OffShoring
During the early stages of the industrial revolution, workers felt that their working conditions were unsatisfactory and their wages should be higher. They organized collective bargaining unions and got improved working conditions and higher wages. The companies were not too concerned because they could use new management theories and more automation to increase productivity, and they could increase prices to maintain their profits. Over time, the American worker became the highest paid, most productive, and enjoyed the best living style in the world.
But the productivity growth rate slowed and the companies started to feel pressure on their profits. In the 1950’s companies started to import cars to answer needs not addresses by the American manufactures (low cost: VW and Fiat; fun sports cars: Triumph, MG and Austin Healey; luxury: Bentley, Mercedes, Citroen, Rolls Royce). In the 1960’s entertainment products became a commodity and began selling based on cheaper price; and countries with lower wages could manufacture a TV set or tape recorder much cheaper than could the US. In 1966, Panasonic TVs sold for 1/3 the price of a Motorola TV and showed the same programs. Discount stores opened and buyers flocked to them in droves. The chain discount stores (Wal-mart is the more successful and most egregious) could shop all over the world for lower price and in most cases could dictate to the manufacturer how much they would pay. American companies could not continue to pay their workers the highest wages in the world and sell for less than other country so they had to move manufacturing to where the costs were lower. Employees in the manufacturing segment felt the pinch and shopped where their remaining dollars could go further.
With American consumers demand every lower prices, especially during economic downturns, the American manufacturer had little choice but to find places where manufacturing could be done for less.
Some companies saw that they could differentiate their products and keep a higher price. Examples in the automobile industry are Lincoln, Cadillac, Lexus and Ferrari. The profit on a Cadillac is higher than a Chevrolet, but the sales volume on Chevrolet is nine times greater than Cadillac (16,718 vs. 147,960 for December 2010). The demand and the profits are with the lower cost item.
So, in my humble opinion, the move to offshoring by the American companies is in answer to a demand by the American consumer.
In the 1950’s, Japan was a low cost manufacturer and increased their overseas sales. As the profits went up, the workers demanded higher wages and better benefits and received them. This drove up the cost of manufacturing, Japan lost their luster and the manufacturing moved to other countries. To keep costs down, Japanese companies have opened many plants in the US. (Toyota has plants in Mississippi, Kentucky, Texas, Indiana, Alabama and West Virginia; Honda Goldwing is manufactured in Marysville, Ohio; and Kawasaki is manufactured in Lincoln, Nebraska and Maryville, Missouri; plus many more examples).
As the costs in one country increase, manufacturers will move to new countries which will drive up the costs there and they will move again. Eventually, we will have a world economy where the cost of manufacturing will be similar throughout the world. This may take several generations. In the meantime, the countries with high standard of living will have to make a painful adjustment while the rest of the world catches up economically.
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February 7th, 2012 at 4:42 am
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