Tuesday, March 15, 2011

US Outsourcing: A Race To The Bottom?

About a week ago, a friend and I were at our fitness club when he ran into another guy as we were talking.

The third man began to converse, and, in time, mentioned he had been laid off from a New York-based insurance company. He then briefly recounted that, though an IT professional with an electrical engineering degree, he'd been laid off from Bell Labs, then a second firm, and, most recently, from the IT department of the insurance firm.

Understandably disappointed, he railed that there was no manufacturing left in the US, while companies are engaged in what he termed a "race to the bottom," hollowing out high-paying jobs from America and outsourcing them to India, China and Southeast Asia.

However, the laid-off engineer isn't entirely correct. As I wrote in this recent post concerning a recent Wall Street Journal editorial,

"A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.

In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.

Perry observes,

"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.

The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.

The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972."

It's not that the US doesn't produce things. It's that high value-added goods don't require as many workers per capital dollar to do so. The sorts of manufacturing jobs the engineer had in mind aren't competitive with those in other countries where such lower-value work is done for lower wages.

But this guy wasn't even in manufacturing. So let's consider his general concern- about outsourcing and a 'race to the bottom.'

I don't know where the guy earned his BS in EE, but it seems as if he was a fairly recent employee of Bell Labs. Probably within the last decade. Let's just say, as kindly as possible, that it's not the same Bell Labs of the pre-Lucent era. And it hasn't exactly been associated with lots of Nobel Prizes since ATT was broken up, as it was in the organization's salad days from the 1950s to 1970s.

Further, while the conversation was fairly brief, he typified himself as just a 'financial IT' guy. Working in such a capacity for a garden-variety general insurer is hardly a unique sort of job.

While he complained that it was no longer useful for Americans to earn EE degrees, as engineering jobs went overseas, I thought of Google, Facebook, Cisco, Apple and lots of other technology firms which still appear to be growing and using engineering talent.

Part of being an American is the freedom to educate yourself and then pursue a chosen field and skill set. If you make poor choices, you may find yourself challenged to maintain the career path you envisioned. For example, there are a lot fewer telecommunications engineers now than there were a decade or more ago, when so much more of the existing systems were analog. That's partly why communications are so much less expensive and more powerful.

It's the same with jobs in steel, autos, and even airlines.

In one respect, the laid-off engineer was correct. American companies, in order to remain competitive, for the good of their shareholders, do locate functions where they are most productive. For lower value-added functions, that can mean lower-wage countries outside the US.

Sometimes, companies have gone too far in this direction, as Boeing's CEO recently admitted, and reverse course,
"Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.

If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.

I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future."

It's the higher value-added functions and services that will remain onshore. American productivity is often superior in those areas, especially when requiring large and sophisticated amounts of capital to work so productively.

Sadly, the engineer's comments seemed to signal, more than anything else, that he'd perhaps made some sub-optimal educational and career choices in the past, which led to his having too few highly-valued skills, despite his degree.

The US does have a challenge to continue to create business growth which will employ highly-educated and -skilled Americans in highly-productive jobs which create high value-added. We can continue to expect lower value-added jobs to migrate to lower-wage locales, often offshore.

But that's not the same challenge as every worker to constantly evaluate whether her or his skills will remain competitive and highly-prized in our economy.

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