I was and am still amused by Donald Trump’s assertions during the Presidential campaign and now, as President, to bring back jobs to America. As many know, this week was “Made in America” week, where big trucks and boats were on display at the White House, touting American-made products and that infamous promise.
This post is intended to give the reader some insights into my own observations about this subject. It’s not an academic exercise with statistics and other “facts.” It is a few of my own observations, having been involved in international business for much of my 35 plus year career in the IT industry. In doing so, I hope to paint a picture of why I think, in many aspects, “bringing back jobs” will never be successful.
Ironically, it is for much the same reasons that the LDS Church finally put a stop to the wholesale emigration of its converts in other parts of the world to America. Leaders finally figured out that it would be hard to “preach[ed] unto every nation, and kindred, and tongue, and people (D&C 133:37)” and to establish the Church in all the world if everyone who joined kept leaving. One can, perhaps trace some of the difficulties in maintaining a strong Church in some parts of the world today to the exodus of Church members to America in the 1800’s. Yet, would the Church be as strong here, without them? It is a double-ended sword, not unlike the globalization problems we face. But I digress.
The on-going problems of job loss in the United States and, in fact many parts of the western world, can be traced back 20 or so years ago.
When I joined my company in 1979, we did business directly in about 90 countries worldwide (it’s now 135 plus). In other places, we had representatives and dealers who sold our products. For the most part, and still today, we imported products to those countries and provided service and support in different ways (local employees, through representatives, and shipping it back to us). Naturally, those products were significantly more expensive than if purchased in the US. Eventually, manufacturing was established outside the US to be closer to the customer, cut shipping time and costs, and lower prices. This didn’t directly affect jobs here because the business was typically additive.
However, in some cases, manufacturing was established to overcome huge tariffs or duties placed upon finished products in some countries. For example, in Brazil, which is a protectionist country, there was 400% duty placed on computers and computer parts coming into the country. The same was even true of things like athletic shoes.
So, many companies, even mine established some manufacturing capability in Brazil because they did not charge duties and tariffs for the parts needed to manufacture the products in the country. However, should you wish to import a service part to fix a broken computer, the 400% duty and a horrendously long custom clearance process was the norm. This made servicing a broken computer a challenge. So, a lot creativity went into our spare parts stocking strategy.
Then, there’s China.
For many years, western companies did very little business in China. Despite, the huge population (1.4 billion people), very few western products made their way there. Most business was done via representatives or joint venture companies (partnering with local Chinese companies).
In the late 1970’s, all that changed. China began a policy of opening its markets to foreign companies, seeking products and investments. And, as you can imagine, multinational companies were falling all over themselves to enter. This seem to take about 10 years for that process to really take off. But, the Chinese were incredibly smart. They had conditions for these companies to establish a presence.
- All profits must stay in China and be invested there.
- The company must establish a joint research program with a university (True of high technology)
- They must hire local people to run the company after an initial startup period.
- You must manufacture here.
Again, companies could not wait to enter and quickly agreed to those conditions and, I’m sure, many more.
Many of the companies I worked with (I was in the Telecommunication business) became very successful in a short period of time as China was rapidly building up its telecom infrastructure because basically they had none. First, with wireline (wired phones) and then wireless (cell phones). Most towns in China might have had one phone in the entire town, if at all.
The major downside was that as they established the joint research ventures with universities, the companies found that their intellectual property and institutional knowledge was being stolen and competing Chinese companies began to form. These companies started to compete aggressively against the western companies and winning business, first in China and then on a worldwide business.
Not only were these Chinese companies being subsidized by the Chinese government, but had much lower labor costs. It made the ability to compete very difficult.
The final observation is about the offshoring of jobs to other countries. Offshoring is the movement of jobs from one country to another. Outsourcing is the hiring of another company to do a job or function previously done in-house, such as manufacturing. To hear the President and other politicians speak, you’d think that some countries came over to the US and just stole our jobs away and moved them to their countries. Not exactly the way it happened.
Multinational companies are, by nature, interested in doing business across the world. Once the market is saturated or mature in their established areas, there is a need to open new markets in the world. As developing country’s economies improve, the demand for goods increases. But, you need to give opportunities for the citizens of those developing countries to have the means to purchase your products. One way to do this is to establish branches in those countries. But, it’s not enough to have a few people working there, you need a large operation to really made a difference. As a developing nation, labor costs are typically much, much lower than an established country. The developing nation, of course, would provide incentives to establish business operations in their country.
In some countries, like India, there is a very well educated portion of the population as well as many in very deep poverty. So, moving jobs over to a place like India, was relatively easy as a well-educated labor force is available.
In China, you have a huge potential labor force, willing to be trained to do manufacturing jobs. Not because these were jobs Americans wouldn’t do, but because the labor costs were so much lower. The spreadsheet managers at the large multinational just could not escape that fact. Any other factor did not matter. For example, most know that most personal computer support is delivered from India. Although customer satisfaction numbers were extremely low, management refused to move it back to the US and other western countries because it became cost prohibitive. The potential loss of business was not a factor. Spreadsheets don’t lie.
As part of my responsibility, I had a project to locate a support center somewhere in the world for a new product we were releasing. Thus, I researched the labor costs in various parts of the world. I looked at labor costs in China, India, Mexico, Russia and the US. Cost was a factor as well as expertise. As you might imagine, there was a significant difference in labor costs versus expertise. However, cost was the overriding factor as we found we could develop the expertise over time.
To give you some idea, the monthly cost for labor in India was 4X less than the US. 2X less in Mexico than the US. We recommended Mexico as an acceptable trade-off between cost and expertise. Management chose India.
The bottom line is that many jobs will never return to the US despite the best efforts of the President and others. Most are considered lower skill jobs for which labor cost is the chief factor. One factor that may play into it is, the rising labor costs in some countries. As the cost of living rises, salaries rise as the supply and demand for workers changes. We have seen, in some countries, workers move from company to company for nominal raises. Loyalty is less of a factor than a few cents an hour increase. In many cases, the jobs are the same, just wearing a different company logo.
Some jobs have returned for various reasons. Some had to do with poor quality control, high shipping costs, organizational changes, and in rare cases, customer demand.
When you think about a company like Walmart that used to champion the “Made in the USA” moniker and had to abandon it for competitive reasons, that is a huge indicator of the sea change over the last 20 years. Even, in spite of Walmart’s international business being less successful. Most goods are now manufactured outside the US.
Consumers demand low prices, so part of the problem can be laid at the feet of the American consumer as well.
What is your own experience? I’m sure some have lost jobs to outsourcing to other countries.