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Monday, August 23, 2004

Outsourcing Pays Off at Home(US) by Rich Smith via Fool.com

Rich writes," Outsourcing is here to stay. It's not just a fad. It's a historical fact. Outsourcing and its economic philosophical daughters, competitive advantage and comparative advantage, have been with us since before Adam Smith first regaled us with the parable of the pin maker. What's more, outsourcing is good for America.According to CNET, for the first five months of 2004 the average price of a DVD player made in China was $40.80. The average cost to produce it, including operating costs, was $39.80. (Just five years ago, it cost at least $500 to purchase one in the U.S., guaranteeing huge profits to its manufacturers. Clearly, the profit margins to manufacture a DVD player have fallen dramatically.)In those same five months, China manufactured 41 million DVD players on outsourcing orders from a variety of firms, such as Sony, Philips, and Matsushita Electric Industrial Company's Panasonic.But notice that none of these companies, which outsource production to China, are American. Chinese DVD player manufacturers aren't threatening American jobs because the American electronics industry lost its trade war with Japan long ago. Which puts USA in the interesting situation today."Rich argues that outsourcing creates more jobs. He says,"To meet increased demand, firms that sell, store, or transport a product (which now costs less) have to hire workers. The lower the price of a Chinese-made DVD player falls, the more customer service reps, website techies, and accountants Amazon.com must hire to keep up with the buyer traffic on its site. The more sales people and warehouse workers Best Buy needs to employ to stock and sell its goods. The more drivers get jobs at FedEx to move the goods around the country. In fact, by increasing the number of goods in circulation, outsourcing even stimulates the hiring of manufacturing employees at companies such as packaging maker Sonoco.The domino effect - Lowering the price of goods through outsourcing spurs job creation in related industries, too and offers the example: The more DVD players come down in price, the more people can afford them. And the more people can afford DVD players, the more people will want to buy DVDs. Think moviemaker Pixar here. Think Netflix, disc provider to the masses. When you add up all the jobs gained from lowering costs through outsourcing, there can be little doubt that they outweigh the few that are lost. So the next time some one says that outsourcing is bad for America, don't accept the easy answer".
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