Have you heard of the newest trend sweeping through corporate America? After nearly three decades of worshipping at the altar of “outsourcing” – moving production out of the United States attracted by lower wages and lower taxes in the foreign companies – American managers are now switching to “insourcing”.
A few years ago, I worked with Jack Welch, the legendary CEO of GE, then America’s largest corporation. Jack was at the vanguard of the outsourcing movement. Together with the mantra: “shareholder value”, it dominated boardroom thinking in manufacturing America. This March, Welch’s successor Jeff Immelt, writing in the bible of corporate America The Harvard Business Review stated: “outsourcing is quickly becoming outdated as a business model for GE Appliances”.
There is a fascinating article on this global trend in this month’s Atlantic magazine featuring China-based, Irish entrepreneur Liam Casey; but the bones of the argument are pretty straightforward and the implication for also Ireland quite clear.
Increasingly, outsourcing is costing American corporations because the initial massive cost savings in hourly wages is now not so appealing and the losses in terms of production productivity and the expense of setting up operations in foreign countries are beginning to make huge manufacturers like GE bring their production back home.
The big changes in the global economy of the past five years are changing the long-term view of outsourcing’s efficiency. We have seen a huge increase in the price of oil, obviously making the cost of shipping goods halfway around the world very expensive. Second, the collapse in the price of gas – due to the discoveries of the shale gas potential of the US – makes energy-intensive production in the States much cheaper. Natural gas is now four times cheaper in the USA than Asia.
Third, Chinese wages are rising rapidly as their economy booms and labour shortages emerge. Their wages are now five times the 2002 level and for the past two years alone have been increasing at close to 20% per annum. In the US, the fall in manufacturing jobs over the past few years has caused trade unions to change work practices so thoroughly that those movements, once seen by management as an impediment to investment, are now seen as willing allies.
Finally, as labour productivity in the US has improved – due to a combination of more intensive technology and cheaper and more efficient energy practices – the overall cost of making things in the US has fallen, while the amount of stuff the average American worker makes per hour is now on the rise.
This final point means that advantages such as low wages or their fiscal equivalent low taxes aren’t as attractive anymore.
Also, many American corporations have had the gradual realization that when you take the production part of your operation and put it in a foreign country, other skills leave too. Lots of industrial innovation stems from people being together, collaborating and talking to each other about how to best change this or that method. When you separate workers from other parts of the business, this communication stops and the ‘learning by doing’ aspect of innovation tends to stop with it.
This debasement of the manual part of production is the type of thing that MBA business books are full of, as though producing the actual stuff can be divorced from the marketing and selling of it without any repercussions.
Manufacturing by textbook is a bit like reading a good sex guidebook; studying it and learning all the different positions, but without actually having sex. And we all know that’s not the way forward!
Speaking of glorious human urges and human nature, the central human weakness for going with the herd – or as it has become known in Ireland – “group-think”, comes into play too. Managers tend to behave in the same way as Irish house buyers did in the boom. The “if everyone else is doing it, it must be right” approach to management tended to see them all looking to outsource first and think later.
The effects of this constant outsourcing on the American industrial working class have been traumatic. This was particularly evident in the period 2000-2010, coincident with the rush to China.
Now, however, if the huge in-sourcing drive we are seeing in the likes of GE (which has just invested close to $1 billion in developing an old relic of the 1970s called Applications Park), we will see a change to all that.
It is still very early days but trends are beginning to become evident. The notion that the US will export jobs, in the process hollowing out its industrial working class indefinitely, simply makes no sense. All the huge changes in the energy and labour costs at home and abroad, making America much less expensive than it previously was vis á vis foreign countries, changes the game. The fact that the CEO of its biggest industrial conglomerate is talking about bringing the jobs back home suggests the mantra of Apple, “designed in California” but made elsewhere might not be the slogan of the future.
What are the implications of this shift for us? Well, taken together with the backlash against tax avoidance from the likes of Starbucks in the UK last week, it suggests that we have to be vigilant. In the era of outsourcing we cut taxes, allowing us to garner good pay rates and conditions in the multinational sector. This was paid for by higher indirect (and direct other) taxes, but the local low-tax strategy played directly into the global outsourcing narrative.
If the global narrative is going to change, what should we do?
It means we probably have a few years to change, not much more. We should run tests about how the overall profitability of US multinationals would be at 20% or 30% tax rates if that were to be imposed by the EU. We could also use the next few years to try to create stronger links between the multinationals and suppliers at home, which might make the insourcing decision more difficult. We could also try to divert — through incentives — as much of the multinational budgets now as possible to local R&D and other activities which might make the multinationals think twice about leaving.
This all takes a bit of vision in government to see what is coming around the corner and a whole-hearted from Irish entrepreneurs to act swiftly. That’s not beyond the realms of possibility, is it?
David Mc Williams new book The Good Room is out now.
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Thought I would get in ahead of you there Adam! Bully beef for me!
Hi David,
Re your last point; hopefully we could also get our guys to insource from India back to Ireland. Also, we could get the US to use Ireland as a half way house and not fully insource all the way back to the USA but continue to use Ireland as a Staging post with the flow going in the oppostite direction as your article points out.
Michael.
Is it correct thinking that a trend to insource will put more money in workers pockets so they can buy the products they are making? I think this was not a consideration when big corporates outsourced in the first place, but are they considering it now?
Reminiscent of the IT world in the mid-90’s. the mantra was OUTSOURCE everything and DOWNSIZE until it was realised that that meant losing day-to-day contact with the skills necessary to even manage the outsourcing. So ‘downsize’ became ‘rightsize’, where a hybrid between the two became a common compromise. Its happening again with the current group-think lurge to ‘the cloud’. Those who fail to learn from history………
I suspect a hybrid compromise is how the industrial process will end up also.
Downsizing, outsourcing and sex guides – it must be holiday season. Cheers to all for 2013.
The arguments for insourcing in the manufacturing sectors are clear enough. But what will be the impact in areas like IT/media – Facebook, Google, PayPal, etc – and financial services? Of the 755 foreign companies listed on the IDA website, US companies account for about half. IT makes up 20%, financial services about 30%. But I’ve no idea who are the biggest players in terms of impact on our economy.
http://www.idaireland.com/search-companies.xml
Now, maybe Waterford Crystal will see the light and put Waterford back into the crystal.
“Manufacturing by textbook is a bit like reading a good sex guidebook; studying it and learning all the different positions, but without actually having sex. And we all know that’s not the way forward!” Brilliant analogy. It has been my observation that countries that outsource or reduce their manufacturing contract or lose their power and if the US decides to in-source then it is one of their smarter moves. When you think that the industrial revolution started in Britian and it was the superpower then, which then went to the US which now passed to China, there appears to be… Read more »
Good article. Yes indeed, Ireland needs vision and foresight to navigate through the next few years when the in-sourcing trend really takes hold in the US. We need to look once again at our natural comparative advantages. One potential advantage is our abundant water resources. Water is becoming as important as oil and, in future, economies with an effective water infrastructure will remain very attractive investment locations for water intensive industries such as pharmaceuticals. Ireland needs to ensure that it optimises the significant amounts of rainfall it receives each year and to address its creaking water infrastructure which is subject… Read more »
Government has nothing to do with the vision, it is companies who have the vision and who act.
Government taxation is just one input into their calculations what to do in the future.
Companies produce and governments spend.
David’s comments at the end with testing higher taxing are just plainly wrong.
The best government can do is to move away from companies, charge them as less as possible taxes and leave them to figure out is it better to insource, outsource or whatever.
Neither David, nor me, nor government can possibly know what is best for economy.
David, do you seriously believe that the ‘shower of idiots’ we have for a government will do anything like you suggest??? They couldn’t organize ‘a piss up in a brewery on a Saturday night’! All they ever do is talk sh*te along with they also coming up the stupidest ideas ever. The same would have to go for ‘management’ in this country. They simply haven’t a clue!!! and that’s one of the main reasons as to why so many places have closed down over the last few years!! You’re simply wasting your breath even talking to them, because they just… Read more »
The US private sector is adapting and getting itself back in business. Hiring practices have improved as a result of the higher unemployment rate, and thinner margins. US firms are hiring energetic eager young Americans who are applying themselves. Energy is working in favour of US manufacturing. Technology, is helping them better allocate investment and control costs. The only thing that remains unresolved is the debt load. But in this respect Americans are dealing with non-public debt, even if they have not yet fixed public debt. And on the issue of public debt they are talking about the issue. Thre… Read more »
What IS more real is the tightening of links between marketing/ sales/ design and manufacturing. Also, low cost reconfiguration that automation allows means manufacturing costs become independent of batch size. Products can become more customized with no added cost.
Basically, outsourcing is no good for customizing. The problem arises because the builders are too far from the market – culturally and distance wise.
This brings me to Ireland. We are closer culturally – perhaps. We need to think in terms of low batch size fast turn around methods. BioTech/ Software etc that do not rely on heavy logistics/energy is key.
Would it be smart so, to “insource the extraction of our natural resources Oil, Gas and now Gold” for the benefit of the Irish People instead of the Private Corporations?
After all it is only knowledge and expertise that the Private Corps have that we don’t have, oh, and of course the will to want to keep the resources for our people and not give them away in under the table, dirty deals for personal self interest by our public representatives!
Maybe we should consider insourcing food production and our once strong sugar industry?
Just saying!
Tortoise
Out-sourcing and In sourcing reminds me of Fast and Slow food .When it is fast it sticks in your stomach .When it is slow , it spreads around.
The experience of slow food is more rewarding and reveals new taste buds you never had before.
So much for in sourcing . So much for that moment when the Tortoise beats the Hare in the race.
Great article. We could do with some in-sourcing here too. Not that we ever had that much industrial activity. As someone mentioned, bring back Waterford Crystal. One thing is sure. There are too many people here in third level education, who are simply not suited to it. They’d be better off learning a trade or doing an apprenticship or working productively in a factory down the road makign useful things (please, only useful things) that don’t have to be shipped in from China. Ha-Joon Chang made the point at Kilkenomics a couple of years ago about the educations arms race… Read more »
We should start to make a difference with the education system from the age of five. Put subjects on the curriculum for a modern age. languages, computing electronics science. My ten year old son is given books to read at school that are least three years behind those he reads at home. He is keen on sports but plays none in school. He can find his ways through many levels on complex computer games but does no computing in school.His schoolwork is broadly the same as mine was almost 40 years ago. We live in a completely different world. I… Read more »
Technically Ireland is way behind in Internet services. You can pay 50-70 Euro for a 7M download 0.4M upload service. In Canada…50M download/ 3M upload is 25 Can$, 19$ for a nation wide Canada/US phone local rates.
We are in the dark ages. Lot to be done here an let’s stop kidding ourselves that we have 21st Cen relevant infrastructure.
This all takes a bit of vision in government to see what is coming around the corner and a whole-hearted from Irish entrepreneurs to act swiftly. That’s not beyond the realms of possibility, is it?
I’m afraid it is David.
If you move any production, managing, storage to another country, then the government of that country benefits in terms of taxation i.e. gains a tax. Your countries government loses that tax. So. Your government increases tax in other areas to make up the loss. The loss is to the worker, manager, spender in your country. So he doesn’t spend, so the tax taker at home doesn’t get money from him, because he’s out of work. Additionally, in the West, the home government has to support him so he can eat, sit at home doing sod all. So Outsourcing benefits, short-term,… Read more »
So first we’re being persuaded to support the removal of our right to set a low corporate tax rate, and now to support the US corporates taking their jobs back to the US.
The damage to the US economy cannot be rectified just by calling home those global jobs. The NAWAPA 21, and an Irish Renaissance just for example.
In other words globalisation had failed spectacularly and it’s amazing what you can find in the cupboard if you look long and hard enough
Fascinating dialogue between Michael Kirsch and Paul Gallagher, from the excellent link Bonbon has sent! As an introduction briefly I would like highlight two concepts of their conversation. One the concept of education, that really should focus over every aspect of life, from responsible procreation, to responsible living, to responsible production of goods, to responsible consumption, to responsible care of humanistic values. The other concept that I would highlight is the one of water conservation, as vital; because water is a sacred element, and even in the XXI century full of fascinating mysteries, and possibilities. IRISH MYTH NUMBER 1 We… Read more »
Insourcing is also being driven by the rise of the machines. Robots don’t have unions or need tea breaks and if you are going to increase automation in your manufacturing process why do so in China? The type of jobs likely to arise from this trend are more to do with maintaining the production line:
http://www.youtube.com/watch?v=6KRjuuEVEZs
> American managers are now switching to insourcing. Only companies that see the calculation in that and can outcompete the competition. Otherwise no. Government stimulus for such domestic employment can also drive such decisions. What such does is make harm somewhere else as somebody needs to pay for it. > The “if everyone else is doing it, it must be right” approach to management tended to see them all looking to outsource first and think later. Stupid companies will just bankrupt, as 3 out of 4 (or whatever ratio is) always do. This will release resources to the econonomy, making… Read more »
Never underestimate 4 more years of Obama – increases in corporate tax rate, marginal tax rate increases for the rich etc to undermine the best laid plans of mice and men. Don’t know if there is any truth in this story. From what I can see US companies will be keeping their capital anywhere except the US.
If the jobs are outsourced to low wage economies neither the unemployed locals nor the underpaid overseas workforce can afford to buy any of the corporate sh*t without borrowing unsustainably. We need to increase the overall size of the real economy by doing and making more of the things that we really need and that enhance our lives. We also need to keep inequality to a tolerable level to prevent it having a negative effecty on the overall economy. Finally we need to treat derivatives like pharmaceuticals, chemicals and engineered organisms and be very careful about releasing them into the… Read more »
Well, it looks like the Saxo Bank 10 outrageous predictions for 2013 have been released.
http://blogs.marketwatch.com/thetell/2012/12/18/gold-at-1200-crude-at-50-and-other-outrageous-predictions-by-saxo-bank/
Bad news it would seem for Eurozone financing. DAX to fall. Spain to head into a bailout. They expect some panic to come as a result of developments in Italy and Greece, and the EUR/CHF exchange rate. (No mention of Portugal, Cyprus, Belgium or France).
Last years Saxo Banks outrageous predictions.
It looks like they proved too outrageous in retrospect.
http://www.thereformedbroker.com/2011/12/16/saxo-banks-outrageous-predictions-for-2012/
Incredible :
While dreaded IMF says to hold back on the austerity, Government makes cruel cuts
Amazing, Enda has now got a warning from the IMF for being too good for the Good Room!
http://www.gata.org/node/12048
GATA -Gold Anti-Trust Action Committee,
an Educational and civil rights organization
cover questions for Michael Noonan.
Does Michael Noonan know the answers? I doubt it?
Will he answer the questions? I doubt it?
Yes David, I say bring it back home.
Did we sign it over to the Troika/ECB?
Come on MINISTER– come clean,we want to know.
Where is our Gold.??
We want our physical gold back home.
Not bits of worthless paper.
Are you right there Michael are you right,
do you think we shall get our gold before the night.
Travelled by train from the West today.
The song came to mind.
HSBC launders drug cartel money and gets fined 1.5 billion. UBS and Barclays rig interest rates and get fined about 1 billion each.
Irish taxpayers do nothing wrong and get fined 70 billion.
The latest trick the statisticians use to “vanish” inflation – the Chained CPI Consumer Price Index.
As the price of beef rises, you can switch to turkey, and as that rises you can switch to catfood. Presto no inflation! Beef, turkey and catfood are chained!
Is’nt competition wonderful ? Is’nt that a creative interpretation of the food chain?
Healthcare chaining – now guess where that leads to!
Here’s my view as someone with an outsrouce team in a devleoping country : as long as you hire the VERY best people it’s a good bet. after a few years you will have to up stiks and go to the next place but developing nations have a ot of runway left to go. distance-outsourcing is not so bad, really, if your internet is good, and the lingua franca works. Competing for and keeping talent in a costly county can really wear you down too. If you pay top dollar in country X you get less churn there, and the… Read more »