Introduction
Offshoring as an economic term can holistically be defined and described as the relocation of jobs and services from one high-cost country to a low-cost country where wages are remarkably lower. Elaborately, jobs and services are moved from a high-cost country such as the United States to low-cost countries such as those in the third world. The process of offshoring manufacturing jobs has been on-going for decades. However, the offshoring of services is a phenomenon that significantly emerged in the year 2002 and has since grown and spread rapidly in the global economy. An estimate of thirty million jobs in the United States that account for just over one-fifth of the total US workforce are significantly vulnerable to offshoring (Hira, 2008). The vulnerable occupations are inclusive of data entry jobs, computer programming, mechanical drafting, electrical and electronics drafting, video and film editing, mathematical science occupations, statistics, actuarial jobs, and information and computing.
However, professions that require personal attention to a customer are less likely to be offshored due to their inability to be carried out remotely. As such, occupations that can be performed remotely as well as easily reduced to a particular set of regulations and procedures are prone to offshoring. In essence, jobs that require knowledge of the customer’s cultural context, as well as judgment, are difficult to be completed remotely owing to their difficulty to be reduced under certain rules, protocols, and procedures. Concerning the numerous controversies regarding the effects of offshoring on the US economy, studies reveal that most of the jobs prone to offshoring have high paying wages and require a top-notch level of education thereby toughening the process of determining how offshoring impacts the US economy. Consequently, developing appropriate policies is challenging.
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History
Ever since firms and organizations ventured into business, there has been an incessant need to increase their profit margin. As such, offshoring emerged as one of their innovative ideas towards profit maximization. In a bid to comprehend the history of offshoring, information regarding its background is crucial. According to Riverfish24 (2012), offshoring is not a new concept in the global economy. As a concept, its models and the complexity associated with the models have gone through several and vital transformations over the years. Offshoring started as a simple idea of importing and exporting of goods. Elaborately, as time passed, firms questioned the whole concept of importing of goods, yet they could produce the goods themselves through improving their skills, learning, and adapting or copying. The focus for this change in thought was to reduce the costs associated with importing. Americans used this enlightenment post the revolutionary war and subsequently began manufacturing the goods on their own rather than importing them from the British. Later on, the idea was adopted by other nations such as the Asian countries that produced the goods at a much lower cost compared to the US.
In the 1970s and 1980s, companies ventured into engineering and innovation of products in a bid to curb the high costs. However, it was in the 1990s that offshoring was conceived when companies opened branches of their businesses in less developed countries. This phenomenon ushered in the new millennium and firms benefited from the economies of scale. In addition, the companies maintained their culture, work practices, and work environment. With the conception of offshoring, the practice and offshore branches were referred to as Captive Arms or Captive Offshore. However, since the concept was new, jobs that were offshored were low-skilled and majorly transactional work. With the concept gaining traction, approval, and success in the global economy, the jobs offshored also transformed from low-end to high-end such as tax and legal support, medical transcription, information technology support and much more. Any job that could be done remotely from a computer was offshored, regardless of the location globally.
The growth of the concept was majorly propelled by the improved technology and infrastructure, advancement in internet and connectivity, and better means of communication advanced by technology. In 2000, ushering the new century was the Y2K bug that threatened to devastate all the out of date computer programs. As such, an opportunity presented itself to the software engineers especially in India who offshored their skills all around the world. Ever since this event, numerous companies recognized the talents and abilities of such individuals around the world like in Philippines, Brazil, Malaysia, Chile, and Sri Lanka thus making offshoring of IT skills and technology possible, (Riverfish24, 2012).
Popular US Offshoring Companies Today
Several US companies are offshoring their jobs and services globally to other countries such as Mexico, China, India, and much more. These companies include
Walmart - the company, is the single largest importer of foreign goods into the USA and offshores thousands of jobs to countries such as China.
Ford - offshores equipment transportation jobs and manufacturing jobs to countries such as Spain, Valencia, and Mexico.
Caterpillar - the company deals in the machinery industry and as such offshores manufacturing jobs and services outside the US to other countries especially the Mexico and Japan.
General Motors- the company just like Ford is in the transportation and equipment industry thereby offshoring thousands of manufacturing jobs to foreign countries like Canada and Mexico.
General Electric- the company, deals in the electrical appliances and equipment industry. Therefore, the company manufactures equipment such as water heaters and high-efficiency bulbs. As such, most of the manufacturing jobs have been offshored to China and Mexico.
Apple (Flextronics)- Apple is a powerhouse in the manufacturing of its brand of devices such as the Mac Pro desktops. Essentially, the company offshores manufacturing jobs to China and Singapore.
Farouk Systems- the company majorly deals in hair products and electronic appliances. In this accord, the company offshores manufacturing jobs mostly to China.
Mars Inc. - the company deals in the food industry and is located in Virginia. It is one of the largest candy companies globally and as such offshores thousands of manufacturing jobs all over the world.
Other companies practicing offshoring include United Technologies Corp, Dana Inc., and 3M Company that collectively offshore jobs to China, India, and Mexico among other countries, (Sullivan, 2017).
Advantages and Disadvantages of Offshoring
While offshoring has become a common phenomenon in cutting costs and diversifying, it is imperative for firms and businesses to know the different dimensions presented by offshoring regarding pros and cons. Recognizing the potential drawbacks and opportunities attributed to offshoring presents fundamental information and knowledge that goes a long way in decision making regarding whether to offshore or not to. Essentially, the knowledge could be a determining and distinguishing factor between the success and failure of a company.
As such, offshoring offers a remarkable and crucial opportunity of saving and cutting costs. Moreover, offshoring promotes a better relationship, transparency and working culture between the parent company and its remote branch. Elaborately, offshoring to particular countries ensures an unlimited access to a wide variety of talented group of workers. For instance, offshoring to a country such as Philippines which has a robust and fast growing BPO industry ensures a constant supply of talented individuals along this line of work. Regarding transparency, offshoring involves a rigorous process of selecting the best staff members that will be brought on board to ensure the success of the business. With the best team selected, it is easier for the parent company to manage it remotely due to the immense trust placed in its competency regarding abilities and skills.
Regardless of the team working remotely, there is no loss of data or intellectual property. The team accesses information and data from the servers of the parent company which is managed and regulated by the firm’s IT team. As such, due to the local security settings, the remote team cannot alter or do anything outside the already implemented security settings. Additionally, owing to the diversity brought about by offshoring, further security protocols such as banning phones in the work area and prohibiting local saving functionality play a vital role in data protection. Long-term benefits associated with offshoring is one of the primary reasons that most companies resolve to offshore. With a competent team already in place, offshoring assures remarkable growth to the parent company without necessarily expanding its fixed costs or overhead (Diversify. 2016).
However, regardless of the benefits associated with offshoring, the concept has several perks and drawbacks associated with it. Offshoring is demanding in terms of implementing managerial and direct control strategies. As such, it is time-consuming in the sense that the implementation process takes long. The lengthiness is attributed mainly to the fact that offshoring is not a setup and forget process. Rather it requires personal attention and critical care. Thus, offshoring is not recommended for companies looking for short-term and quick gains. Also, offshoring requires specific functional and well-documented procedures and processes thereby requiring additional training for the offshore team to meet the specific objectives. By so doing, additional costs are accrued from the training programs for the overseas staff. Working with an offshore team could be risky because it is difficult to monitor and judge the quality of work by each employee. In this accord, the quality of services provided by the offshore team is at the client’s risk. As such, if the quality is low, the company stands the risk of losing popularity and trusted clients.
Ultimately, the success of an offshore company depends on patience and the objectives that the company is seeking to accomplish. Most often than not, success lies in achieving the needs of the business rather than the needs of the owner. If the owner is interested in immediate returns without devoting full attention to the company and offshore staff, then failure is always imminent and unavoidable.
How Offshoring Hurts the US Economy
According to Roberts (2015), the United States is quickly descending into the Third World status. The author further asserts that the evidence is everywhere and one does not need to look far. Inferencing from the statistics provided by the US Bureau of Census, all the households categorized into quintiles as well as the top 5% experienced a drop or decline in real household income in the year 2015. Furthermore, the bottom 20% quintile experienced a 17.1 percent drop in real income. Elaborately, the decline in terms of money was from 14, 092 US dollars to 11, 676 US dollars. Still statistically speaking, since the year 2000, the fourth quintile has experienced a remarkable 10.8 percent drop in real income, that is, from 34, 863 USD to 31, 087 USD. In the same year, the middle quintile experienced a 6.9 percent drop. However, in 2007, the second quintile saw a minimal drop of 2.8 percent in real income, and finally, the top quintile has been experiencing a decline of 1.6 percent since 2006. Regarding unemployment, the US Bureau of Labor Statistics reported an astonishing figure of 93, 175, 000 unemployed Americans of working age. From the report provided by the Social Security Administration, 38% of all the working Americans made less than twenty thousand dollars, 63% made less than forty thousand dollars, 72% made less than fifty thousand dollars, and 51% made less than thirty thousand dollars in 2014 (Roberts, 2015).
Robert attributes the significant decline in real income and the scarcity of jobs to offshoring of jobs. Moreover, the author asserts that offshoring is as a result of the immense pressure from Wall Street and large retailers. As such, to mitigate these oppressive factors, companies move to countries where reduced labor price results in maximized corporate profits, executive bonuses, and raised stock prices. As a result, well-paying, manufacturing jobs were offshored followed by software engineering jobs, IT, as well as other professional service jobs. Offshoring has led to the economy creating low-paying part-time jobs like bartenders, retail clerks, waitresses as well as ambulatory health care services while full-time employment opportunities continue to diminish in percentage together with the overall percentage of available jobs. Additionally, the part-time jobs do not provide sufficient wages to form or maintain a household thus further hurting the economy. Consequently, due to the meager wages and inability to form a household or family, the young American adults of around 25 years are forced to depend on their parents in terms of shelter and food through their youth.
The inability of the young adults to form families and households translates to the significant collapse of the market for home furnishings and houses as well as housing in general. Looking at the US economy wholesomely, the finance sector is the only part of the economy that has shown growth over the years, from four percent in 1960 to 8 percent in 2015. However, due to the unique financial concentration and the reckless risk taking coupled with debt leverage, offshoring has made the financial sector a significant risk to the entire US economy. The declining real consumer incomes translate into little or no growth in the average demand to drive the economy. Also, debts accrued by the consumers inhibits them from increasing the expenditures with credit. As a result of the reduced spending, investment has lost meaning to the business world and as such investors detrimentally withdraw from the economy. With investors withdrawing, the economy tumbles downwards with businesses struggling to reduce their costs by replacing the part-time jobs with full-time jobs and subsequently substituting foreign employees with domestic ones. Consequently, the US government is deeply indebted and the US currency has been over-supplied due to quantitative easing efforts.
Deleteriously, offshoring of manufacturing jobs means that development, design, innovation, and research are also offshored resulting in the loss of the supply chain as well as the economy at large. Essentially, an economy that does not manufacture things cannot subsequently innovate. In addition, college students cannot find employment because the opportunities have been taken up by foreigners. Ultimately, this phenomenon leads to reduced demand for college education. Elaborately, what is the point of an individual going to college only to end up jobless or get a part-time job that cannot repay the student loan? As such, few graduates mean less skilled labor and competent workforce profoundly affecting the job market and ultimately the economy. As Hersh & Gurwitz (2014) stipulate, the competition in offshoring and importing is deleterious especially to the wages and subsequently the entire US economy. More elaborately, the more pressure a US company experiences from offshoring, the more pressure is exerted on the share of wages within it. Subsequently, the wage effect is felt across the entire economy. Thus, offshoring as a general concept affects the US economy in the sense that foreign countries offshoring into the US are subjected to lower taxes in comparison to the US based industries. As such, the US industries are forced out to offshore their services thus taking away employment opportunities.
Within the 2000-2010 period, the United States economy lost six million manufacturing jobs, which is interpretively a third of the total number of jobs. Despite the massive economic melt-down due to offshoring, companies such as United Technologies still have plans to lay off seven hundred and eighty-six employees in the Indiana plant and subsequently move production to Mexico. Worse still, the company is also moving employment from Arden Hills, Minnesota to offshore companies in Poland which will result in the subsequent loss of seventy-two jobs (Sullivan, 2017). Caterpillar is another company that, regardless of the downward plunge of the economy, plans to move its works to China, Mexico, France, Italy, and Germany thereby laying off seven hundred and twelve employees. 3M is yet another company offshoring its jobs to Mexico leaving one hundred and thirty Americans jobless in the suburban Cincinnati. General Electric (GE) is another company offshoring to Hungary and off-laying a hundred and eighty workers in Ohio due to the low demand for the incandescent and fluorescent light bulbs manufactured there. In addition, the company laid off two hundred and twenty-five workers in 2016 to move its production to Hungary, United Kingdom, and France. The offshoring acts by these businesses have resulted in the general loss of employment in the US economy thus setting off a domino effect leading to further downfall of the economy.
However, regardless of the offshoring activities by the companies mentioned above, the loss of employment, and downward plunge of the economy, efforts by the government are underway to correct the misdeeds. One of the main particularly handy policy towards correcting the deleterious effects of offshoring is the tax credits offered to companies reshoring work. Also, the US president is set to have a meeting this year with the companies mentioned above in a bid to find solutions to the loss of employment overseas.
Offshoring in Five to Ten Years
According to the Economist (2013), companies are rethinking their global footprints and are retracting back to their home countries, especially the Western companies. Plexus (2013) further reiterates these sentiments by asserting that the role of offshoring will be limited in scope and benefits in years to come. Owing to these fundamental remarks and observations, it is evident that offshoring will be no more than a concept that was once frenzied over rather than one that companies are willing to take risks for in future. There are several reasons to towards this change and gradual shift. As the Economist reports, the global labor arbitrage that sent companies rushing overseas is gradually drying up. Elaborately, China and India that have been for a long time offshoring hubs have seen their wages increase from ten to twenty percent in the past decade. Moreover, the employee turnover in these regions especially India has hiked by 80 percent thereby eroding the concept of labor arbitrage. On the other hand, manufacturing wages in the US and other European countries have remained the same over the same period. This phenomenon has seen offshore companies retreating to their country of origin thereby bleeding the offshore process slowly. Despite countries such as the Philippines, Vietnam, and Indonesia still offering low wages, they do not provide efficiency, and effective supply chains like China and India do.
Additionally, the gap between labor costs and wages has considerably reduced, and as such, companies see no compelling need to invest offshore rather than home. Another factor that is set to kill offshoring is its opposite, reshoring. Many companies are reshoring their jobs back to the US in a bid to save their economy by subsequently bringing more work home. Regardless of the companies reporting less than 25 percent of the cost saving they used to get from offshoring, the companies are significantly reshoring citing cost as a non-factor. Companies under this consideration include Google, Apple, Caterpillar, and Ford among others. This is set to reduce offshoring massively especially coupled with the efforts by President Trump to bring back home most of the overseas jobs in an attempt to mitigate unemployment problem and resolve the national debt. Another reason for the future collapse of offshoring is the realization of the numerous disadvantages that subsequently outweigh the benefits. In essence, the drawbacks include the long distance, increasing expenses accrued by the shipping of goods half-way across the globe, reduced innovation due to lack of manufacturing at home, poor quality frequently cited by clients, poor coordination between the offshore staff and the parent company, cultural barriers and difficulties, heightened business risks, and the increased risks of wars and instability in the developing countries.
Another undermining factor to offshoring is the gradual shift of companies from manufacturing everything in a single low-cost area to supply the whole world. In contrast, companies prefer to be located in areas with a huge consumer base as well as large new markets; a concept referred to as on shoring. To this end, companies prefer being located close to their biggest markets where it is easier to change productivity and customization in accordance with the changes in consumer demands. As such, rather than offshoring, companies prefer to summarize contracts, manage documents, file their trademarks or patents, and code documents. Further strategies include near-shore LPOs and advanced legal technology in the delivery of sustainable cost improvements (Plexus, 2013). From all the reasons mentioned above, offshoring may not be out of the picture for now but the signs are there, and in a few years to come, it will be greatly underutilized as a profit maximization business strategy.
Conclusion
Offshoring is the process of moving jobs and services overseas in low-wage countries in a bid to maximize profits. The practice began when Americans decided to manufacture their goods rather than importing them from England. Subsequently, companies began expanding branches into other countries thus giving rise to offshoring. Essentially, offshoring has both advantages and disadvantages. Many of the factors that influence the pros and cons are either market-based or government-influenced such as taxation and immigration policies. There are several companies practicing offshoring in the US such as Walmart, GE, Apple, Mars Inc., Caterpillar among others. Detrimentally, offshoring hurts the US economy through loss of employment to cheap overseas labor, reduced incomes, and the collapse of the labor market. The effects trickle down to other sectors such as the education sector whereby graduates lack the drive to go through colleges due to the daunting fact of lack of employment. However, there are efforts by the US government and President Trump to bring jobs back home through reshoring and offering tax credits to companies that practice reshoring.
Ultimately, offshoring’s light is fading away as time goes by. Companies are retracing their steps back home with labor arbitrage promised by offshoring eroding away. In five to ten years, offshoring will likely be less practiced. It will be no more than a concept rather than a practice worth rushing or fussing over. There are no recommendations to do away with offshoring but rather, it should be practiced smartly and wisely. The concept should not be overdone to the detriment of the economy of a country; moderation is a key factor here.
References
Diversify, Offshore Staffing Solutions. (2016). Offshoring Pros and Cons. Diversify. Web. Retrieved from: http://www.diversifyoss.com/newsroom/offshoring-pros-and-cons/
Farrell, D. (2006). Smarter Offshoring. Harvard Business Review. Web. Retrieved from: https://hbr.org/2006/06/smarter-offshoring
Hersh, A., & Gurwitz, E. (2014). Offshoring Work Is Taking a Toll on the U.S. Economy. Center for American Progress. Web. Retrieved from: https://www.americanprogress.org/issues/economy/news/2014/07/30/94864/offshoring-work-is-taking-a-toll-on-the-u-s-economy/
Hira, R. (2008). Offshoring U.S. Labor Increasing. Populations Reference Bureau. Web. Retrieved from: http://www.prb.org/Publications/Articles/2008/offshoring.aspx
Plexus. (2013). Why Offshoring is Over, and Legal is too Late to the Party. Plexus. Web. Retrieved from: http://www.plxs.com.au/why-offshoring-is-over-and-legal-is-too-late-to-the-party/
Riverfish24. (2012). History of Offshoring. HubPages. Web. Retrieved from: https://hubpages.com/business/History-of-Offshoring
Roberts, P., C. (2015). Offshoring the Economy: Why The US is on The Road to the Third World. Counterpunch. Web. Retrieved from: https://www.counterpunch.org/2015/10/30/offshoring-the-economy-why-the-us-is-on-the-road-to-third-world/
Sullivan, A. (2017). Trump to Seek Jobs Advice from Firms that Offshore U.S. Work. Reuters. Web. Retrieved from: http://www.reuters.com/article/us-usa-trump-jobs-idUSKBN1612DQ
The Economist. (2013). Here, There and Everywhere. The Economist. Web. Retrieved from: http://www.economist.com/news/special-report/21569572-after-decades-sending-work-across-world-companies-are-rethinking-their-offshoring
