Rational or not? The industry’s eternal search for lower labor costs

Idle thoughts at 30,000 feet …

On the airplane returning from my most recent Outsourcing Navigator workshop, I was wondering: Has anyone ever looked at electronics industry outsourcing from a macro perspective?

I always preach the importance of total cost of ownership in outsourcing decisions, but that is not what I mean. I mean, has anyone ever tried to add up the total amount the industry has spent on its never-ending, search-and-deploy mission to the next lower labor cost region?

Prof. Hau Lee, a supply chain expert at Stanford University, tells us he’s never heard of any such studies. If anyone would know, he probably would. Someone should study the matter.

In what has at times resembled a progressive disease, we have run around the world chasing low cost labor for decades. Prices go up, and we run to the next low cost labor.

We do crazy stuff in pursuit of this goal. We spend breathtaking amounts to set up plants, train people, and establish supply chains. There is no doubt some benefit to the local economy when we do this.

But then we shutter the plants, abandon the sites, and move on when we think we can save a buck an hour on labor. To do this, there’s an incredible cost of capital in relocating our fixed capacity around the world.

Then there are the related transportation costs. We fly stuff all over the world. Before I owned it, the parts in my cell phone, including the final assembled product, probably had more mileage than I have frequent flier miles.

So I ask again, has anyone ever calculated the cost of moving this industry progressively around the world all these years? Would that total cost have erased whatever labor advantages we got by moving to China, for example?

Implicit in my question is the possibility that it doesn’t make sense. But, I’ve never encountered a fact-based argument one way or the other.

Have you ever wondered? Let us know, and give us your opinion by posting a comment below.

Posted by Charlie Barnhart, June 14th, 2007

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3 Responses to “Rational or not? The industry’s eternal search for lower labor costs”

  1. From: Chuck Tilleman
      on June 15th, 2007

    You need to consider the stock holders and the stock market when thinking about a business decision. The idea of lower labor cost plays to the minds of the people that invest so the facts don’t make any difference. A program to automate the process can match the model of lower cost and match the announced cost reduction but no mileage is gained with this strategy. The move has to be to the lower labor pool? Cover ass is in play here big time.

  2. From: GSW
      on June 15th, 2007

    The quest to move to low cost is not necessarily just to save a buck or two but also to create a cash flow and markets in the regions where you move. The influx of capital catalyzes the market that you move into such that you reap from the selling into the market.
    This always happens at the cost of the infrastruture of existing market where you manufacture it but makes the product cheaper in the same market.

  3. From: DJS
      on June 15th, 2007

    I’ve worked with several multinational companies during their outsourcing efforts. Of these, only 1 appeared to make any financial sense, using an offshore CM to take advantage of reduced component costs associated with larger purchased volumes. Even so, we dealt with severe quality problems and the eventual “cloning” of our products. The common theme I’ve seen with these companies is relatively young executives spearheading the transition to outsourcing, increasing the short term value of the stock and cashing in on the big payday then getting out quick before the financial fallout comes.

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