Low cost of labor – how long will it last?

Published May 6th, 2011 by Monique Rupert 2 Comments

I was recently reading an article in SupplyChainDigest titled:  “Rethinking China”. The article ponders a couple of topics; one, is it really beneficial for the US economy to have such a trade deficit with China even if it helps individual companies?; and two, whether we really have free trade with China or rather a labor arbitrage situation.

I work with many large OEM’s based out of North America, almost all of which are publicly held corporations who must answer to Wall Street each quarter. That is why much of their supply chain is either outsourced or done in Asia. This is nothing new.  For years we have seen outsourcing in all types of areas to help companies improve their bottom line.  Being in the IT business for the last 20 years, there has been a huge trend to outsource IT services to India and the results have been mixed.  Companies were (and still are) willing to take some inefficiencies in effort because of the low cost labor force. For example, offshoring work typically requires more effort, perhaps up to two times than what it would take to get it done locally.  In fact, I noticed many companies being forced to use this labor force because it looked like a competitive advantage for their company.  If you weren’t outsourcing then there was a school of thought you were paying too much money for services and you weren’t using best business practices. Over time and with experience, many times bad, companies have tried different strategies to make it work, and it has for many companies.  But some companies have determined that they wanted less inefficiency and possibly higher quality so they bring some of the resources to North America to do some or all of the work which can be significantly more expensive. Many of the large Indian IT firms will propose a mixed model of some work onsite and some offshore. In addition, with the boom of the IT industry in India, the labor costs are increasing and those costs are being passed on to the companies.  So as the cost increases for Indian resources, there is a new quest to find the next low-cost, high skill labor pool.

The author of “Rethinking China” shows that over the last 12 years, the trade deficit between the US and China has increased by 400 percent. Wow, that is a staggering figure particularly when you consider that the majority of that deficit is China manufacturing finished goods and shipping them to US vs. commodities. Obviously, this has taken many jobs from the US economy, however, one could argue that our labor force can do higher value work. Much of the manufacturing that these companies have shipped to China is labor intensive work because their labor cost is so low. But perhaps as the Chinese economy grows, the labor force will insist on higher wages and better working conditions, which would likely increase costs to the North American based companies. Perhaps there is a difference in quality as well. I have noticed some companies trying more mixed manufacturing methods where they send some of their people to supervise the plants in China or take part of the manufacturing back in house.

It will be curious to see how the industry looks in ten years. Will companies be looking to other countries for low cost manufacturing labor costs as the labor costs rise? Which countries will those be? Will there be quality issues in manufacturing? Will there be consolidation of the manufacturing in China to a few high quality companies? Clearly the trend of outsourcing is here to stay but the model of who does it, how it looks, and where it happens may change over time. Will the IT outsourcing experience parallel the outsourcing of manufacturing? I am interested in your experience and predictions.

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2 Responses to “Low cost of labor – how long will it last?”

  1. Juniper Innovations

    Some web reports discuss a quiet trend of companies shifting some outsourcing due to costs, quality, management and lead time issues amongst others. An example is here http://www.manufacturingnews.com/news/11/0429/accenture.html

    We’ve also heard presentations discussing China’s interest to increase value added activities and reflect these in a higher pricing strategy. The implication discussed was their prices will increase.

  2. Air Charter

    I think that even more jobs will be outsourced unless something is done to change the current trend. I believe US companies need to be offered some sort of incentive to start hiring American workers.

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