Effects of Reshoring on Outsourced Services

In Obama’s January 2012 State of the Union Address, he pointed out that companies who outsource their operations and manufacturing services were the leading cause of the high unemployment rate in the States and the bane of the current economy. The largest manufacturer of American goods is China, and the President has announced forming a trade enforcement unit to look into possible unfair trade practices present in the Asian country and hopefully persuade companies to reshore manufacturing jobs into the United States.

The President has reason to remain hopeful indeed. A study by Boston Consulting Group has shown a trend in companies bringing manufacturing operations back into the US from China, possibly creating 3 million jobs for Americans. According to MFGWatch’s 4th quarter 2011 Survey whose respondents come from various manufacturing industries including: Consumer Products (24%), Machinery Tools & Equipment (15%), Textiles (12%), Automotive (10%), Medical (6%), Aerospace (5%), Defense (3%) and Others (25%), 33% of manufacturers have begun researching into possibilities of reshoring manufacturing jobs back into North America, a 7% rise from last quarter’s 26%. This was brought about by indications that economic conditions are improving enough for manufacturers to consider bringing work back into America. Supplier markets are becoming more stable and global suppliers are more available compared to previous quarters.

Though conditions seem to be improving for manufacturers to consider reshoring to North America, there are still factors that keep most of them from doing so. High logistics, shipping and energy costs, high operating costs, and concerns about access to capital all affect the propensity of manufacturers to begin reshoring and hire additional workforce.

How does this affect outsourcing in general? Although there have been recent progress in the reshoring of manufacturing jobs to the US, a bulk of the industries, particularly the Information Technology industry and the customer service sector, will remain largely outsourced. Aside from the fact that substantially lower wages drive most companies to outsource globally, a study by Harvard Business School has shown that company executives are doubting America’s competitiveness against the global job market. The study involved comparing the productivity of America with those of emerging economies.

The major doubts about America’s competence lie in its capacity for productivity. According to the study: “Respondents point to America’s tax code, political system, K-12 education system, macroeconomic policies, legal framework, regulations, infrastructure, and workforce skills as the greatest current or emerging weaknesses in the U.S. business environment.”

Of the various factors why businesses refrain from investing in the US and creating jobs, the high cost of skilled labor was among highest concern, followed by regulations which highlighted the bureaucratic complexity present in the country’s system. Another concern was the high statutory corporate tax rate.

There were a total of 9,750 respondents in the study, a large percentage of which hailed from the Finance and Insurance sector, Manufacturing sector, and Professional, Scientific, and Technical Services sector. The respondents’ ages ranged from 30 years old to 70 and above, many of whom are in senior leadership positions with titles of Chief Executive Officer, President, Chairperson, Founder or Owner.

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