Outsourcing

I

Introduction

Outsourcing, the practice in which companies move or contract out some or all of their manufacturing or service operations to other companies that specialize in those operations or to companies in other countries. In both cases the practice is usually done to take advantage of lower-cost labor or other efficiencies. When outsourcing involves the movement or contracting of those operations to foreign countries, it is properly called offshoring or offshore outsourcing. However, in common usage the term outsourcing is used more frequently than offshoring. In this article, outsourcing refers to both the contracting out of manufacturing or service operations to other companies or to companies in other countries. Outsourcing by United States companies has become highly controversial because large numbers of domestic jobs are lost when companies close factories and move production overseas. An example of this type of outsourcing would be an American jeans manufacturer that closes a factory in the United States and hires a contractor in China to produce its jeans, which are then imported and sold with the American company’s logo.

Outsourcing has grown increasingly controversial since the year 2000 because the practice, which once affected blue-collar workers only, has begun to affect many white-collar workers. Service-sector companies, for example, such as call centers and software companies, have laid off many American employees and contracted with companies in India and other countries to do call center and software work.

Many workers and labor unions assert that corporations that send manufacturing or services operations overseas are showing disloyalty to American workers, pushing down their wages, and hurting the nation’s economy by eliminating jobs. But many American companies insist that outsourcing is smart business strategy and is good for the nation’s economy. Corporate executives say outsourcing not only helps their companies lower costs, increase profits, and stay competitive, but also benefits the American consumer by enabling companies to reduce the price of their goods and services. Defenders of outsourcing also say the practice provides poorer nations with much-needed investment, jobs, and economic development.

Outsourcing has become the subject of fierce debate among economists. Many argue that outsourcing is beneficial to the United States and to other countries because it increases economic efficiency. By allowing American companies to concentrate on doing what they do most efficiently, they can contract out work that companies and workers in other countries do more efficiently. But some economists assert that outsourcing might undermine the American economy longer term. They warn that if U.S. companies continue moving a lot of their software jobs and expertise to India and China, such outsourcing might eventually enable the Indian and Chinese software industries to overtake the American industry. Such a transfer, these economists say, would seriously undermine America’s technological leadership as well as its ability to create jobs and wealth.

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II

How Outsourcing Developed

Before World War II (1939-1945), the U.S. economy was largely self-sufficient, producing the great majority of what the nation consumed: fruit and apparel, meat and machines, steel and automobiles. But the nation did import some items, such as coffee, tea, spices, bananas, mineral ore, diamonds, and luxury manufactured items, such as designer dresses and fine china. Companies did not engage in outsourcing before World War II largely because international trade was not nearly as developed as it is today, nor were global communications, an important foundation for outsourcing.

After World War II, the seeds of outsourcing were planted as global trade vastly expanded. The United States was the engine behind this expansion as the federal government sought to increase imports to speed the economic recovery of war-torn Europe and Asia. This trend was spurred by reductions in tariffs, which had long hampered trade. See also Foreign Trade.

In the 1950s the administrations of U.S. presidents Harry S. Truman and Dwight D. Eisenhower worked vigorously to rebuild Japan’s economy, especially its textile industry. In the early 1950s Japan started supplying large quantities of textiles to the United States. As Japan continued to rebuild, the United States began importing apparel from Japan, and soon from South Korea, Hong Kong, Taiwan, and the Philippines, while these countries also built up their economies.

A

Textile and Apparel Industries

These purchases from abroad usually involved easy-to-manufacture items and were considered importing rather than outsourcing because these purchases were done by importers and middlemen, not by American manufacturers that had moved operations or contracted out overseas. Economists say that there was no definitive point that marked when importing turned into outsourcing, but in the 1960s and 1970s some American textile and apparel companies began contracting out to producers in Asia to furnish some of the textiles and garments that previously had been manufactured in the United States. For many companies, the biggest attraction was the far lower cost of labor in Asia, where factory workers often earned less than one-tenth the wages of comparable American factory workers. In the 1960s and 1970s many other American companies, including some shoe retailers that had their own domestic manufacturing operations, began contracting with companies in South Korea, Taiwan, and other countries to provide shoes and sneakers.

Outsourcing accelerated in the 1980s, with U.S. companies starting to turn to Central America and South America and not just Asia. Outsourcing developed a new variation as giant retailers, as distinct from traditional manufacturers, increasingly oversaw apparel production. These retailers often created private-label lines and moved production from factories in the United States to low-wage factories abroad. Around this time, many European apparel manufacturers started doing the same thing.

This steady increase in outsourcing was spurred not just by lower wages but also better air transportation, improved logistics for shipping goods by sea, the reduced cost of international phone calls, the creation of cooperative networks with overseas businesses, increased design and manufacturing expertise abroad, and the development of faxes and overnight delivery services, which made it easier to communicate with foreign contractors. For example, it became possible to send new apparel designs quickly from designers in New York City to factories in Asia.

B

Other Industries

As overseas manufacturers became more sophisticated in the 1970s and 1980s, American companies began outsourcing other types of products, no longer just apparel and shoes, but also radios and toys and then televisions, stereos, videocassette recorders (VCRs), and automobile parts. During the recession of 1981-1982, when unemployment was high, Americans began to protest outsourcing because dozens of garment, machinery, electronics, and auto parts factories closed as companies turned increasingly to outsourcing. The major automobile companies—Chrysler Corporation, Ford Motor Company, and General Motors Corporation—were not only outsourcing auto parts but were also setting up entire assembly plants in foreign countries.

In the 1990s outsourcing continued to expand, as companies built on past successes and other companies that had not engaged in the practice joined in, often as part of a strategy to lower their costs to keep up with the competition.

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