August 30, 2010    Volume 17, No. 13

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Multinational CEOs Say Outsourcing Has Gone Too Far


By Richard McCormack
richard@manufacturingnews.com

Chief executive officers and senior manufacturing executives working for multinational corporations predict the United States will become an even less competitive location for manufacturing, according to a survey conducted by Deloitte on behalf of the U.S. Council on Competitiveness. Over the next five years, the United States is expected to slip further behind the world's current leading manufacturing nations -- China, India and Korea. The CEOs say Brazil will surpass the United States as a better destination for manufacturing by 2015.

The CEOs "see a fundamental shift -- a new world order in manufacturing -- that replaces the 20th century dominance" of the United States, Germany and Japan, says Craig Giffi, vice chairman of Deloitte. "It's a virtual restart from the 21st century."

The CEOs are nervous about what this means for their children and grandchildren if the United States can't get back into the global manufacturing game. They recognize that outsourcing of manufacturing has not worked in the way they had envisioned. "We overestimated the issues associated with outsourcing jobs to low-cost nations and the consequences of that," says Giffi. "The executives underestimated the erosion that would have in their overall capabilities in places like the United States and how that would fundamentally shift their supply chains."

They also now recognize the folly of chasing low wages. "I don't think when the whole process started there was a fully baked understanding of the fact that this is pretty elusive," says Giffi. "It's like chasing drops of mercury around the table. It's very hard to contain once you start playing that game."

Why are the CEOs just beginning to acknowledge that their collective decisions to move production have damaged the U.S. economy, given that thousands of domestic manufacturers and millions of manufacturing workers have been raising flags about offshore outsourcing for the past decade?

The multinational companies, Giffi replies, have been driven by the interests of their shareholders. "Because they have options and have standards for profitability and performance, they feel like their hands are forced. But when you talk to the leaders and you have an honest and open conversation, what becomes clear is that these are passionate individuals themselves. They are very patriotic. Across the board, we generally find given their druthers they would prefer to remain competitive by building and locating in the United States, but there are an enormous number of challenges that come with doing that."

While outsourcing once looked like a good business practice, "time has proven that there are tradeoffs with everything and consequences with those decisions," Giffi adds. Companies can locate factories with the most advanced production technologies anywhere in the world. The significant factors that influence where those investments are made have been influenced by a nation's economic policies. In the United States, those policies have been focused on the financial sector and services at the exclusion of manufacturing.

"We allowed ourselves to believe for a long period of time that we could grow our financial services sector forever -- that there was no limit to our being a service economy," Giffi says. "Those were fundamentally baked into economic policy and it became so commonly accepted that it was the precept of modern economies -- that was the future." But such an approach was an "illusion" and has resulted in the loss of good paying jobs.

Since the financial sector suffered a monumental collapse, CEOs are starting to promote the adoption of economic policies that favor manufacturing. "They are saying that we have to have genuine high-value jobs created from making things and as they look around the world they see that the United States has been riding one horse -- the financial services industry," Giffi explains. "There is a completely different and more basic understanding now that says innovation is tightly tied to your ability to manufacture. Creating, researching, developing new products and making them is fundamental to the stability of an economy."

There is now an opportunity for the United States to seriously address its lapsed economic policy. "There should be a higher level of receptivity to the message, finally," says Giffi.

The Council on Competitiveness is using the results of the survey to develop a manufacturing strategy. Why is the council so late to the game? "I can't comment on where they have been in the past," Giffi replies. "But I do believe that they are now focused on the right topic at the right time. It's good news when we get more and more people looking at it and drawing attention to it and going forward with a process that says we really do need a strong industrial base."

But the United States government can't dither in putting together policies that favor production over consumption. "This isn't something that can be debated indefinitely," says Giffi. "Business leaders are forced into a world of making decisions 24 hours a day seven days a week on where they have to make investments in plants, equipment and new jobs." If the United States does not address its cost structure, talent gaps, trade polices and infrastructure "then we will see a continual gradual deterioration and downward spiral. . ."

To view Deloitte's "2010 Global Manufacturing Competitiveness Index," go to www.deloitte.com/globalcompetitiveness.


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