When it comes to international business, one of the most important issues that companies can face is whether or not to use a third party to help meet some of their manufacturing needs.
Apple, Adidas, Hewlett Packard and First Solar are among the many companies that have chosen to use third-party manufacturing companies to help fulfill the demand for their products. Shifting manufacturing operations to other countries can be a massive undertaking. There are several important factors to be considered in such a major decision….
The Pros of moving your manufacturing abroad
1. Using third party companies, such as Foxconn in China, can provide access to labour that is cheaper and more efficient.
There are a number of reasons why the labour is cheaper. China, for example, has a vast population, estimated to be at around 1.4 billion people, or approximately nineteen percent of the global population. The work force is therefore also enormous. This leads to competition for any available positions, and gives employers an advantage.
The combination of this competitive job market with a lower cost of living than many Western countries means many Chinese workers are willing to work for less, which presents an opportunity for global companies to save on labour costs.
It is not just the Chinese who are willing to work for less. In fact, companies often outsource to India, Southeast Asia, Mexico, and Central America because workers in these areas are willing to work for less as well.
Because wages are smaller, payroll taxes are also smaller. There are far fewer unions in these countries, so there is a reduced risk of workers going on strike as well. There are also less work regulations for companies in these areas, such as required increases for overtime pay rates, which can save time and money.
2. The quality of the labour is often still great, despite the reduced costs.
Most people who have ever used an Apple product, for example, can attest to the high quality. Apple is known throughout the world for its precision and impeccable design. The fact that Apple’s sophisticated products are manufactured by Chinese workers who often make less than seventeen dollars a day does not reduce quality at all. In fact, in the first day that pre-order sales went live for the IPhone 6 and the iPhone 6 Plus, 4 million phones were ordered.
There were some concerns about the iPhone 6 Plus bending, but that didn’t stop people all around the world from waiting in massive lines to get their hands on one of these new phones.
3. Moving manufacturing overseas can mean that companies can close plants in their own countries.
Shutting down these plants can save large amounts of money in real estate costs, as real estate is likely to be cheaper in the outsourcing country.
The Cons of moving your manufacturing abroad
1. Despite the fact that third party companies can often provide quality labour at a drastically reduced cost, there are sometimes moral issues that can accompany this type of labour.
For example, working conditions for employees in these companies can be extremely difficult.
To return to the example of Foxconn, the manufacturing company that makes products for Apple, Amazon, Hewlett Packard, and others, workers there often have to sleep in dormitories that have up to thirty people living in a three-bedroom flat. Workers also frequently have to work extremely long hours, to the tune of eighty hours per week. Furthermore, workers often have to stand, or are only allowed to use one third of a chair to sit on in order to keep them more focused.
Life at these types of companies can be very difficult for the workers, and it is definitely something to consider when it comes to making business decisions for major corporations.
Another key point to consider is that sometimes the factories and buildings in which these workers work often aren’t safe. These countries have fewer building regulations, and sometimes accidents happen.
For example, in April 2013, an eight storey commercial building in Bangladesh that housed a clothing manufacturing company collapsed after cracks appeared in the structure. Over one thousand people were killed in this accident.
2. Outsourcing your manufacturing or other aspects of a domestic business means transporting large amounts of jobs elsewhere.
Although this can increase a company’s bottom line, it can also require putting large numbers of domestic workers out of work, which can be hazardous to the company’s global brand management. In an age of increasing social responsibility, firing five thousand domestic workers is not exactly great for a brand’s image.
Displacing so many people from their jobs is a very significant decision. Also, the workers who are losing their jobs are often the people who have helped grow the company into what it is. So, transporting so many jobs can often create resentment from, and hard times for, domestic workers.
Between 2001 and 2011, around 2.7 million jobs were outsourced from the United States to China. A large percentage of those jobs were from the textile industry. While textile companies saved on their bottom lines by relocating operations to China, millions of workers lost their jobs in America. That is a heavy social cost to pay.
There are both pros and cons to outsourcing manufacturing. Ultimately, it is up to the individual company to decide whether or not using a third party company to meet its manufacturing needs is the right decision.
If a company can find a third party company which can provide cheaper labour, less regulation and fewer taxes, but also treats its workers fairly and provides them with a safe working environment and better quality of life, as many do, it can be an excellent option.
The negative brand implications for putting domestic workers out of the job, and the possibility of forcing foreign workers to work in what are sometimes harsh conditions, however, may lead other companies to continue their domestic manufacturing practices.
In an increasingly globalized world, opportunities for third party manufacturing will surely increase. The extent to which these opportunities will be taken advantage of is yet to be determined.
Have you made the decision to start outsourcing your manufacturing, and what have been the results?