Laboring Under a Misconception About Outsourcing

Conventional wisdom says that the United States has permanently lost much of its manufacturing base to outsourcing, but Charles Fishman shatters that notion and examines the return of industry in his most recent article in The Atlantic. The rebirth of General Electric’s Appliance Park in Louisville, KY, will blow your mind, as it did mine.

We all witnessed the overseas migration of manufacturing as price competition drove companies to seek cheap foreign labor over American labor. In an article earlier this year in the Harvard Business Review, Jeffrey Immelt, CEO of GE and head of President Obama’s Council on Jobs and Competitiveness, argued that human innovation and technical innovation can offset labor savings, offering hope for a seemingly hopeless industrial outlook in America. Put another way, total cost can trump price.

Best practices are simply tools; tools that allow companies—and, indeed, whole industries—to “borrow” thinking and approaches from other companies and industries. At times, they fuel growth by spreading practices that are, well, “the best.”

At other times, however, they’re a game of “follow the leader” that falls victim to group-think. This is especially evident when the economic drivers have shifted. In his article, Fishman claims that the same arguments against outsourcing in 1979 exist today, but the weights of those arguments have evolved:

• The cost of oil has tripled since 2000, raising transportation costs from remote outsource locations.
• Chinese wages are now five times what they were in 2000, and will be increasing 18 percent per year.
• The natural gas boom in the United States has dramatically reduced domestic energy costs.
• Domestic union power has diminished; a new pragmatism has arisen.
• Pirating of products and ideas is an outsourcing risk.
• U.S. labor productivity continues to increase.
• Transport delays, inventory on the seas, and lack of control are risks of outsourcing.

None of these issues, however, represent the largest risk of outsourcing. Fishman claims that the erosion of the core competency of manufacturing itself is the greatest risk. Engineering and manufacturing are hands-on and iterative processes. When the two are separated, the other competency fades quickly and engineers can forget how to design for efficient, high-quality and productive manufacturing. Innovation declines, and good ideas are left on the table—or never make it to the table in the first place.