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Why I believe the outsourcing trend is reversing

By P.J. Louis

Three events have occurred in the last four years resulting in a change in technology development and manufacturing. These include:

1. The recession beginning in 2008
2. The Sendai earthquake off the northeast coast of Japan
3. The earthquake-triggered tsunami hitting Japan

The three events combined have created an environment where new nations are emerging as potential providers of outsource services, former manufacturing nations like the United States are being flocked back to, and current providers of outsource services are outsourcing themselves.

These events have collectively caused a long-term shift in the outsourcing market.

The global recession highlighted weaknesses in the global supply chain as well. Countries that were major suppliers of critical components were all of a sudden no longer as reliable as they once were.

Even before the Japanese earthquake and tsunami, China and Taiwan were replacing Japan as a supplier of semi-conductor chips. Japan’s recent disasters created a greater opportunity for not only China and Taiwan but also other nations. (Read also: End of an era as Japanese earthquake forever changes face of semiconductor chip manufacturing)

The long anticipated fall of the Chinese economy and escalating costs of doing business in China, has forced American businesses to move their manufacturing out of China and back into the United States. India’s standard of living is rising and making it more expensive to do business in India.

The cost of labor in China and India is still much lower than the cost of labor in the United States. However, business realities are beginning to appear such as the cost and complexity of transporting goods, the environmental protection regulations in countries like the United States (think lead-based paint on Chinese-made toys), the rising cost of fuel, and high tech manufacturing automation in countries like the United States. The rising cost of fuel probably has had the greatest impact on overseas manufacturing because it simply is getting too expensive to ship material by sea and air.

 

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All of the aforementioned factors are causing companies to move back to their home countries despite an earlier Venture Outsource interview with Tom Donohue, president and CEO of the US Chamber of Commerce where Mr. Donohue said, “The bottom line: outsourcing has made the manufacturing process more efficient and productive, which has helped consumers and our overall economy. Outsourcing allows manufacturers to buy components from a vast array of suppliers, lowering costs for the manufacturer who is able to pass on the savings to consumers.”

Examples of companies moving some of their production back into the United States are Caterpillar, Master Lock and General Electric.

Caterpillar is shifting some of its heavy machinery production back to the United States. Master Lock’s automated manufacturing complex makes the Company a more cost efficient maker of locks than last year. General Electric has brought back some of its home appliances manufacturing back to the United States.

Caterpillar is investing $120 million in new equipment and upgrades at its Griffin Engine Center in Spalding County, GA. Approximately 200 jobs will be created as a result of this investment. It is not a lot of jobs but it is a start and the investment will have a trickle-down effect in Georgia. Yes, the company has outsourced thousands of jobs to India in the past few years; however, this investment is a sign the United States can still be competitive.

Master Lock has returned home more than three-dozen jobs to its manufacturing facility in Milwaukee. These jobs were in China and are now back in the USA. Again, it is not hundreds of jobs but it is a positive step forward.

General Electric is reopening its Louisville, Kentucky appliance plant fall of 2011. This will result in the creation of more than 1,300 new jobs. General Electric has been a huge outsourcer of jobs to nations like India and China for years. The reopened plant represents a small fraction of what General Electric sent overseas, however, the plant is a positive step.

Japan will continue to see long-term impacts from the tsunami and earthquake. Japan’s nuclear crisis is not going to be over for years. There is concern Japan’s food chain is being impacted by the nuclear radiation release and ocean dumping of nuclear waste; all of it as a result of the recent earthquake. This will definitely have an impact on chip manufacturing and supplying of advanced materials.

In the area of advanced materials and rare earths supplying, the United States respectively surrendered these industries to Japan and China due to associated costs and environmental concerns. Well, with the disaster in Japan and China’s emerging wrestling match with rising national, advanced materials supplying and rare earth mining may become economically viable.

Bear in mind, I am not stating countries like the United States will abandon outsourcing, but some level of manufacturing is returning to home nations.

Now is the time for businesses in countries like the United States to take advantage of the times and bring manufacturing back home.

While countries like the United States are bringing back manufacturing to their nations, countries like Mexico need to use this period in time as an opportunity to develop itself as a more productive outsource provider.

The United States is currently seeing a small but definite resurgence in the call center business.

Call centers were among the first portions of United States-based corporations that were outsourced.

For example, telephone companies began outsourcing operator services and customer care service to other United States-based companies in the 1980s. By the 1990s these same businesses began being outsourced to India. By the end of the 1990s India was the dominant provider of call center services in the world.

Computer information backup firm, Carbonite, has opened a technical support call center in Lewiston, Maine. The jobs created will be shifted from the Company’s current India operation. This center will be employing 150 jobs by the end of 2011.

This period of economic unrest is an opportunity for nations to reset their economies and manufacturing complexes and is providing a limited window of opportunity to bring back some industry.




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