Why Outsourcing is Bad for Business

Summary

The video highlights how the once-promising trend of outsourcing and offshoring, which began in the 1980s, is now declining. Rising wages in countries like China and India, along with increased transportation costs, have reduced the cost benefits. Companies like GE and Apple have begun reshoring production to the U.S. The video also emphasizes the negative impact of outsourcing on quality control, citing Boeing’s issues, and warns of the potential loss of intellectual property, as seen in Samsung’s rise after partnering with Japanese firms.

Takeaways

• 📉 Outsourcing and offshoring, popular since the 1980s, may be losing their appeal due to rising costs.
• 📈 Wages in China and India have increased by 10-20% annually over the past decade, reducing the cost advantage for companies.
• 🚢 The cost of transporting goods from overseas to the U.S. has increased, making reshoring production more attractive.
• 🔄 Companies like GE have moved some production back to the U.S., as seen in their Kentucky plant for washing machines.
• 👎 Apple's partnership with Foxconn faced criticism over poor working conditions, damaging Apple's brand and prompting some production to return to the U.S.
• ✈️ Boeing's outsourcing strategy for the 787 Dreamliner, which involved many suppliers and subcontractors, led to quality control issues and damaged its reputation.
• ⚠️ Samsung's rise is a cautionary tale for U.S. companies, highlighting the risks of losing intellectual property to competitors when outsourcing.
• 🏭 South Korean firms like Samsung rarely outsource, preferring to keep production in-house to protect business processes and innovation.
• 🤖 The potential loss of intellectual property when outsourcing can strengthen competitors, as seen with Samsung’s past relationships with Japanese firms.
• 📊 U.S. and European companies are reconsidering outsourcing due to rising costs and the risk of intellectual property loss, leading to a reshoring trend.

Q & A

Why is outsourcing seen as a declining trend, according to the script?

Outsourcing is declining because the savings that were once realized through hiring contractors domestically or abroad are no longer significant. Rising wages in countries like China and India, combined with high transportation costs, have reduced the cost advantages.

What were the original benefits of outsourcing and offshoring to countries like China and India?

The original benefits were the availability of low-cost, highly skilled workers in countries like China and India, which allowed corporations to reduce costs while maintaining high-quality production.

How have rising wages in China and India affected outsourcing?

Rising wages, which have increased by 10-20% annually in both China and India, have made outsourcing less attractive as the cost savings are diminished, and in some cases, compensation now matches or exceeds pay in America and Europe.

What role did Apple's relationship with Foxconn play in influencing public opinion on outsourcing?

Apple's relationship with Foxconn, known for its poor treatment of workers, caused public outrage and damaged Apple's brand, leading the company to move some production back to the US as a response to critics.

What lesson does Boeing's experience with the 787 Dreamliner teach about outsourcing?

Boeing's outsourcing model for the 787 Dreamliner, which involved too many suppliers and a lack of centralized quality control, led to flawed batteries and grounded planes, highlighting the risks of excessive outsourcing and loss of oversight.

How did Samsung benefit from being an outsourcing partner for Japanese firms?

Samsung gained valuable insights into the manufacturing processes of Japanese firms, which helped them improve their own capabilities. This example serves as a cautionary tale for companies outsourcing too much, as it can lead to the strengthening of competitors.

What factors have led companies like GE to reshore some of their production to the US?

Higher overseas costs, such as rising wages and transportation expenses, have pushed companies like GE to reshore production to the US. GE, for instance, moved the production of washing machines and appliances back to a plant in Kentucky.

What was Boeing’s main mistake in their outsourcing approach for the 787 Dreamliner?

Boeing's main mistake was giving too much autonomy to major suppliers and subcontractors, resulting in a lack of centralized quality control and oversight, which negatively impacted the reliability of the 787 Dreamliner.

What concerns do South Korean business leaders have regarding the outsourcing practices of American and European companies?

South Korean business leaders believe that American and European companies are making a mistake by outsourcing so much manufacturing, as it exposes intellectual property and manufacturing processes to competitors, potentially strengthening them.

What is the broader implication of rising wages in outsourcing hubs like China and India?

The broader implication is that the cost advantage that made these countries attractive for outsourcing is fading, leading companies to rethink their outsourcing strategies, with some opting to bring production back to their home countries.