What’s Happening Overseas…outsource-ship

Another increasing development is what is going on in China. China, while not the only recipient of American work, goods, and money, is by far the largest. China is without a doubt one of the top global powerhouses in terms of producing consumer goods. However, that chapter may be nearing its end. A Time magazine article talks about five major issues facing China: increases in labor costs, lagging technology, innovation is trying to match-not move ahead-of foreign competitors, not many global Chinese brands exist, and a lack of skilled managers. Perhaps the biggest push for the re-shoring initiative stems directly from the increase in labor costs and lack of able managers.

China was able to grab a lot of the worlds production work on the idea that labor was cheap. That is quickly becoming an issue however, as labor in China is no longer as cheap as it once was. Time reported that a machine operator in China earns about $1,500 more than a machine operator in India and a skilled secretary earns about $2,200 more. To add to this problem, the competition among workers is so high that employees’ wages are high above other emerging economies. Add in the fact that there is a lack of skilled managers to oversee these workers, again, costs dramatically increase. Scarce resources are expensive and human capital is no exception to that rule. If skilled labor is hard to come by, then labor costs will be higher.

Innovation is another key problem for China. Chinese culture supports high education standards in terms of skills needed to be strong workers.  However, they do not foster creative thinking. This creates two issues: a productive labor force that produces high volumes of consumer goods and a lack of creative thinking. When China first began its economic boom, workers were encouraged not to think creatively and instead follow the rules and processes to produce goods. And while this has worked out very well in terms of growth and economics expansion, China can no longer rely on this concept alone. Without creative thinking, there is no innovation and therefore, no new growth.

While Chinese managers look for ways to counter this notion of “stay inside the box”, they are finding it very difficult to get workers to overcome this hump. Chinese laborers have had it drilled into their minds for centuries that failure is never an option.  Thinking outside the box and being creative presents a high risk of failure. As the Time article stated, China can build anything, but they are having trouble moving forward because of a lag in technology and a lack of ability to be creative by upper management.

India may just be the next developing nation to experience a major economic boom, similar to the one the propelled China into the global spotlight. However, the boom in the growth will most likely not be as big or as extensive as China’s was. Still, with lower labor costs, outsourcing companies are beginning to move their operations away from China and into other countries where costs still remain low. One of the leading problems that has been causing India some headaches is the lack of a solid infrastructure to move goods around within the country.  “The country is bereft of companies that can build the things its builders need,” said Mark Bergen in a New York Times blog.  According to a Bloomsberg Businessweek article, the Indian government has begun working hard to tie the loose ends of the country together so that a stronger manufacturing base can be created along with an environment the will attract foreign companies to manufacture in India.

Another concern that has hindered Indian economic growth is the level of corruption that supposedly plays a role in Indian government. U.S. lawmakers claim that while foreign government officials are trying to promote India as the new “manufacturing hub”, a high level of protectionism is believed to be prevalent. At the same time, there seems to be aggravation over the coercion of local businesses to take intellectual property from foreign companies and use it in domestic firms, which seems to be ignored by the Indian government.

All of these are still barriers that India needs to overcome before any major boom can be expected to happen. As more businesses show interest in setting up shop in India, many of these issues can be ironed out. And as manufacturing moves out of China and back to the U.S., India will probably not be able to see as rapid of an economic growth period as China did, as now its competition is also with its source: U.S. manufacturing.

Next week part 3 will conclude this series and try to draw some answers about what may lie ahead for U.S. manufacturing and how it can have an impact on the U.S. economy.





Chadd Brown
Super Tool, Inc.

Click here to read Part 1