History of Outsourcing
In the United States, if you work in the Information Technology Sector (especially at a help desk), the very word ?Outsourcing? produces some sort visceral gut reaction. The fear that your IT job will be shipped out to a low cost country is a very real one nowadays. As with everything, outsourcing has its roots in the past. Now let me take you back to the year 1980.
In the beginning of outsourcing history, the United States was caught in the grip of stagflation (sluggish economic growth (stagnation) combined with simultaneous jumps in inflation and unemployment). In order to rein stagflation, the Federal Reserve increased interest rates to approximately 20%, hoping the huge increase would slow inflation. The Fed?s high rate solution worked perhaps a bit too well. In 1981, a severe recession followed. Another side affect of this interest rate hike was a huge boost in the value of the dollar. Foreign investors anxiously began buying up extremely safe and high yield U.S. government bonds. With the dollar?s value skyrocketing to nearly 4 German Marks and 360 Japanese Yen per every U.S. dollar (for reference purposes the yen trades at approximately 120 to the dollar today), American industry found itself in serious trouble. Foreign companies could now hold their prices steady and be guaranteed a cost advantage.
U.S. industries, especially the auto industry, clamored for relief and the American government reacted with its G-7 partners and brought down the value of the dollar. However the U.S. and the G-7 were too late, once strong industrial states such as Michigan and Pennsylvania suffered massive job losses as the rust belt that began in the 1970s spread further.
Between the strong dollar and increasing foreign competition, American car companies found themselves in a desperate situation and were forced to resort to a radical measure to insure cost parity and profitability. In the mid 1980?s, GM took what was then a very unusual step and closed 10 factories in Flint Michigan and moved them to Mexico. This event became the subject for the documentary ?Rodger and Me? and catapulted filmmaker Michael Moore into the spotlight.
The United Autoworkers Union reacted and made the transfer of jobs overseas a major issue of contention in negotiations with the big three auto manufacturers. In fact, the UAW was able to successfully negotiate agreements to prevent overseas outsourcing in the parts divisions spun off by GM and Ford. These spin offs later became Delphi and Visteon respectively.
It was too late to put the Genie back in the bottle; U.S. companies looked at outsourcing and saw one thing: A return to profitability. The trend began to accelerate during the 1990?s with the signing of NAFTA between the United States, Mexico, and Canada. With NAFTA signed, American firms began looking at Mexico as both a market for export and a potential center of production. Chrysler, GM, and Ford expanded their Mexican production capacity and soon a host of other companies followed. Foreign owned plants staffed by Mexican labor factories called Maquiladoras sprang up everywhere along the U.S./Mexican border.
What Americans hardly noticed was an increase in manufacturing along the Canadian side of the border as well. Lower wages gave a significant cost advantage cost advantage over American workers. More importantly, Canada?s population spoke English, making it easy for U.S. firms to do business in that country.
This combination of lower labor costs and an English speaking workforce soon had dire implications for one American industry in particular: film making. Soon more and more American televisions shows and films were being filmed in Canada rather than their traditional home in California.
The ?Canadian Affect? wasn?t limited to just film making. As the dot com economy faded into history, American automakers found themselves squeezing parts suppliers for additional cost savings. With their lower labor and overhead rates, Canadian parts suppliers found themselves at a cost advantage versus their U.S. counterparts. In the first 11 months of 2002 Canadian parts manufacturers boosted their exports to the United States 11%, while American parts manufacturers were dealing with bankruptcies and layoffs.
At the same time as the United States crafted NAFTA, the world was in the process of redefining the GATT accords. At the end of WWII a group called the World Trade Organization was formed in order to insure that the trade war which exacerbated the great depression would never occur again. These agreements in effect made it easier for American transnational conglomerates to operate as truly global companies rather than local companies in multiple countries. By the 1970?s and 1980?s American and Japanese electronics firms such as Toshiba, Motorola, and Texas Instruments were moving more of their production facilities to low cost locations such as Taiwan and Singapore. At the time, cost was the motivating factor behind the first wave of relocations. Furthermore, these countries possessed business-friendly regimes. Eventually these countries would also be caught in the great globalization crunch and watch as their factories were moved to other low cost countries such China.
This global production environment started to become more prominent during the late 1990?s. At first the concern in the late 1990?s was a potential shortage of skilled workers in the United States. With the dot com economy in its heyday workers were becoming a scarce commodity. U.S. multinationals were already experienced with manufacturing overseas, why not take the next logical step and begin setting up IT and research departments overseas as well?
In the late 90?s this process began slowly since the economy was doing well and stock prices were up. However, by the first half of 2000, many companies were in desperate straits as the riches promised by Internet business evaporated into thin air. As the economy began faltering, CEO?s became more and more focused with the bottom line.
The world had become a much more interconnected and interdependent place since the early 1980?s. With the advent of e-mail and high speed internet access, transnational corporations both large and small had the ability to manage and control far flung overseas divisions. Perhaps more importantly, China and India began concerted efforts to open up their economies to the world, culminating with China’s admittance to the WTO.
Instead of hiring one engineer in the United States for $70,000, it was now possible to hire 10 engineers for the same amount of money in a developing country. With shareholders (many of whom represented large worker pension funds ironically) clamoring for more robust earnings, CEO?s began to act ruthlessly to restrain costs.
Of course this brings us the present where workers today look over their shoulders and hope that their jobs aren?t exported overseas. Unfortunately, outsourcing is not a recent phenomenon and is a system that took years to develop. Likewise, solutions to outsourcing won?t be obvious for years, if not decades. It is crucial that a solution to outsourcing be developed in the context of our global and regional trading systems in order to succeed. The jobs of high skilled workers in the developed Western countries must be protected while simultaneous openings are made for investment and advancement in the still-developing nations.
Source : http://www.sudhian.com/
