VIEWPOINTS : The Dark Side of Offshore Manufacturing : Moving Production Overseas Is on Rise--but Is It Smart?
Today’s conventional wisdom is that manufacturing knows no national boundaries: Successful companies are global companies. Don’t worry about vertical integration, goes the argument. Let others do for you what you cannot do as efficiently.
No wonder, then, that U.S. companies are increasingly turning to the South Koreans and the Taiwanese to do their manufacturing for them. Over the past two decades--and especially since 1980--American companies have steadily moved production to overseas plants or subcontracted it to foreign suppliers, all in search of lower wages. From 1966 to 1987, annual imports of foreign-made products that contain some U.S. components jumped from $1 billion to nearly $40 billion. And that figure excludes goods that contain only foreign components or that a foreign supplier makes for a U.S. business.
The results are obvious: American plants are being closed, American workers are being laid off and American technology is being “exported.” Almost inevitably, tensions arise between what’s good for the country and what’s good for the country’s business. In that public policy debate, most people assume that it’s just smart business for an individual company to manufacture offshore. But how smart is it?
Minimal Savings
The fact is, offshore manufacturing has a dark side that managers too often overlook. In their eagerness to fix the competitiveness problem, companies may be jeopardizing their long-term health and in some cases, even their short-term earnings. Seven points make the case for U.S. managers to stay home and work on the basics of the company rather than running overseas in search of a temporary, if not illusory, quick fix:
- For companies that do go offshore, the actual savings from the use of cheap labor are at best minimal. The additional “hidden” costs associated with transportation, inventory, training, product design changes and tariffs can add as much as 50% to the foreign vendors’ bid price and wipe out any potential savings.
- The potential for savings is small: Direct labor is, on average, only 15% of total costs anyway. Trimming it doesn’t do much for the bottom line, especially if the effort diverts attention from the remaining 85% of the cost structure--from things such as administration, inventory control, marketing, research and development and distribution.
- The advantage doesn’t last long. Wages tend to rise as workers become more productive and the value of the dollar fluctuates. Manufacturers can end up like Gypsies, hopping from one country to another in search of the best economics.
- By giving up manufacturing, U.S. companies may be giving up their technological leadership. A company cannot design in a vacuum, and it cannot exploit new technologies if it doesn’t use them. In the 1960s, color television manufacturers such as RCA, GE and Zenith rushed to offshore locations in the Far East while their Japanese competitors were upgrading their product and manufacturing technologies. Now the U.S. firms are on the sidelines when it comes to the new generation of TV products, including videocassette recorders and camcorders.
The semiconductor industry may suffer the same fate. Americans are giving up production of high-volume memory chips. But these serve as a testing ground for engineers trying to produce new technologies for other applications and for manufacturers trying to perfect delicate processes.
Official Pressure
They also generate earnings for additional research. In essence, U.S. companies are providing the finances, the managerial expertise and the engineering skills to firms that can emerge as competitors once they get strong enough. Hitachi, one of many examples, used to make microprocessors under license from Motorola. Now it is introducing its own 32-bit microprocessor.
- Once a company establishes operations overseas, the host government may begin pressuring it to transfer more technology and to stimulate the growth of spinoff industries with independent production capabilities. Technology that crosses national boundaries doesn’t have the same protection it has in the United States. Indonesia has no patent protection; South Korea doesn’t protect the copyrights of software or semiconductors.
- Consider what happens to an industry’s domestic political clout when some companies produce in the United States and others import from overseas. In June, 1985, Micron Technology initiated an anti-dumping petition against seven Japanese microchip producers. But the Semiconductor Industry Assn. didn’t support it. How could it, when so many of its members have manufacturing facilities in Japan?
- Offshore manufacturing is a sore spot with labor unions, which may be less willing to be cooperative on other fronts, such as improving productivity at domestic plants.
The claim that going offshore is the only way to stay competitive is no longer credible. Look at the companies that have successfully confronted foreign competition from a U.S. base--for instance, Eastman Kodak and Black & Decker. And don’t forget that the Japanese have been successful on American soil. If there’s any hope for lasting competitiveness, managers must stop looking for easy answers and face up to the more fundamental problems in their companies.
