The issues with Outsourcing

In the past twenty years, many manufacturers that wanted to reduce costs would outsource to low-cost countries such as China, Malaysia, or Thailand. Today more companies are realizing that outsource works is not what they think they are getting and doing business overseas is more trouble than it is worth.

A company owner explained: “Many countries are not ready to do business globally. Outsource is a long term business but they only look at it as short term. They promise a lot but never keep their word, most products are low quality, many materials get lost or stolen, the abuse of low labor workers also create bad image for our company, and many government officials demanded a bribe. That is not what we expected.”

An industry representative complained: “As a long term strategy, we trained them, invested in them, and helped them to build products and hope we could do business as partner for a long time. What we did not know was after all these initial investments; they copy our products then created their own companies to compete with us. They sell them at lower price to capture the market. As a result, we now realize that outsourcing is bad business. That is why we are bringing our factories back to the United States.”

A company owner explained: “These companies have no long term perspective. They only do whatever to increase profit for themselves, including cheating and falsify documents. Almost every company that outsource have to deal with quality issues. In 2003, my company outsourced works to Chinese company to make electronic circuit board with exacting specifications. But each shipment turned up flawed, with many boards made of the wrong material, or falsely labeled “certified.” What complicated matter was that we demand high quality boards for our electronic equipments. We needed million of them at a time but we had to reject about half due to poor quality. They kept saying that: “It is good enough and no one will know.” Since we sell most products in Christmas time, if we do not have enough electronic boards we cannot produce enough products to sell and eventually missed the sales. After several years, we lost a lot of money, our customers were very unhappy about quality so we stop outsource.”

Another company owner said: “When you are doing business oversea, there are logistical issues, language issues, and cultural issues. You have to deal with theft and bribery too but the worst thing is overtime your partners become your competitors. You will find out sooner or later that they copy your products and sell them at lower price. You cannot sue them; take them to court as their laws protect them. Outsourced manufacturing is a horror story.”

These issues have forced many companies to move production back to the U.S and Europe. Returning works home not only improve the quality but it is also making business less risky. Twenty years ago, average wages in China was about one-tenth of the U.S and Chinese companies often said: “Why hire one U.S workers when you can have 10 Chinese workers.” Today, the cost of doing business in China has jumped 10 to 25 percent a year, the average wage is about half of the U.S. When adding in shipping and high fuel costs then outsourced manufacturing is no longer a bargain.

The return of manufacturing production to America and Europe is a surprising factor to their governments. Returning jobs could create new opportunities for thousands of unemployed workers. However, as more companies are bringing work back, it creates an uncertain and fear in low cost countries, especially where the economy is dependent on outsourcing manufacturing such as China, Malaysia, and Thailand. Some economists warn that re-shoring will make the economies of these countries become unstable, due to high number of unemployed workers. An economist said: “Government can deal with thousand or hundred thousand unemployed workers but when the number reaching million or several millions then you will have riots. That will create a lot of problems for any government. For many years their people enjoy economic prosperity and suddenly it is gone. If you are not preparing to deal with this situation today, then it may be too late.”

Sources

  • Blogs of Prof. John Vu, Carnegie Mellon University
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