Group 12, post # 4: Offshoring Going Out of Style

Although offshoring has been projected to continue to rise in the future, some large companies who used to offshore have started moving their services back to America.  GE, an original pioneer of offshoring, has moved its production services from China to Kentucky.  GE also shipped much of its IT services overseas, and is making a new engineering center in America to return those jobs to the US.  GE is not alone in moving jobs back to America.  In a survey of big American manufacturers by the Boston Consulting Group last spring, nearly two-fifths of firms said they were either planning to move or thinking about moving production facilities from China back home.

Companies have started this trend for both political and economic reasons.  The threat of losing jobs overseas has exerted a powerful downward pressure on middle-class wages, and offshoring has undermined support for globalization.  So, why is the pull from outsourcing jobs to low-wage countries starting to weaken?

The political mood may have influenced decisions to bring jobs back, but the main drive is economic. Manufacturing is becoming more automated, so labor makes up a decreasing proportion of costs. Also, for businesses that continue to rely on manual labor, labor costs have soared in formerly poor countries. Wages for Chinese manufacturing workers are going up by around 20% a year, faster than their productivity is growing. A stronger Chinese currency has added to the pressure on costs.  Consultants at both BCG and Alix Partners predict that by 2015 it will cost about the same for an American firm to manufacture in America as in China. Western firms are also finding that innovation is easier when manufacturing is in the same place as research.

The offshoring of services is still growing, however.  The reason why some companies want to expand their presence overseas is to be close to consumers in fast-growing new markets, not to exploit low wages as part of an offshoring strategy.  Companies who are bringing previously offshored services back home have learned that looking after customers and developing new IT tools are in fact a large part of business. As with manufacturing, the advantages of outsourcing services are falling. For an American firm, the gap between the cost of employing an Indian software programmer and the cost of a local one will fall to under 20% by 2015, predicts Offshore Insights, an advisory firm.

These are encouraging signs that offshoring may be dying out as a practice.  However, as skills increase in poorer countries, people in rich countries will find the global labor market ever more competitive.  Middle-class workers in the US will need to invest heavily to ensure a competitive workforce in the future.

SOURCES:

http://www.economist.com/news/leaders/21569739-outsourcing-jobs-faraway-places-wane-will-not-solve-wests