If you lived in America in 1992, you will recognize the following words, unless you happened to be living under a rock: “The Giant Sucking Sound.”
That is the colorful phrase used by presidential candidate Ross Perot to predict the impact of the North American Free Trade Agreement, as good-paying American jobs would be sucked away to the low-cost outsourcing destination of Mexico.
Mr. Perot had a gift for making phrases, if not for politics. The Giant Sucking Sound came to stand for two decades of concern about the offshoring and outsourcing of employment from high-cost zones like the US, Canada and Europe to low-cost zones from Mexico and Eastern Europe to China and Vietnam. The Onion, a satirical Web site, mocked these fears with a recent report that American parents are outsourcing child care to India and Sri Lanka, using cardboard boxes to ship their offspring across the seas.
Offshoring and outsourcing had devastating impacts on many communities in the Nineties. But the Giant Sucking Sound has grown a lot quieter in the new century. For one thing, at least in the US, most of the manufacturing that could be outsourced already has. And services are not moving offshore as fast as feared. According to the Hacket Group, big American and European companies are likely to lose a net 2 million business services jobs to outsourcing between 2002 and 2015. To put that in perspective, the total workforce of the US and the European Union combined exceeds 360 million people.
Offshoring and outsourcing were driven by two things: the low wages paid to workers in developing nations compared with their rich-world counterparts, and the information and communications (ICT) revolution, which made it possible to knit together global operations and deploy knowledge work anywhere. So, what changed? Wages in the world’s offshoring hotspots have grown explosively, as labor markets do what they do best: adjust to demand. So the cost advantage of hiring Chinese assembly line workers or Indian IT experts is much less than it was.
But business executives also learned from experience the downside of turning vital parts of their operations over to other companies or running manufacturing facilities on the far side of the world. Handing off key industrial processes and IT systems to another company risks creating a competitor. Shipping long distances is slow and costly, and sharply limits a company’s ability to adapt to market changes. Doing your engineering and design in one location and your manufacturing in another can save money in the short term – but it robs engineers of expertise in manufacturing, which can wind up costing a lot more money long-term.
The result of this learning curve can now be seen in the headlines. In 2012, General Electric moved manufacturing of home appliances from China to a factory in Kentucky. Google has decided to make its media-streaming appliance, Nexus Q, in San Jose. Lenovo, a Chinese technology company, will shortly open a new assembly line for personal computers in Whitsett, North Carolina. Europe has yet to see a surge in “reshoring,” as it is called, but the recession has loosened some labor markets and reduced labor costs, and it could soon happen there as well.
It turns out that being close to your customers, and ensuring that your key people stay close to what the company does, has enduring value. Location matters. Community matters, even in a global market. As communities in the industrialized nations fight for a better future, the Giant Sucking Sound is one less thing to worry about.
Note: I am indebted for the facts behind this post to a terrific special report, “Here, There and Everywhere,” in the January 19 issue of The Economist.
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