing your hard-earned Euros over to Spain and Italy.

    Lol!!!

     

  54. itguyphil
    February 26, 2013

    I agree. The best management teams involve more people in the process of making decisions. This way, there is no chance to say you were ignorant of the major concerns.

  55. Ariella
    February 26, 2013

    @tech4people maybe we'll have to go back to bartering.

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