Issues of outsourcing and insourcing become especially critical during the growth phase of any startup.
By: Michael Kaiser
For at least two decades, if not more, globalization has become the ‘karma’ for social, economic and political discussions. And yet, the “jury is still out”.
What Is Globalization?
The impact of technology on globalization as been extensively reviewed and will continue to be so for the simple reason that technology is developing faster than globalization. I have chosen two slightly different interpretations of globalization:
1. Globalization refers to processes that increase world-wide exchanges of national and cultural resources. Advances in transportation and telecommunications infrastructure, including the rise of the Internet, are major factors in globalization, generating further interdependence of economic and cultural activities.
The term globalization has been in increasing use since the mid-1980s and especially since the mid-1990s. In 2000, the International Monetary Fund (IMF) identified four basic aspects of globalization: trade and transactions, capital and investment movements, migration and movement of people and the dissemination of knowledge. Further, environmental challenges such as climate change, cross-boundary water and air pollution, and over-fishing of the ocean are linked with globalization. Globalizing processes affect and are affected by business and work organization, economics, socio-cultural resources, and the natural environment. Globalization | Wikipedia
2. The tendency of investment funds and businesses to move beyond domestic and national markets to other markets around the globe, thereby increasing the interconnectedness of different markets. Globalization has had the effect of markedly increasing not only international trade, but also cultural exchange. The advantages and disadvantages of globalization have been heavily scrutinized and debated in recent years. Proponents of globalization say that it helps developing nations “catch up” to industrialized nations much faster through increased employment and technological advances. Critics of globalization say that it weakens national sovereignty and allows rich nations to ship domestic jobs overseas where labor is much cheaper. Globalization | Investopedia
Outsourcing and Insourcing
One of the key roles that globalization played for the United States, and one that generates to this day intense pro- and con- arguments is the issue of outsourcing. Its negative impact on the manufacturing industry of the country has been thoroughly discussed and needs no repeating.
Now some good news have emerged for the opponents of outsourcing, and simply put, is the opposite: insourcing. In the December 2012 issue of The Atlantic magazine James Fallows and Charles Fishman explore this trend in separate articles that point with examples to a return of manufacturing in the United States.
But can it be argued that outsourcing was always a negative one-way process, and thus represented all that was bad about globalization? The fact is that insourcing was already visible in the automotive industry of the country, with Toyota, Hyundai, BMW, Mercedes-Benz and other foreign car manufacturers establishing advanced manufacturing facilities in several states. The same was the case with some foreign pharmaceutical companies like Roche and Novartis who built large R&D and manufacturing facilities.
In both industries, automotive and pharmaceuticals, insourcing represented a two-way street in favor of the local and national economies, to the benefit of contractors, parts manufacturers and clinical research organizations.
There is no doubt that the wave of outsourcing in the last two decades led to irreversible losses to the number of manufacturing employment all over the US, including household needs and clothing; the reason was the cost of local manufacturing vs. foreign ones. Countries like China, India, Mexico, Brazil, Thailand, Viet Nam and other emerging economies eagerly answered to the demand for cheaper (but brand name) products. The US was not the only client, the European Union was not far behind and so were a limited number of Latin American nations. It was clear that globalization led to a major socio-economic shift, and more significantly a political one between the US and China, the latter emerging as the single most important competitor and provider to nascent and developed economies.
China and…
It cannot be ignored that the demand described above had a beneficial effect for the elephantine supplier that China became across the globe (and to a lesser degree two other BRIC countries, India and Brazil). The local demand for the goods that it was producing for its clients changed Chinese society in a way that could not be predicted in the early 1990’s. A plethora of entrepreneurs and foreign manufacturers from General Motors and Apple to Italian and French clothing emerged
in response to its emerging middle class demand for Western goods. Chinese tourists started slowly showing up, in a manner reminiscent of the Japanese tourists in the late ‘50s and early ‘60s. But there was a significant difference: information technology in the form of internet, mobile phones, tablets, etc. which the Chinese eagerly adopted, a form of cybernetic tourism. But let me dispel the notion that all is roses, and for that no one better than James Fallows, not only in last December’s article, but in his many previous ones during his years in China as a reporter for The Atlantic magazine. His description of the brutal working conditions in many manufacturing facilities, even like the Foxconn one, is sobering to say the least.
As Charles Fishman describes in his article, the return of General Electric’s important home appliances business to their original Ohio base became necessary because the cost of outsourcing to China had reached a higher level than manufacturing in the United States. (The Insourcing Boom | The Atlantic)
James Fallows explains why insourcing is returning back to the United States:
“Through most of post–World War II history, the forces of globalization have made it harder and harder to keep manufacturing jobs in the United States. But the latest wave of technological innovation, communications systems, and production tools may now make it easier—especially to bring new products to market faster than the competition by designing, refining, and making them in the United States. At just the same time, social and economic changes in China are making the outsourcing business ever costlier and trickier for all but the most experienced firms.
For Americans, the most important factor is the emergence of new tools that address an old problem. The old problem is the cost, delay, and inefficiency of converting an idea into a product. Say you have an idea for—anything. (For me, the list would start with silent leaf blowers, which I’d give to all my neighbors as gifts.) Before you can earn the first dollar from the first customer, you have to decide whether the product can be built, at what cost, and how fast, so you can beat anyone else with the same idea.” Mr. China Comes to America | The Atlantic
This is not a case of a business analogy of “The China Syndrome”, the eponymous 1979 movie with a cast led by Jack Lemmon, Jane Fonda and Michael Douglas. Rather one should see insourcing as a corrective issue at a time of global financial dislocation, and the notion that China is folding its arms should be immediately discounted from this analysis. As a matter of fact, and paradoxically so, the American insourcing trend frees China to further develop and provide its global customers with its own line of automotive, appliances and other products, very much like Japan and South Korea have done in the past and up to the present time. For China, the legendary Middle Kingdom, this will be a very different challenge to its present role as the global outsourcing destination.
The Other One
Another case of outsourcing and insourcing is India. Together with its neighbor China, they are the two most populated countries in the world, with an increasing middle class that looks to the US and Europe as their standards of social and economic improvement. The advantage that India had over China was its use of English in all its scientific and business endeavors, but China is rapidly meeting the challenge in that area as well. America may have outsourced clothing and other cotton and synthetic materials, but it insourced a gold price from India: software expertise in the thousands and thousands. India’s domestic industry did not fold its arms either and was able to provide its own manufacturing of heavy equipment and automotives. The Tata conglomerate acquired that British treasure, the Rolls Royce car and generic pharmaceuticals where manufactured by dozens of Indian companies, who in turn moved some of their manufacturing facilities to, yes, you guessed, the US.
Epilogue
As far as globalization in general is concerned, its future development will be measured by how well advanced and emerging economies and societies interact with each other and how they manage contrasting socio-political theories.
Suggested Reading
Note: A personal “Thank You” to Andrew Johnson, Ph.D., for referring me to The Atlantic articles listed above.