Have We Started to Consider the End of Outsourcing?

Published in the Telegraph-Journal 7th December 2012

In recent interviews with business media, Apple revealed that it will begin to manufacture computers in the United States for the first time in years. “Next year we’re going to bring some production to the U.S.,” said Apple CEO Timothy Cook. This announcement comes on the heels of decisions made by companies such as General Electric which are moving some of their manufacturing operations back the U.S. after years of outsourcing their production offshore to countries such as China and India.

Reversing the offshoring trend —insourcing— to bring manufacturing back to the U.S. addresses a number of challenges: transportation is simplified and less expensive, intellectual property is more easily protected and costs can be managed with greater transparency closer to home. Companies are better able to manage innovation and productivity because they are more involved in the key elements of production. But these developments don’t mean that the era of outsourcing to offshore locations is over. Nor does it mean that jobs that have been offshored are coming back to North America in large numbers.

Many offshore outsourcing decisions were based on the single determinant of dramatically less expensive labour. In many cases, offshore labour was so cheap—fifty cents an hour against as much as $20 an hour in North America—that it compensated for higher costs and risks in other areas. Labour arbitrage may have been a determining factor for many firms seeking to reduce costs, but there are other advantages to countries such as India and China. Offshore labour generally lacked troublesome unions, and safety and environmental conditions tended to be less onerous than in the West.

There is another reason that many U.S. companies are reconsidering their commitments to offshore production. Any one of four critical risks can torpedo an outsourcing relationship: economic fundamentals, behaviour, execution and relationship management. Reviews of outsourcing relationships increasingly reveal that many were not well managed. Relationships frequently lacked common, shared metrics which then led to disagreements about quality. Overlapping operational and contract management roles contributed to interpretations of metrics that were overly dependent on management of the day. With no agreed objective measurement of performance, misunderstandings about success were often difficult to avoid. Maintaining an effective outsourcing relationship requires conscious ongoing investment of management expertise as well as financial. Since the rationale for offshoring was cost cutting, some firms were unwilling to contribute to that investment. Poor economic fundamentals often were unresolved.

Changes in the global economy have caused many firms that had been committed to offshoring to reconsider their options. The cost of fuel is one of those key changes. Shipping cargo is much more expensive than even ten years ago as oil prices have tripled. The cost of wages in China has increased exponentially and is forecast to rise at more than 15 per cent per year in the medium term. In the U.S., labour unions have become more compliant if not more acquiescent in the wake of the 2007-2008 financial crisis. Unions are more agreeable to making deals that reduce the costs of wages and benefits to corporations. Productivity has increased substantially in the U.S. largely as a consequence of robotics, computerized inventory control, voice recognition and online commerce. This trend has accelerated during the current recession with the result that productivity increases have compensated for higher labour costs. Labour has become a smaller proportion of the total cost of finished goods.

There is a dawning realization in many U.S. firms that management failures have been chiefly responsible for the reversal of commitment to offshoring and outsourcing of all kinds as the economics have changed in favour of bringing jobs back. Although much of American manufacturing many never return, the rebirth of even a portion of manufacturing will require a rethinking of the critical role of management to the survival of the firm.

Are We Hollowing Out the Regional Corporate Infrastructure?

By Peter Lindfield, published in the Telegraph-Journal 3rd August 2012

Toronto investment firms are supporting a $1.8 billion bid for Quebec-based hardware chain Rona by U.S. rival Lowe’s Not only does this move set the stage for a high-visibility battle between Bay Street shareholder interests and the Quebec government, but it has re-opened the debate about foreign takeovers of Canadian firms and if this potential sale is another example of the hollowing out of Canada’s corporate infrastructure.

Lowe’s, a $30 billion retailing giant headquartered in Mooresville, North Carolina, is hoping to capitalize on investor dissatisfaction over Rona’s direction. Lowe’s today has about 30 big-box stores, but its arrival has added to the stiff competition from the Canadian subsidiary of Home Depot, which operates about 180 stores. Home Hardware, a cooperative owned by 1,080 retailers, has recently expanded its number of large stores. Rona has about 1,500 retail outlets, including franchises and affiliates and operates about 840 stores under its own banner. According to some analysts, there is insufficient space in the Canadian market even for three large players.

But Quebec Finance Minister Raymond Bachand has characterized Rona as a “strategic interest”, stating that he has opposed an acquisition by Lowe’s based on the calculation that it would be potentially damaging to Rona’s 15,000 employees in Quebec and approximately 90,000 workers across Canada. Quebec’s investment and pension fund, Caisse de dépôt et placement du Québec, currently owns about 12 percent of Rona’s shares. Although Lowe’s has committed to keeping Rona’s headquarters in Boucherville, Quebec, and to continue relationships with Canadian suppliers, Mr. Bachand has mandated Investissement Quebec, its provincial investment division to investigate “every means it can use to block this transaction.”

Some economists quickly criticized Mr. Bachand, calling his intervention a “breathtaking example of sticking his nose where it does not belong” and asking “what of the interests of investors?” This condemnation of political interference into corporate affairs echoes Ontario’s Institute for Competitiveness and Prosperity 2011 report which stated that, “when Canadian companies are bought by foreigners, it simply raises the stakes for creating the appropriate balance of pressure and support for innovative, growing companies.”

According to the Institute, the hollowing out of Canadian corporate infrastructure is a myth. Their report goes on to state that Canadians should not oppose foreign investors who are prepared to acquire Canadian companies that “have not aggressively capitalized on opportunities in their own business.” Additionally, Canadians should “not be afraid to admit that sometimes Canadian management teams are not up to the challenge of global competition” and that “new, foreign-based management is needed to face it.” Impeding foreign acquisition would have the effect of “slowing the creation of new globally competitive corporations in order to staunch the takeover of existing corporations would do real harm to Canada’s prosperity.”.

In the face of this analysis, Mr. Bachand is unconvinced and unrepentant stating that, “we simply can’t think that, despite the good-faith statements made by a buyer, that in the long term economic rationalization won’t come to dominate and that this purchasing power now clearly exercised in Canada won’t be eroded over time.”

Mr. Bachand’s perspective is particularly insightful, especially if in this statement, one substitutes “Quebec” for “Canada.” Studies of the acquisition of Canadian firms by foreign interests overwhelmingly focus on the aggregate interests of Canadians nationally, as though regions—with their own economic realities—did not exist. If New Brunswickers were to contemplate the acquisition of this province’s iconic corporations by foreign interests—Moosehead Breweries, Ganong Bros., J.D. Irving Limited, to name a few—surely a public debate would ensue about the merits and risks of turning these companies over to interests not rooted in this province.