Question

What is the relationship between outsourcing and globalization?

Answer 1

There is a big difference, strategically, between the kind of globalization we’re seeing most U.S. companies do today, which boils down to little more than labor arbitrage to low-cost countries, and true globalization. There’s no strategy and not much more skill needed to offload work to low-cost destinations. It’s a winning short-term balance sheet move, with potentially disastrous long-term implications if the relationship isn’t more than skin deep. For example, when companies offload manufacturing, and increasingly, R&D, to lower-cost countries, they can cut prices and offer bigger product selections here in the United States. But if all those relationships are arm’s-length, it’s only a matter of time before those offshore suppliers eat their parents alive. They acquire U.S.-funded manufacturing and design capabilities now and add the marketing later (it’s way easier to acquire than most companies let on—yet another myth of U.S. corporate superiority). These companies can build a brand base in their local markets and then come back into the U.S. market under their own name at a lower price point. Worse, in a pure outsourcing strategy, the emphasis is almost invariably upon the U.S. market. There’s little attempt to use the relationship with the supplier to enter growing foreign markets around the world—to develop a global selling network in addition to a global labor network—for when the U.S. market is no longer dominant.

Don’t get me wrong. I’m not condemning global labor sourcing. It’s inevitable. But the focus for many companies today is pretty short sighted.