the world after covid-19: less outsourcing, more onshoring and automation?
If you were to create a cliché generator to start articles about the global economy, one of the things it’ll be guaranteed to spit out would be purple prose about living in a hyper-connected world where manufacturing and knowledge work spans continents in the blink of an eye. In today’s political squabbles, those who see this as a fundamental good and a steppingstone for even more international connectivity battle nationalists who see global companies looting the small industry towns on their past while forcing others’ cultures on them. And while we often focus on why clinging to the past brings nothing but misery, woe, and conspiracy theories, we seldom question the axiom that global supply lines are always a net positive.
Of course, there are some basic things we need to address before going forward. We really do need global access to survive in the modern world and shutting down free market zones would be an unmitigated economic disaster. We see just how awful a slowdown in trade is as we’ve locked down during the pandemic. Just imagine severing multinational ties to force countries into becoming self-contained universes. After decades of sprawling supply chains, it’s doubtful that would be possible, much less desirable. On top of that, automation in advanced economies and developing ones, will ensure that jobs lost to what nationalists blame on outsourcing won’t return because 9 out of 10 of them were lost to machines in the first place.
However, as we’ve tried to optimize every facet of manufacturing to squeeze every cent from every process involved in putting together everything from packing peanuts to cars, we ended up with a serious problem. Our supply chains have little to no slack. Any delays due to customs snags, geopolitical uprisings, or a pandemic quickly become costly and threaten what we can put on store shelves. Just consider that one of the biggest problems with a hard Brexit was the delays in the flow of goods at borders which would quickly lead to massive shortages of food and medicine, never mind raw materials for factories and power plants. And this is not to get into the tangled messes when it comes to transnational outsourcing.
the ugly side of offshoring and outsourcing
Some nations have much lower labor costs because the cost of living is so much lower, and a lot of new factories can help lift countless people out of poverty, as happened with China. Thanks to becoming the world’s factory, it went from a Soviet satellite state with an ancient and once proud history, to a rival superpower. But it did so at the cost of massive political repressions, catastrophic pollution, and now uses its power to bully and economically colonize nations that have few other development options thanks to automation and globalization. Even worse, in some countries with low costs of labor, that low cost is achieved by taking labor regulations as nothing more than polite suggestions of well-meaning busybodies.
On top of that, while contributing to a minority of lost jobs when compared to automation, outsourcing is one of the drivers of wage inequality. Companies eager to outsource anything they deem outside of their “core competencies” to contractors and offshore firms severed a chain of opportunities that allowed people to work their way up from entry level positions and gain skills as well as institutional knowledge. Half a century ago, you could start in the mail room and end up as a well-paid middle manager. Today, the mail room is a bunch of servers maintained by a contractor and your only way up is to find another job a rung further up the career ladder and hope you get it.
So, while offshoring and outsourcing lower the costs of doing business and allow you to focus on your core offerings, they involve surrendering control and dealing with externalities like the red tape of customs and potential theft of intellectual property. And this is not to mention that a lot of offshore contractors don’t necessarily know or care about your company culture and mission, much less how you want to do things and why. Why should they? You’re nothing more than a client. They owe you no loyalty. If you stop paying them, someone else will take your place, also eager to save a dollar and make the spreadsheets look good at an investor meeting, while cutting off pipelines of talent and dedicated workers.
why we need to accelerate onshoring
Companies fed up with leaving their supply chains and important work up to the whims of a customs official or a programmer half a world away are starting to think of ways to take back control and onshore their operations. While their owners and investors may have balked at the expense in the past, seeing just how fragile their pinch-every-penny-until-it-hurts-to-pinch-more-just-in-time infrastructure really is, they may change their tune. No more waiting for a customs approval. No more finding space in massive, polluting cargo ships registered to hell knows where with the laxest laws today. No more fly-by-night coders with questionable and fraudulent credentials. No more worry about IP theft and knockoffs.
It would be an investment in stability, in extra resources to weather storms, economic, literal, and epidemiological. Yes, the end result may cost more, but the product will be superior, and the pipeline of talent about which companies keep complaining while refusing to do anything about, will be back. That said, nationalists pining for the reopening of old factories in industry towns should hold off on their cheers. The end result won’t be a small-town resurrection. It will be massive, automated campuses producing anything and everything with new generations of robots to keep costs down, positioned closely to urban hubs and distributions centers, hooked up to grids driven by renewables and low carbon sources.
Some jobs would be brought back, but far from all. Automation would still reign supreme. And education and adaptation would still be the only way forward. But at least the supply lines will no longer be fragile and ethically murky. The quality of both product and service will be higher. More opportunities to move up will open. The talent pool would grow larger. And money spent on buying so many of the things we need wouldn’t be empowering authoritarian regimes and corrupt kleptocrats. Meanwhile, we would of course be looking for the best and brightest from around the world but urging them to come where their skills are most needed, not simply hunt for places where labor is cheap.
when robots rule the factories
Ultimately, automation itself is a good reason for onshoring. If work is going to be done by a bunch of machines anyone can buy, why spend the extra money setting it up in an overseas factory and shipping it back home? Why not just do it right where your customers are and where you have the most control? This applies to the developing world as well, which is also looking at replacing as many as two thirds of its factory workers with machinery. After that, the cost advantage of offshoring pretty much vanishes because the machines will cost roughly the same and can be moved anywhere they’re needed. The only real costs after that would be the maintenance and electricity to run them.
None of this is to say that offshoring and outsourcing will vanish overnight when it comes to manufacturing. There will always be factories around the world ran by conglomerates based half a world away. But there will be less reliance on transnational supply chains and a much greater incentive to build factories closer to home for greater economic flexibility and much more control over the many externalities of a global economy that seems unable to think more than a quarter ahead. And while certain nations will always have an edge in something, robots would significantly blunt that advantage, especially if that edge is nothing more than low labor costs. Machines will work the same no matter where you put them.
Once again, we have to consider that the world has changed in the last few decades and while our mantra in the previous century was “faster, cheaper, and more,” our mantra today has to be “cleaner, better, and safer.” While we enjoy relatively disaster free years, we could put the nagging need to update how we do business out of our minds. But the relative macroeconomic prosperity of the last decade made us complacent and delayed the need to get with the times. Now we have a choice to make. Do we embrace mass automation, make it our ally, and focus on quality and stability over quantity, or do we refuse and continue suffer through recessions, mass layoffs, and talent shortages every time the wind blows too hard?