Written by Alex Lach
The ongoing national debate about the employment practices of U.S. companies and private equity firms abroad features two phrases that confuse rather than clarify the issues: offshoring and outsourcing. For most Americans, the phrases are interchangeable, referring to the agonizing loss of jobs here in the United States, many in manufacturing, to workers abroad—aided and abetted by U.S. businesses and investors.
Indeed, a large percentage of Americans are concerned about jobs shifting from the United States to other countries. And they don’t put much stock into whether those jobs stay within a particular company or are contracted to a third party when the ultimate outcome is jobs lost at home. This is why most Americans find debates about outsourcing versus offshoring to be meaningless. To them it is all about the overseas outsourcing of jobs.
Still, before we present the five most important facts about overseas outsourcing, let’s first get the definitions right. According to Plunkett Research, a leading research group on outsourcing and offshoring practices, offshoring refers to:
The tendency among many U.S., Japanese and Western European firms to send both knowledge-based and manufacturing work to third-party firms in other nations. Often, the intent is to take advantage of lower wages and operating costs.
This differs from outsourcing, which Plunkett Research defines as “as the hiring of an outside company to perform a task that would otherwise be performed internally by a company.” The difference lies in the fact that outsourcing can take place within our domestic borders or abroad. But for the purposes of this column we will examine the combination of outsourcing to other countries and offshoring, and refer to the combination of these practices as “overseas outsourcing.”
So how pervasive is overseas outsourcing in our economy? Comprehensive data on overseas outsourcing practices are hard to establish, due in large part to limited government information which, according to the Congressional Research Service, were “not designed to link employment gains or losses in the United States, either for individual jobs, individual companies or in the aggregate, with the gains and losses of jobs abroad.”
Furthermore, companies attempt to limit exposure of their overseas outsourcing practices, leading researchers to believe that even the most extensive methodologies only capture one-third of all production shifts. Still, there are important factors to understand about outsourcing as the debate makes its way back onto the national stage. Here are the top five trends:
1. U.S. multinationals shifted millions of jobs overseas in the 2000s. Data from the U.S. Department of Commerce showed that “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.”
Furthermore, a recent Wall Street Journal analysis showed, “Thirty-five big U.S.-based multinational companies added jobs much faster than other U.S. employers in the past two years, but nearly three-fourths of those jobs were overseas.”
2. As overseas outsourcing has expanded, U.S. manufacturing has suffered the brunt of the blow. According to a report on outsourcing by Working America, “Manufacturing employment collapsed from a high of 19.5 million workers in June 1979 to 11.5 workers in December 2009, a drop of 8 million workers over 30 years. Between August 2000 and February 2004, manufacturing jobs were lost for a stunning 43 consecutive months—the longest such stretch since the Great Depression.” Manufacturing plants have also declined sharply in the last decade, shrinking by more than 51,000 plants, or 12.5 percent, between 1998 and 2008. These stable, middle-class jobs have been the driving force of the U.S. economy for decades and theses losses have done considerable damage to communities across the country.
3. The global electronics contract manufacturing industry reached a staggering $360 billion of revenue in 2011, and is expected to expand to $426 billion by 2015. This figure consists of companies, many of which are American, contracting outside firms largely in third-world countries with cheaper labor coststo manufacture their products. While this figure is not exclusively U.S. companies, large corporations such as Apple Inc., which conducts all of its manufacturing on foreign shores, and Nike Inc., which subcontracts all of its footwear production to independently owned and operated foreign companies, lead the trend.
4.Private equity firms have increased the pressure to cut costs by any means necessary, leading to more overseas outsourcing. Steve Pearlstein, a professor of public and international affairs at George Mason University and a Pulitzer-prize winning columnist, details the overseas outsourcing done by private equity firms in the 1980s, beginning with:
A wave of corporate takeovers, many of them unwanted and uninvited. Corporate executives came to fear that if they did not run their businesses with the aim of maximizing short-term profits and share prices, their companies would become takeover targets and they would be out of a job. Overnight, outsourcing became a manhood test for corporate executives.
For the private equity firms that took over companies, “the standard strategy has been to load up company executives with so much stock and stock options that they don’t hesitate to make difficult decisions such as shedding divisions, closing plants or outsourcing work overseas.”
5. Labor costs are the main driver of corporations sending jobs overseas, but foreign countries’ costs are increasing compared to the United States. According to a 2012 survey from Duke’s Fuqua School of business, nearly three-quarters of respondents indicated labor cost savings as one of the three most important drivers leading to overseas outsourcing. This was twice the rate of response for any other option. But according to research from the Hackett Group, the cost gap between the United States and China has shrunk by nearly 50 percent over the past eight years, and is expected to stand at just 16 percent by 2013. Labor costs in China and elsewhere are rising, and coupled with rising fuel prices raising shipping costs, the economic argument for sending jobs overseas may be becoming less persuasive.
Despite these increasing costs, the Duke survey found that “only 4 percent of large companies had future plans for relocating jobs back to the United States.” The Duke survey does not identify the reasons for this reluctance to bring these jobs back to our country, but a key factor could be the U.S. tax code, which, as Seth Hanlon explains, “rewards companies for making investments abroad—and leads to them shifting offices, factories, and jobs abroad even if similar investments in the United States would be more profitable absent tax considerations.”
This post was originally published by the Center for American Progress.
Photo: David Barrie/flickr