Made in America: The Death of Offshore Outsourcing

Back in December of 2001, China first joined the World Trade Organization (WTO) after a near 15-year battle to break into foreign trade. The nation’s efforts to enter the WTO — beginning in July 1986 — had taken so long that former Chinese prime minister Zhu Rongji jokingly remarked enough time had passed to “turn black hair white.”

The long and arduous application and negotiation process, though, was no doubt worth it for the East Asian nation. China has scored a number of remarkable economic achievements since its entry into the WTO, including:

• Second-largest economy by GDP
• Largest merchandise exporter
• Second-largest merchandise importer
• Fourth-largest commercial services exporter
• Third-largest commercial services importer

For China’s trade partners, of course, the effect was not quite so rosy. For one, opening the doors to Chinese trade meant new and fierce competition in the labor market, particularly in manufacturing. After all, why pay an American wage when you can get a Chinese worker — working in a factory with minimal regulations — to do the same job for pennies on the dollar?

According to reports from the Economic Policy Institute, outsourcing to China has cost the U.S. over 3.2 million jobs since China’s entry into the WTO 2001. Of these 3.2 million jobs lost, three-quarters (2.4 million) were in manufacturing.

Decades of Decline

All told, the U.S. manufacturing industry lost 11 times more manufacturing jobs in the 2000s than in the 1990s, despite comparable rates of overall manufacturing growth.

Adding insult to injury, even those fortunate enough to hold onto their jobs have watched their annual earnings decrease by roughly $1,400 — all in the face of a staggering 35.2% cumulative inflation rate.

Needless to say, offshore labor outsourcing — not just in China — has been an economic headache for American workers for decades and still is today. The total number of U.S. jobs outsourced in 2015, for perspective, was a staggering 2.4 million.

Today, though, China is just one of many threats facing American workers brought on by globalization. With increased rates of IT services outsourcing, India and Indonesia have recently overtaken China as the top-rated outsourcing countries.

Unfortunately, there’s not much American workers can do about this problem, even if they wanted. Between minimum wage laws and higher costs of living, there’s simply no competing in the global job market anymore. After all, according to a 2012 survey from Duke’s Fuqua School of Business, nearly 75% of corporations say that labor-cost-saving is a top-three reason for overseas outsourcing — twice the rate of response for any other option.

Not too surprisingly, 89% of U.S. economists agree that job outsourcing directly hurts our economy (according to Sourcing Line Computer Economics), which ultimately raises the question: What can and should be done in order to combat this trend?

The Death of Offshore Outsourcing

The good news for job seekers here in the States — at least in the manufacturing industry — is that the effects of offshore outsourcing may have already reached their peak. The bad news, though, is that what comes next could be a whole lot worse.

In fact, the death of offshore outsourcing will be brought on by the very thing destined to put the nail in the coffin for American manufacturing workers: automation.

Already, we’re beginning to see the effects of low-cost robotics and automation overseas. Last week, Apple and Samsung manufacturer Foxconn Technology Group (Taiwan) revealed a reduction in its workforce by 60,000 at a single factory.

For perspective, the company reduced its employee count from 110,000 to 50,000. That’s more than half of the factory out of work, replaced by machines.

The very same week, German sports retailer Adidas announced it would begin making “robot-produced shoes,” made in a new state-of-the-art factory, dubbed the “Speedfactory.”

According to Adidas, the Speedfactory is a 4,600 square-meter facility built to automate the company’s shoe production. The first production plant, which will be located in the German city of Ansbach, represents the end of the company’s 20-year outsourcing streak to Asia.

Adidas has jointly revealed plans to open a second Speedfactory in the United States in 2017, with others to later follow in Britain or France. Considering that the U.S. ranks as the highest salary nation in the word and the UK as the sixth highest, the message is clear: humans, even in low-paying, developing nations, are becoming obsolete.

Return of the “Made in America” Tag

While somewhat bittersweet, robotics process automation (RPA) is inevitably going to cut into the offshore outsourcing industry. For factory workers in the U.S., the effect is virtually one and the same, but for American companies and their investors, this could be a major boon.

In terms of cost effectiveness, automation has gained a major advantage over outsourcing in recent years. According to one study by Deloitte, entitled “The Robots are Coming,” an offshore full-time equivalent worker is ~35% cheaper than a UK worker, while a typical robot costs just one-ninth the price.

Interestingly enough, RPA could mean the eventual resurgence of the “Made in America” label, as distribution and supply chain costs come down with onshore factories. Of course, these goods won’t technically be made by Americans, but they’ll be made in America nonetheless.

We’re already seeing evidence that this is the case with the recent resurgence of domestic manufacturing growth. One of the most advanced robotic manufacturing facilities in the world, for instance, is run by Tesla Motors, which builds its electric cars entirely in the U.S.

Further, with the official opening of its Robotics Manufacturing Facility in Michigan last year, Swiss-based ABB became the first global industrial robotics company to begin building robots in the USA.

Taken from a recent ABB blog:

A resurgence in home-grown American manufacturing is now taking root in the country, largely driven by advanced technology.

For American manufacturers, returning home will ultimately translate to improved product quality, reduced delays, and even cost savings. And while bringing manufacturing back to the U.S. won’t necessarily mean the return of the American factory worker, it’s poised to create thousands of high-paying service jobs for the skilled workforce.

Perhaps most importantly, though, bringing manufacturing back to the U.S. means stopping what’s been a 15-year offshore money-bleed.

Until next time,

Jason Stutman

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