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OUTSOURCING: GOOD or BAD

Daniel Duffy

C++ author, trainer
Without this "unfair" practice, the Western standard of living would be substantially lower. Sure, the market price of this overseas-manufactured good in the West is higher, but it is quite a bit lower than what it would be were it produced in the West. Use American labor to produce iPads, and suddenly they cost you $5,000+ each.

Penny wise, pound foolish?
 

DominiConnor

Quant Headhunter
One effect of outsourcing has been the interaction between capital and labour in production.

When you produce goods or services you must choose what to automate and what to do by hand. People need paying but machinery costs money up front. If we take a machine depreciating at 10% and cost of capital at say 5% it means the equilibrium is roughly 6 times the annual cost of employee. Note I say cost, because non-wage costs in the USA are really quite vicious, health costs US employers harshly.
The increased Indian/Chinese participation in the global economy has lowered the cost of labour, meaning that automation will have been slowed down globally.
Short version means we have delayed the introduction of robots by using Chinese and Indians, many of these jobs would have anyway been automated away as machine costs came down and pay rose. Whole classes of jobs disappear from any economy on a regular basis.
Call centres would be now almost wholly automated if it were not for Indians.
You can't replace one with a $500 PC, but the Western cost of such labour is the same as a system that costs about $3-400K per call centre employee. At that level employers would buy serious tech to replace labour, and since wages are rising in India and the tech is getting cheaper these jobs are going to entirely disappear over the next decade.

When I left university there were lots of jobs for copy typists. For the young people here, that meant they read stuff off bits of paper and typed it on to other bits of paper. Yes really. A good % of all women did that all day, it was seen as an above average job.
As a kid a TV repair man would visit my house every few months because the mean time between failure of a TV was months, not the decades it is now. They cost months pay so they were fixed not thrown away as now, if you'd done that many workers take home pay would have been entirely consumed by repeatedly buying TV sets.
Work out how many people you need to visit every single house in a country every three months.
Yes, lots.

Since many TVs came from Japan, labour was in effect being imported, and a whole class of employment ceased to exist. It was brutally rapid, tens of thousands of skilled jobs fixing TVs gone it 2-3 years.

Look at a construction worker. My family are all builders and growing up saw how manual that labour is. Now they have more machines and pre-made components, a vast array of pre-made stuff that sticks things and fills in holes. electric drills were so expensive then that many used hand cranked ones. I'm older than most here, but I'm hardly Victorian, electric screwdrivers were unknown.
Now my kids have a battery powered screwdriver as a toy, made in Germany, again labour is imported.

But...
German industrial labour is amongst the most expensive per hour on the planet. They are very productive, smart Germans become engineers, smart Americans become lawyers. Education counts as well. Creationism is not a problem in US schools, it is a symptom of a system that is broken beyond repair. My kids could not be convinced that a shiny man on a cloud made dinosaurs as pets for cavemen no matter how hard you tried. Most Americans think that, imagine what they think is happening inside a digitially controlled drill rig, so they think it has a soul ? Germans don't believe this crap, nor do Chinese or Japanese.
That doesn't stop you being a lawyer but ignorance of basic science mean that advanced manufacturing is not so easy with US workers as it was.

But the real killer is the lawyer issue.
Imagine 100 smart new grads each in Germany, China and the USA
Would a smart kid in the USA really want to work for GM or Ford ?
Yeah some, but typically not as a first option.

No.
Fact is that the Chinese people in manufacturing are the smarter end of Chinese, the Americans in manufacturing are the dumber end of Americans. Guess who is going to win that ?
 
One effect of outsourcing has been the interaction between capital and labour in production.

When you produce goods or services you must choose what to automate and what to do by hand. People need paying but machinery costs money up front. If we take a machine depreciating at 10% and cost of capital at say 5% it means the equilibrium is roughly 6 times the annual cost of employee. Note I say cost, because non-wage costs in the USA are really quite vicious, health costs US employers harshly.
The increased Indian/Chinese participation in the global economy has lowered the cost of labour, meaning that automation will have been slowed down globally.
Short version means we have delayed the introduction of robots by using Chinese and Indians, many of these jobs would have anyway been automated away as machine costs came down and pay rose. Whole classes of jobs disappear from any economy on a regular basis.
Call centres would be now almost wholly automated if it were not for Indians.
You can't replace one with a $500 PC, but the Western cost of such labour is the same as a system that costs about $3-400K per call centre employee. At that level employers would buy serious tech to replace labour, and since wages are rising in India and the tech is getting cheaper these jobs are going to entirely disappear over the next decade.

When I left university there were lots of jobs for copy typists. For the young people here, that meant they read stuff off bits of paper and typed it on to other bits of paper. Yes really. A good % of all women did that all day, it was seen as an above average job.
As a kid a TV repair man would visit my house every few months because the mean time between failure of a TV was months, not the decades it is now. They cost months pay so they were fixed not thrown away as now. Work out how many people you need to visit every single house in a country every three months.
Yes, lots.

Since many TVs came from Japan, labour was in effect being imported, and a whole class of employment ceased to exist. It was brutally rapid, tens of thousands of skilled jobs fixing TVs gone it 2-3 years.

Look at a construction worker. My family are all builders and growing up saw how manual that labour is. Now they have more machines and pre-made components, a vast array of pre-made stuff that sticks things and ills in holes. electric drills were so expensive then that many used hand cranked ones. I'm older than most here, but I'm hardly Victorian, electric screwdrivers were unknown.
Now my kids have a battery powered screwdriver as a toy, made in Germany, again labour is imported.

But...
German industrial labour is amongst the most expensive per hour on the planet. They are very productive, smart Germans become engineers, smart Americans become lawyers. Education counts as well. Creationism is not a problem in US schools, it is a symptom of a system that is broken beyond repair. My kids could not be convinced that a shiny man on a cloud made dinosaurs as pets for cavemen no matter how hard you tried. Most Americans think that, imagine what they think is happening inside a digitially controlled drill rig, so they think it has a soul ? Germans don't believe this crap, nor do Chinese or Japanese.

But the real killer is the lawyer issue.
Imagine 100 smart new grads each in Germany, China and the USA
Would a smart kid in the USA really want to work for GM or Ford ?
Yeah some, but typically not as a first option.

No.
Fact is that the Chinese people in manufacturing are the smarter end of Chinese, the Americans in manufacturing are the dumber end of Americans. Guess who is going to win that ?

smart Germans become engineers, smart Americans become lawyers.

- That was the best part. Maybe also quants?
 
When you produce goods or services you must choose what to automate and what to do by hand.

The history of capitalism over the last two centuries has been about, inter alia, the substitution of labor by machinery. It was the use of machinery that the Luddites were fighting in England from about 1811 onwards (before mass executions and transportation to Australia snuffed out the movement).

People need paying but machinery costs money up front. If we take a machine depreciating at 10% and cost of capital at say 5% it means the equilibrium is roughly 6 times the annual cost of employee.

I hope you don't mean depreciation in the accounting sense because that is merely a device for tax purposes -- i.e., you can have a machine that has been completely written off but is still cheerfully in operation, with at least another twenty or thirty years ahead of it. It's the cost of capital plus annual maintenance and operating costs that factor into calculations and these will be balanced against calculations of output volume and where the breakeven point is.
 
On a small scale this might benefit you [owner of idea], on a larger scale it will benefit company's management elite.
When company is looking for a way to cut costs, and then outsources entire teams, who you think get bigger bonuses? Very often they don't care much about quality: its all about how the numbers will look in a spreadsheet.
 
I fail to see how creationism creeped into this topic. I have two masters and have taken a total of one biology class. Didn't seem to hinder me one bit. If you asked the majority of people who mock creationism to explain evolution past "we came from chimps" they would look at you with a blank stare. People think that believing in science makes them smarter, but unless you take the time to understand the concept yourself you are just exchanging one blind faith for another. I digress.

Outsourcing is no different than mechanization and automation. Jobs that were once in demand and required massive labor are no longer needed. Others will crop up and then they will die. People need to be flexible and mobile. This has been so for a while now and will only be more so in the future. The world has caught up to us. We can try and fight back, but the onus is on the individual to lean and excel. We provide mobility and opportunity, the two things than a free person needs to succeed. Everything else your doing.
 
As someone who has not only worked in a factory, but had a father lose his career (photo finishing) do to first mechanical advancements (1 hour photo) and then technological advancement (digital) AND then he lost his factory job to outsourcing to Mexico, I can tell you, yes, it all sucks and hurts the average American family. From a global perspective, I can hardly feel pity though. My dad lost his job and went to college for two years thanks to NAFTA. He found other work, my mom worked and went to school, we all made due. The poorest American is still king in Africa, China, etc.

Yes, poverty is relative and living in the ghetto is horrible and I would never wish it on anyone nor would I want to do it, lets be real. Schools are free, there is a lot of government assistance, we don't have political instability, wars in this country, etc. Food is plentiful and cheap and there are plenty of service jobs that might pay minimum wage, but at least there are jobs. Having a roof over your head and food in your belly used to be enough. Now you need two cars, a big screen and once a year vacations. Gone is the idea that one generation would suffer so the next could thrive. One only had to look to recent immigrants to the USA and see there success to understand that American failure is largely psychological or self induced.

People love to blame the government, corporations, schools, etc, but when you press them hard enough they will typically fold and admit that kids fail because of bad parenting. Unfortunately bad parenting cannot be corrected by subsidies and taxation. Raising a functioning and successful adult is hard, harder than most imagine. When you have intellectually and emotionally stunted adults raising kids, the deck is already stacked.

This went a little off topic, but if an American loses their job, a job that they don't deserve anymore, I do not feel bad. It is selfish as a nation to keep jobs that a developed nation should no longer do. Allow other peoples to lift themselves up, move away from an agrarian society and into an industrial society and let them start enjoying what we, as Americans, have enjoyed for a long time now.
 
Just to add a slightly different slant to this. Whilst it is true that your major manufacturing bases in the west (which killed off many of the previous skilled craftsmen) have often been snuffed out, there has been something of a mini-renaissance when it comes to hand made goods. You only have to look at the popularity of such sites as Etsy for example.

I can go online and buy hand-made lace from Belgium, hand-made candles from England, Micro-brews from California, hand-made furniture from Vermont and tapestries from France.

When your stock goods become cheaper, TV's, furniture (think Ikea) etc. then you have - in theory - more cash to spend on bespoke or luxury items. This combined with the Net is a positive thing in my opinion. The world really is your market place if you have something cool and innovative to sell, even if you only make ten of them a year.
The rising middle class societies of Asia as well will provide an abundance of new customers driven by personal taste rather than spending restricted to geographical location.

Just my 2 cents, but I think we are going through a difficult adjustment period, where formerly poor nations are rapidly growing and technology is changing the face of industry. Once things level out (and as an optimist I believe they will) , providing we don't destroy the planet in the interim I think things will be pretty darn good in the future.
 
Just to add a slightly different slant to this. Whilst it is true that your major manufacturing bases in the west (which killed off many of the previous skilled craftsmen) have often been snuffed out, there has been something of a mini-renaissance when it comes to hand made goods. You only have to look at the popularity of such sites as Etsy for example.

I can go online and buy hand-made lace from Belgium, hand-made candles from England, Micro-brews from California, hand-made furniture from Vermont and tapestries from France.

But you have to be well-heeled to afford this kind of craftsmanship. The major manufacturing bases allowed for a thriving middle class. As these bases vanished, the middle class has decreased in numbers: one increasingly sees a small rentier and financial elite at one end (able to afford hand-made crafts) and a large economically stressed and precarious working population at the other. This is corroborated by the marketing efforts of companies like P&G as described in this WSJ article:

In August that year, P&G's newly appointed CEO, company veteran Robert McDonald, accelerated the new approach of developing products for high- and low-income consumers.

"We're going to do this both by tiering our portfolio up in terms of value as well as tiering our portfolio down," Mr. McDonald said in September 2009.

To monitor the evolving American consumer market, P&G executives study the Gini index, a widely accepted measure of income inequality that ranges from zero, when everyone earns the same amount, to one, when all income goes to only one person. In 2009, the most recent calculation available, the Gini coefficient totaled 0.468, a 20% rise in income disparity over the past 40 years, according to the U.S. Census Bureau.

"We now have a Gini index similar to the Philippines and Mexico—you'd never have imagined that," says Phyllis Jackson, P&G's vice president of consumer market knowledge for North America. "I don't think we've typically thought about America as a country with big income gaps to this extent."

Over the past two years, P&G has accelerated its research, product-development and marketing approach to target the newly divided American market.

When your stock goods become cheaper, TV's, furniture (think Ikea) etc. then you have - in theory - more cash to spend on bespoke or luxury items. This combined with the Net is a positive thing in my opinion. The world really is your market place if you have something cool and innovative to sell, even if you only make ten of them a year.

If you've managed to keep your job and your purchasing power has remained unscathed, yes. But there have been more losers than winners in the evolving dispensation. The craftsmen themselves, incidentally, are probably just eking out a bare living. Capitalist mass production is where the money has been in the past: this is what allowed living standards to rise, and the creation of a mass middle class. As some people have pointed out, we seem to be regressing to a neo-feudal age. The market for yachts and private jets is great -- but the (quantitatively larger) market for middle-class items isn't.

Once things level out (and as an optimist I believe they will) , providing we don't destroy the planet in the interim I think things will be pretty darn good in the future.

Resource limitations and depletion rule it out. Enjoy the golden age while you can.
 
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