Outsourcing?
Over the last 2 decades the world has been sold the many upsides of outsourcing by big business; lower costs (particularly labour costs), access greater talent pools, greater profits, etc.
The reverse side of the coin has often fallen on deaf ears, particularly when it comes to questions of quality, loss of control, risk, societal damage, overdependence on the east for „cheap“ supplies & services.
Outsourcing has in some cases become a cudgel that companies use to beat unions into docility as witnessed by decades of decline in workplace organising and mainstream unions. Workers’ rights can be undermined and circumvented with threats to offshore their jobs.
The coronavirus pandemic has made systemic vulnerabilities in chasing the „cheapest“alternative impossible to ignore. The Corona virus has highlighted the downside of outsourcing and offshoring. Just as a footnote, commenters pointed out that recent decades strongly resemble the run-up to the Great Depression. Both periods were marked by extreme concentrations of corporate power and personal wealth.
The downsides of radical outsourcing that has occurred in the shadow of uncontrolled corporate power can be seen best in the examples of the Automobile & USA Pharmaceutical industries.
While India and several European nations play critical roles in the global medical supply chain, China is among the top providers of active pharmaceutical of prescription drugs consumed by Americans.
For example, China accounts for 95% of U.S. imports of ibuprofen, 91% of U.S. imports of hydrocortisone, 70% of U.S. imports of acetaminophen, 40% to 45% of U.S. imports of penicillin. Almost 80% of the USA‘s supply of antibiotics are made in China. This scenario has become the norm in many western countries, and the current disruption to Chinese domestic production caused by the pandemic is straining the entire availability of antibiotics. This offshoring of antibiotics production is a „blunder of epic proportions“and warned of by Rosemary Gibson, in her 2018 book “China Rx: Exposing the Risks of America’s Dependence on China for Medicine.” In essence, the USA has virtually no capacity available to make even basic drugs for treating coronavirus, or antibiotics for infections that may come with it, including bronchitis or pneumonia.
Even if one believes that essential drugs could be imported to the U.S. from Europe, problem is: the production in Europe is also extremely reliant on China for active substances.
What about sourcing from other countries? India is the world’s premier supplier of generic drugs. However, the Indian Government has already announced restrictions on the export of 26 pharmaceutical ingredients as a strategic move in preparation for India’s own possible manufacturing slowdowns caused coronavirus.
Thus one result of the current pandemic will be that pharmaceutical companies will need to make intelligent choices about where to base their manufacturing and distribution hubs, and not put all their eggs into one basket.
Automobile Industry
Chasing the cheapest production, Automakers have also been fast to export jobs and production eastwards, primarily to China. Now as shortages of supplies from China take effect, automobile production around the world is stalling in a classic domino effect. Not only are automakers faced with disruptions to supplies of parts being delivered from China but also a fall in demand in regions hit by extensive quarantine measures which disrupt public life.
Volkswagen has announced the temporary closure of European plants, Hyundai and Kia recently stopped several assembly lines in Korea, and Nissan suspend its auto production in Japan. General Motors expects that production outages could affect plants in USA, Jaguar Land Rover cannot continue operating assembly plants in Britain (no parts = no assembly). Most other Automobile producers are also in similar danger
The world is quickly realizing how much it depends on China. Though with China becoming the world’s economic powerhouse, China’s labour costs are rising, local companies are increasingly competitive and the government has become less accommodating. China has benefitted greatly over the last decade, it has built up an incredibly skilled worker base, extensive highway and rail systems and a vast consumer market.
China’s importance now goes beyond what it makes. Its rising consumers buy more cars and smartphones than anybody else. The rising wealth in China enables Chinese to become tourists to all corners of the earth and they are now the largest tourist demographic, spending $258 billion a year, nearly twice what Americans spend.
For companies seeking „cheap“ outsource destinations, which location will be the „new China“, and how long will that last? What will the lesson of this pandemic be? Hopefully that chasing the cheapest solution can in the long run turn out to be the most costly. Diversified production is a necessity. Risk management needs to be done properly. The Harvard Business Review in 2006 laid out the scenario of Pandemic preparedness. Not many business people seem to have grasped the consequences.
