Off-Shoring: There and Back Again

For big business, it has been a given for years now that to be successful, you have to take advantage of ‘low cost centres’ such as India and China.

For manufacturing, China has been a destination of choice for some time now, due to the low cost of production. Low cost because, the people are cheap and disposable, there is no pesky environmental lobby to keep companies from dumping dangerous materials in the water or the air, and the cost of raw materials were not materially impacted by the need to ship them from places like Canada and then back again as finished goods. In general summary, because the Chinese people are of little value to the rest of the world, and especially their own government, they can be taken advantage of to cheaply manufacture 95% of the goods in your home and get to keep all the waste in their own back yards. Yay for us!

Then there is knowledge work, a more recent target for off-shoring. Some examples of knowledge work would include call-centre staff, accounting, software design, hardware design and product testing, just to name a very few. Many may be surprised to know that India and China produce 10x to 100x more engineering grads each year than North America. While a much bigger risk to my personal well-being than the manufacturing issue, I am not as morally averse to this since the people involved are better paid, and the impact to the environment is minimal (well, the increase in air travel to support this trend may have a significant impact, but I am not able to quantify this). This really takes advantage of India & China’s biggest asset, lots and lots of smart people. The key enablers here is workflow software and cheap internet connections.

So finally to my point: Now that is seems obvious to everyone that a successful company must do a large percentage of your design and (all?) manufacturing offshore in these low-cost centres, I think you might want to think twice and look to ‘onshore’.

Oil is $130 a barrel and climbing. This means that more and more of the cost of goods produced abroad will be influenced by shipping costs. Because of off-shoring, the components involved in putting together our consumer goods are travelling record distances, in some cases many times around the world, before they get into the consumer’s hands.

The price of natural resources required to manufacture the goods are also sky-high, linked in part to the cost of oil, but also to the demand that the increasingly cheap goods and larger addressable markets create (when you do business in China and India, you get to sell there as well). To give an example, copper, which is a key component to all electronics, has increased in value by 6x in the past 6 years while worldwide production has remained relatively flat. This is why people are stealing the copper wire out abandoned houses, and why Canada stopped making the penny out of copper in 1996 (if they still were, they would be worth about 1.6 cents each in copper value).

I think that the cost of transport and the cost of natural resources will start to make cheap labour less of an attractive decision point on where goods are made. With the cost advantage of goods made offshore reduced, other buying criteria such as the marketing advantage of goods made locally will increase. Also, it seems that ‘green’ fad is now back, with many companies using this as a key marketing message to promote their goods. Perhaps people will start to think twice about buying goods from countries where the environment is being raped and pillaged, in favour of countries where environmental protection is strictly policed.

You might think I am crazy, in fact most people that read this blog probably know me personally, so you KNOW that, but I will cite at least one example of a SUCCESSFUL company that does manufacturing in a high cost centre: Research in Motion, the maker of the CrackBerry, does a large portion of their manufacturing in Waterloo Canada, with some of its for-business models made in Hungary and Mexico. Its only their very cost-sensitive consumer line (Pearl) that has resorted to China manufacture.

When it comes to knowledge work, well, that might be a done deal.

So how long before all manufacturing work is done in Canada for products produced for rich knowledge workers overseas? 😦


3 Responses

  1. Interesting ideas! Maybe other factors that will bring manufacturing back to North America will be greater concern for product standards and human rights in countries like China (I can dream, right?) and perhaps a “Made in Canada” movement that actually has teeth.

    It was a real wakeup call for me when I realized that the consumer market is really propped up by people who are willing to work under much worse conditions than I would stand working under, for much less reward.

    I assume that the abolition of slavery, the enfranchisement of women, the protection of children, and then the rise of unions has made it more attractive for manufacture to move overseas. This is scary because we just tend to assume that our products are made in a sustainable way…but no. All it takes is a revolution someplace. Eventually companies will have to draft emperor penguins.

    No wonder the US conservatives are so torn up about illegal immigrants…half of them hate the brown people and want them to leave, and the other half use them to support their businesses.

  2. Another factor might be risk to supply when the Chinese people eventually rise up against their government for favouring foreign corporations interests over their own. The disparity between rich and poor in China is HUGE and increasing rapidly. ‘Favourable’ conditions for rebellion! If businesses are impacted by work stoppages due to protests and strikes, they might think twice about basing all their manufacturing there.

    On the impact of pollution: I read a summary of a report about male sperm count dropping 12% in Shanghai men due to pollution. Perhaps the Chinese government is looking to increased pollution as a cure for their population problem??

  3. Pollution due to sterilization: mother nature’s cure for humans?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: