Response to Outsourcing Versus Globalization

Peter Koudal, director of Deloitte’s research division, adds this comment to last week’s piece on outsourcing versus globalization:

I think your point about outsourcing and the risks/challenges associated with it are on point. We just published a piece around this issue in Harvard Business Review in the March issue around “Global Manufacturers at a Crossroads.” The main point of that article was very much in line with your reasoning. The main arguments to quote:

“Conventional wisdom holds that multinationals increase their foreign direct investment as opportunities arise in low-cost, emerging markets. But a Deloitte Research study of global investment by U.S. manufacturers finds the opposite: In industries ranging from chemicals to computers to transportation equipment, U.S. manufacturing FDI decreased from $12 billion in 1999 to $4 billion in 2003. Today, such investments capture less than 15% of total U.S. FDI, compared with nearly 30% in 1994.

This trend has troubling implications for the competitiveness of U.S. manufacturing multinationals. Rather than establishing or acquiring their own assets, including plants, equipment, distribution facilities, and office buildings, companies increasingly appear to be using arm’s-length contractual means-such as through outsourcing-to engineer, manufacture, and sell in these markets. However, as the hub of global manufacturing activity moves toward low-wage nations such as China and India, innovation in technology, products, and processes will move as well.

An asset-light investment strategy for low-wage economies may seem attractive to manufacturers seeking to increase their short-term return on assets, minimize fixed costs, and increase flexibility. But holding back on direct investment may extract a high cost over the long term: It could diminish multinationals’ ability to compete against the expanding number of manufacturers rooted in the dynamic low-cost markets where new technologies, consumption patterns, and business models emerge. By failing to take more direct control over a greater share of their sourcing, engineering, manufacturing, and marketing in low-wage, fast-growing economies, multinational manufacturers are, in effect, creating competitors on a massive scale.”