Outsourcing - BPO
Come Home Corporate America
Hollow Industrial Base
During the last decade, a hot topic in Japan and America has
been the “hollowing out” of their industrial bases.
The share of Japanese-owned productive capacity located abroad
has grown from 8% in 1994 to 40% today. The United States currently
has just over 50% of its manufacturing base located offshore.
For both Japan and America, the large outflows of direct investment,
especially to China, have caused an uneasy feeling that both countries
had bleak futures as manufacturing centers.
Surprisingly, in Japan the pendulum is now moving back as large
Japanese multinationals are busy investing in manufacturing plants
at home. Here are just a few examples of this trend. Canon is
building a large digital camera facility and plans to spend 80%
of its $7.2 billion capital budget in Japan over the next three
years. This is a reversal from the past ten years when 80% of
its capital budget was spent overseas.
Toshiba is building a $2 billion semiconductor facility. Sharp,
Matsushita and Nippon Steel are also building major plants in
Japan. Overall, spending on plants and equipment in Japan is rising
at a 10% clip.
It’s not that China is not important to Japan’s economic
growth. China has passed America to become Japan’s largest
export market. In addition, it needs a strong presence in China
to tap its rapidly growing consumer market as well as a low cost
base to manufacture lower tech products. For certain products
like cars it is also likely to keep large manufacturing bases
in countries like America. For example, Toyota produces more than
1 million cars annually at eight manufacturing plants in America
and has two plants under construction in Texas and Tennessee.
But for the more advanced capital-intensive products, the investment
is clearly coming home. How can we account for this surprising
turnaround and what are the lessons for America?
Lose Now, Lose Big Later
First, Japanese firms have learned the drawbacks of outsourcing.
Supply bottlenecks, poor infrastructure, power shortages, uneven
quality, difficult inventory management and high employee turnover
are just some of the problems. Secondly, even though China’s
wages are about 5% of Japan’s, its increasingly sophisticated
factory automation has lessened the importance of labor costs.
For advanced high tech products it accounts for only 10-15% of
total costs. Having manufacturing closer to home also shortens
new product lead times and increases cooperation between R&D
and production teams leading to a crucial edge in staying ahead
of its nimble competitors. Supply lines of 2,000 miles can be
problematic.
Finally, and perhaps most importantly, there is the critical
issue of protecting intellectual capital. Having research, development
and production closer to headquarters better protects proprietary
technologies. Unfortunately, here in America the outsourcing trend
does not appear to be reversing even in capital-intensive products.
Many of the new high tech jobs are for managers to manage the
outsourcing process. Microsoft, Intel, IBM and Motorola all have
large and growing R&D centers in China to take advantage of
Beijing’s cheaper pool of talent. Given China’s disregard
for intellectual property rights, perhaps American executives
should pause and reconsider the long-term costs of growing outsourcing
programs.
Their offshore R&D staff may very well walk off with proprietary
knowledge and the company’s future. Many Americans believe
the loss of manufacturing jobs is just about lower wage rates
in other countries but this is not always the case. One example
is Whirlpool which makes its high-end front loading washing machines
in Germany ($32/hour labor) and ships them to US ($23/hour labor).
The reason given by Whirlpool: trained German workforce, available
capacity, and necessary technology. Whirlpool could have produced
these washing machines at their Ohio plant and saved the $50 per
unit shipping costs while creating high wage American jobs.
Leverage Our Strengths
Then there is America’s growing annual trade deficit that
exceeds $600 billion a year with $200 billion attributable to
our trade gap with China. You have to admit that it is harder
to make a strong case against Chinese trading practices when 40%
or more of American imports from China come from American multinationals
with China-based manufacturing plants. Why not sell more of the
stuff we make in China to China’s 1.3 billion consumers?
If these markets are not open to American companies, let’s
use the leverage of access to America’s vast consumer market
to bust them open.
There are some economists and policymakers who claim a strong
manufacturing base is not important. I beg to disagree. History
shows that manufacturing is the foundation of all wealth and that
research and development follows manufacturing rather than the
other way around. There are now more American workers in state
and local government then in the manufacturing sector, and manufacturing
as a percentage of GDP has fallen from 20% in 1980 to less than
10% today. This is not a call for isolationism or rolling back
globalization, just a reminder that outsourcing has its downside.
How about a little common sense and balancing short-term cost
savings against long-term strategic risks?
Stop Accepting the Risk for Short Term Benefits
Instead of just taking the comparatively easy step of lowering
labor costs by outsourcing, let’s roll up our sleeves like
the Japanese, improve manufacturing techniques and reap the benefits
of keeping more production and technology closer to home.
Carl Delfeld is head of the global advisory firm Chartwell Partners
and editor of the Chartwell Advisor and the Asia Investor Intelligence
newsletters. He served on the executive board of the Asian Development
Bank and is the author of The New Global Investor (iUniverse:2005).
For more information go to www.chartwelladvisor.com or call 877-221-1496
Carl Delfeld is head of the global advisory firm Chartwell Partners
and is editor of the “Chartwell Advisor” and the “Asia
Investor Intelligence” newsletters. He served on the Executive
Board of Directors of the Asian Development Bank in Manila and
is the author of The New Global Investor (iUniverse: 2005). For
more information go to http://www.chartwelladvisor.com or call
877-221-1496.
Article Source: http://EzineArticles.com/
|
