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Anne Kim has an article in our latest issue which focuses on the recent “insourcing” trend in manufacturing—which is to say, companies deciding to forgo overseas operation and move their production facilities back to the United States. The shrinking wage differential from 40 years of stagnant median incomes here and quickly rising labor costs in China is part of it, but another part is that outsource is a terrific logistical headache:
For one thing, some companies have learned the hard way about offshoring’s hidden downsides, such as the lack of intellectual property protection for proprietary manufacturing processes, quality control issues, and the frustration of waiting weeks for products to arrive by container ship while rivals potentially rush hot new products to the shelves. Moreover, long supply chains mean more exposure to earthquakes and tsunamis, wars, oil shocks, and other unpredictable disruptions.
In an oft-cited 2011 study, the consulting firm Accenture surveyed 287 major companies and found that nearly half are plagued by “cycle or delivery time” problems and quality issues due to offshoring. For some manufacturers, such as baby crib makers, the problems went far beyond quality to basic safety. In 2010, the Consumer Product Safety Commission recalled more than two million cribs—made mostly in China, Thailand, Mexico, Indonesia, and Croatia—for safety defects leading to at least thirty-two infant deaths.
Kim writes that we should promote manufacturing not as a major jobs program, since robotics are likely to be much of the actual work, but as a way of maintaining our innovation. This seems reasonable. But one of her suggested methods for achieving this end seems a bit misguided:
We should shamelessly court companies to America and help them expand when they get here. Even as offshoring’s economics tilt America’s way, other countries—less opposed than we are to heavy-handed industrial policy and even downright cheating—are busily dreaming up strategies to put a thumb on the scales in their favor…
[President Obama] should ask Congress for a several-billion-dollar “war chest” to meet or beat any incentive offered to a company by a foreign government to lure production there.
As iffy as it sounds under current trade laws, the reality is that America’s competitors routinely engage in this behavior, and the United States would only be leveling the playing field by doing the same. By entering the game, Washington could use the opportunity to argue for clearer and more restrictive rules on such recruitment activity, which would be the best outcome.
With respect, this seems likely to backfire. As Kim herself points out we’ve already seen this kind of race-to-the-bottom behavior among US states trying to lure large companies. Rather than try to bribe the corporations, countries ought to set a level playing field and make the corporations work for them. Simple tax incentives aren’t everything, as James Fallows pointed out once.
But more important are the financial implications. Part of what caused the massive property bubble in Ireland was a flood of corporate cash drawn by lax regulation and tax incentives similar to what Kim describes.
However, the rest of her suggestions seem like a good bet, and her piece is worth a read.
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c u n d gulag on March 12, 2013 1:28 PM:
Uhm, if I was in charge of a European company, no amount of money thrown me and my companies way, would make me want to come to America.
The politics is downright stupid, with one party determined to throw the country into another recession, if not a depression.
The health care system sucks, and it's expensive for me and my company.
If I thought of moving, I'd wait until Obamacare kicked in, to see how much that positively affect the health care situation.
And I'd worry about my female workers, with all of the talk about limiting contraception and abortion.
The infrastructure is crumbling, with no cure in sight.
The American worker is frequently under-educated, with many in some parts of the country, being downright stupid and/or outright ignorant.
And, finally, too many people with too many guns.
I'd say, "You fix all of that, America, and maybe I'll rethink my position. But for right now, no thank you! Why would I leave the civilized world, and come to America?"
Anniecat on March 12, 2013 2:29 PM:
You know, I've wondered about outsourcing for 30 years -- ever since I worked for a furniture firm that had the furniture built in the Philippines and Hong Kong, then shipped here to be finished and upholstered.
The problems never stopped -- and we dealt with factories who'd been making the furniture since the early 1950s!! The factory transfer to the port was tardy so they missed their boat and had to be re-booked. The ship was delayed en route. The factory sent the wrong model of furniture, or the wrong amount of the right model. Our shipment got off the ship at the wrong port, or got off the ship at the right port onto the wrong truck, and either way had to be tracked down. With new designs, even if the designer and the company owner went to the factory personally to oversee creation of the prototype, at least the first shipment of the new design was a total write-off. Not to mention at least 4 trips to the factories per year by the company owners, furniture designers, and/or production personnel.
I always wished somebody in the accounting department would cost out all of that against the presumed savings and see how it really worked out.