Manufacturing Returns to the West?

Since the 1980s, large multinational corporations have been outsourcing manufacturing jobs to countries where wages are much lower than in the West, most notably to China and India. After three decades, however, this trend seems to be slowing down. Large manufacturers such as General Electric (GE) and General Motors (GM) are starting to repatriate a portion of their manufacturing back to the United States. The Chief Executive of GE, Jeff Immelt, has called outsourcing ‘’yesterday’s model’’ and has ordered the return of some of the production of fridges, washing machines and heaters to Kentucky.

Image courtesy of Bert van Dijk, © 2008, some rights reserved.
Image courtesy of Bert van Dijk, © 2008, some rights reserved.

The original idea behind outsourcing was that Western multinationals would be able to make huge savings by transferring manufacturing to countries with low-cost labour. Though this business model was hugely popular with the corporations themselves, the general public looked upon it unfavourably since it contributed to job losses for the less skilled workers as well as for the middle class. Outsourcing has come to be regarded as a negative side effect of globalisation by the workforces in the United States.

Yet, the appeal of outsourcing appears to be on the wane. Nearly two-fifths of large U.S. manufacturers said they were considering moving production facilities from China back to the United States. This raises the question of why the appeal of these low-cost countries is slowly decreasing.

One of the major contributors to the decline of outsourcing is that wages in these formerly low-wage countries have increased significantly in the past decade. According to a study conducted by the International Labour Organisation, real wages in Asia between 2000 and 2008 have risen by 7.1 to 7.8 per cent a year. The average cost of labour in economically developed countries, on the other hand, only rose by 0.5 to 0.9 per cent a year in that same period.

Whereas before, businesspeople would complain about American workers’ high pay and unrealistic expectations, they have now started to criticise the complacent attitude of Chinese workers who have become less willing to put in long hours in tedious factory jobs. One can see a reversal of this trend in the United States where the relatively higher level of unemployment has led to a renewed willingness to work for lower pay.

Though other Asian countries, like Vietnam, Indonesia, and Bangladesh are competing to take China’s position as the low-cost haven of choice, they cannot replicate China’s scale, efficiency and supply chains.

Another reason that outsourcing is becoming less appealing to large manufacturing companies is the disadvantage of having production facilities in faraway locations. Not only has the cost of shipping goods across the world by sea gone up incrementally, the total transportation time can amount to several weeks. Additionally, Western corporations have found that geographically separating production facilities from research and development centres runs the risk of harming a firm’s ability to innovate.

The decline of the outsourcing of manufacturing jobs is also partially political in nature. High levels of unemployment in Western countries after the 2007-08 financial crisis have created an atmosphere of hostility among the general American public towards outsourcing. The public concern over this matter has encouraged politicians to criticise corporations that send manufacturing to low-cost countries.

The primary motive of manufacturing companies to expand their presence overseas nowadays is to be closer to consumers in fast-growing new markets in order to be able to respond more quickly to changing local demand, rather than to exploit low wages as part of an outsourcing strategy.

One must, nevertheless, remain realistic about how significant a trend ‘reshoring’ really is. Most of the multinational manufacturers considering the repatriation of jobs to the West are only intending to bring back a limited number of production facilities. A large segment of what was moved overseas in the past decades is likely to remain abroad. And, in reality, for many of the largest multinational companies, the amount of work that they continue to send overseas outweighs the amount that they are bringing back.  The manufacturing work that is being repatriated will be heavily automated, in effect making the actual number of jobs brought back to the West smaller than the number lost to low-wage countries in the East in the first place.

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