Is outsourcing about to go into decline?

This is a big story, given its own special report by The Economist – and it's a highly recommended read for A2 Business Students.The central thrust of their argument is that the advantages of offshoring work (outsourcing overseas) are falling, fast. The logic of returning work to the developed economies looks fairly convincing.

For a couple of years I’ve been reading articles suggesting that changing exchange rates were making it less attractive to offshore work from Britain. Doubts have been growing since then.

I’ve summarised some of the key points presented here:

• Some of the biggest US manufacturers are moving more work back to the States (and even firms like Lenovo – the big Chinese laptop makers are opening up production facilities in America). Foxconn, a Taiwanese firm which makes a large share of the world’s electronic gadgets, now says it will expand in America. General Motors plans to shift almost all its IT (much of which had also gone to India) back to the US.
• Offshoring never had as direct or dramatic an impact on employment in America and Europe as was widely believed – computers and robots did that. However the threat of losing jobs overseas has probably exerted a downward pressure on middle-class wages in rich countries.
• 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.

Why?

• These days the main reason why companies want to expand their presence overseas is to be close to consumers in fast-growing new markets, not to take advantage of low wages as part of an offshoring strategy.
• Manufacturing is becoming more automated, so labour makes up a decreasing proportion of costs. And for businesses that continue to rely on armies of people, labour 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 upward pressure on costs. Other countries, such as Vietnam and Bangladesh, are competing to take China’s place as low-cost havens. But these cannot match China’s scale and supply chains.
• Companies are increasingly factoring in the rising cost of shipping goods across oceans, and the risk that natural disasters or geopolitical shocks could cut off essential supplies. It’s also seen to be easier to build in quality assurance. (I’ve seen outsourcing blamed for problems with Boeing’s Dreamliner here).
• Western firms are also finding that innovation is easier when manufacturing is in the same place as research.
• Pioneers of services offshoring are bringing work back home, having discovered that looking after customers and developing new IT tools are in fact a “core” part of business. For many firms, sending call centres overseas has turned into a nightmare.

Hard to say if these arguments are sound, or should be celebrated. “Reshoring” may boost demand for labour, but only for high-quality, well-educated workers. As skills increase in poorer countries, people in rich ones will find the global labour market ever more competitive.