10 December 2012

"Insourcing" and "reverse globalization"

I first encountered the terms in my print copy of The Atlantic (online here):
Just five years ago, not to mention 10 or 20 years ago, the unchallenged logic of the global economy was that you couldn’t manufacture much besides a fast-food hamburger in the United States. Now the CEO of America’s leading industrial manufacturing company [General Electric] says... offshoring [is obsolete]...

Yet what’s happening at GE, and elsewhere in American manufacturing, tells a different and more optimistic story—one that suggests the curvature of Vernon’s product cycle may be changing once again, this time in a way that might benefit U.S. industry, and the U.S. economy, quite substantially in the years to come...
  • Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
  • The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
  • In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
...So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.

GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.

Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers—four weeks on the boat from China and one week dockside to clear customs. Today, the water heaters—and the dishwashers and refrigerators—move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes...

What is only now dawning on the smart American companies, says Lenzi, is that when you outsource the making of the products, “your whole business goes with the outsourcing.” Which raises a troubling but also thrilling prospect: the offshoring rush of the past decade or more—one of the signature economic events of our times—may have been a mistake.
Much more at the link, and also at Salon, which discusses Apple bringing jobs back to the U.S.  The caution there, however, is that such "reverse globalization" may not necessarily be good for the American worker.
So, another more cynical way to look at why insourcing is suddenly all the rage starts from the understanding  that American corporations embraced offshoring as one tactic (of many) to weaken the negotiating power of unions. And it worked! Mission accomplished! Now that the power of organized labor has been broken, they can safely return home.


  1. This is encouraging, except for point #2. That is, much of the "natural gas" boom is dependent upon fracking. Fracking is becoming more and more controversial, and I wonder if it will slow down the boom. I don't think that the fracking opponents will be able to stop it, but it is something to look at nevertheless.

    1. I really dislike the procedure of fracking; Wisconsin has abundant sand resources which are being extensively mined, at ill-defined risk to the environment.

  2. The power of organized labor in the U.S. has not been broken. Or at least it will not remain broken.

    One of the greatest attributes of American labor is quality control and control of quality control. When manufacturing is outsourced to foreign countries, the American company loses control over material specification as well as size and tolerances and recalls are embarrassing and costly. The liability of potential injuries and/or deaths caused by lack of quality control cannot be ignored. I am delighted that manufacturing may return to the U.S. en masse.

  3. Oh, so that's why gasoline prices have been declining the global oligarchs have gone "whoopsl" and are trying to maintain the new normal for a bit longer. ..that's from paranoia land.

    Jobs could also be returning because wages have been driven down to the point wages are accetable to the fat cats again.

  4. The outsourcing of American products has been one of the major contributors to the Recession/Depression. Putting individual gain so far above the good of the country and its citizens is primarily responsible for all the unemployment we have. That, and the sleight-of-hand dirty tricks of the financial markets. Oh, yeah. and two wars that weren't paid for.

  5. US Companies still think it is smart to outsource their IT in India. Penny Wise, Pound Foolish. I got a call from a recruiter who wanted an experienced senior systems programmer, but only wanted to pay $36k a year, no benefits, on contract. 15 years of experience minimum. The responsibility of the job is to assure that all IT resources are available to the company and their people to do their job. So when it fails, it gets very expensive very quickly. It is NOT a job for an amateur.

    When I get calls like this, that lowball they pay in such an extreme way, they are simply going through the motions in order to justify an H1 visa. They can then claim that they can't find an American who can do that job, when they mean they can't find an American who can afford to do the job. They have already decided to outsource it.

    The problem is, every 10 minutes their network, database, servers, whatever is down, means unproductive employees. Angry customers. Lost revenue. Lost sales. It really doesn't take much to loose what ever they saved in salary to competent staff, local and on site. I reckon 30 minutes per year of down time per year is all it takes.

    I usually respond to such BS requests for my resume and application with a demand for the name of the company. I tell them I am asking for this because I want to short the stock. If that company is that dumb, then it just a matter of time before it catches up with them and bits them in butt.

    True story. A recruiter called me up and wanted a senior systems programmer for Northrup in San Jose. Only wanted to pay $32k a year, no benefits, in one of the most expensive cost of living areas in the country. I asked him if he was was joking. He said he was dead serious. I explained that having 80 engineers earning about $120k a year in salary and benefits, sitting around for 15 minutes, for the IT systems to recover will cost a minimum of $1500, probably more. I pointed out that it could cost Grumann half a million in lost productivity by letting some unexperienced hack learn on their system. And to boot, he will have to work two jobs just to keep a roof over his head. Good luck with that.

    The recruiter got very indignent with me and starting telling me that I don't know what I am talking about and that there were heaps on highly component and experienced engineers who want want to work in San Jose on $32k/No Benies and that I was ungrateful for his generous offer.

    Yea, right.


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