How can Outsourcing be impacted by Donald Trump’s Presidency
Facts are facts and the U.S. economy did lose around 6 million manufacturing jobs from 2000 to 2010, roughly representing one-third of the total effective labor market. And offshoring was effectively responsible for a part of it.
I believe we all recall Mr. Trump’s reiterated campaign promise of high penalties to whoever would shift work from the US to any other Geography. This included Outsourcing and, being the US one of India’s IT Outsourcing Services main revenue sources, Mr. Trump’s pledge almost caused that country to have a “nervous breakdown”.
But, the fact is that regardless how severely such policy might have impacted India or other Offshoring sources of Outsourcing Services, it would most likely have impacted the US even harder. Why?
While in one hand the US does not have enough internal IT services offering capacity to cover the overall domestic market demand, on the other hand, India enables much lower costs.
A free market implies thriving to get needed solutions in a cost-effective manner that assures or even raises profitability mark-ups. So, while competing in the marketplace the smart way to ensure this is by lowering operational costs, hence the entire market dynamic inevitably leads to the need of partially Outsourcing workload.
A developer in the US may bare an hour rate of $15 to $30 while a developer from India may represent an hour rate of just $5 to $8, and being pragmatic about it, quality wise (and as hard as it may be for you to believe), the end result may not differ at all.
The motives are both demographic and cyclographic, but the bottom line is that in India the cost of living is way lower that in the US, so for an India expert getting $600 a month enables a locally perceived life standard that would require some $5.000 if in the US.
After having met some Fortune 500 US company’s representatives at the end of February 2017, including: Apple; General Electric; Microsoft; Pfizer; Caterpillar and 3M; Mr. Trump seems to have cooled down on his burning desire to implement penalties and heavy taxation towards offshoring sinners.
Well, no one has spoken about it ever since it seems no longer to represent “news”, but I have a theory… in line with the previously mentioned …
Just as grounds for hypothesis formulation, let’s consider the following American companies that have their workforce mostly offshore based: Nike (84%); Cognizant (81%); Stanley Black & Decker (74%); Lear Corporation (92%) and the list goes on …
The last one mentioned (Lear) has some enlightening details on its annual 2016 Financial Report where one may read:
- “… Low-cost manufacturing footprint, increased operational efficiencies have boosted margin …”
- “… 45% of Lear’s manufacturing engineering facilities are located in low-cost countries …”
Both statements explain a Net Growth of 18% with just a 7% Revenue Variation, meaning costs were cut.
The graphic below shows these companies YE 2016 results:
Now, remember the IT costs in India when compared with the US?
Some 33% lower. Let’s consider that in average offshoring reduces costs just by 58 % (not the 67% that India represents).
If we consider that the companies listed above would have to bring their jobs to the US therefore, having their operational costs rising 58%, the table would read:
Taking in consideration that the inflation rate in the US has been of a steady 2,1% year-on-year, none of the listed companies would be effectively profitable if operating from the US alone.
One universal law in Marketing is that what is truth in “Small Ville US” is verifiable in “Metropolis US” therefore, all companies that offshore services would be impacted in the exact same way proportionally to the revenue contribution that such Outsourcing has on their Core Business and that would mean the US economy to significantly hurt with it.
When a Fortune 500 company starts showing profit losses, the stock market panics and shares drop like if they were in the Niagara Falls; so, the natural “instinctive” attitude to overcompensate for profit loss due to rising costs has always been to raise prices.
If Mr. Trump’s pledge were to go forward and the major US companies would be forced to raise their prices, both their market share would drop (because there is competition out there) as also US workers would find their salaries accounting for less buying power. Bad deal!
Last week Mr. Trump promised a $7 million government compensation so that Carrier would not go ahead with offshoring plans.
We must have in mind that no government on earth (not even North Korea) has any real money; every cent that Governments manage come either from taxes (corporate and individual) or loans (which afterward bare interest rates). So, when a government promises compensation like this, it means that someone else will be paying the bill.
If the general idea is that the “sinners” (the ones insisting on offshoring) will pay the bill via the promised 35% additional tax, well … in fact, most likely they will not, because they will be dead (out of business) due either their stock market decapitalization deriving from reduced profits either by the 35% increase in taxation or the additional costs of producing locally in the US.
It’s a lose-lose situation! … Not good … Not good at all!
The solution is neither to nearshore nor to offshore, the solution is to leave corporate management to corporations (as within a truly free market context) while channelling incentives that over time will close the gap.
But how if the other guys are so much cheaper?
Again, as no economy exists without offshoring, there is no economy fully based on offshoring. A country like the US is capable of offering companies much lower energy cost than some others as well as much lower specific taxation and at the end of the day Offshoring is not only about labour costs, it’s about: geography and logistics edge/ coverage; security; energy cost and supply stability; materials flow speed; proximity to target markets; and the list goes on …
But I will give you two concrete examples:
- Argentina has a huge power supply problem and several times a year the Government cuts power to factories so people may have electricity at home, so it’s not possible to establish a proper assertive production calendars. The logical conclusion would be for international companies to pull out. But the Government overcompensates by retrofitting taxation amounts. So, the company paid who $1 billion in taxes gets back 50% at the end of the year as compensation for productivity losses, plus exporting the production assures steady profit margins (even if having not been able to produce as much as the initial forecast).
- China strictly forbids any cash to withdraw from homeland made profits, the money just must be reinvested locally. What is the smart way then? Corporations do not produce the components locally, so they sell the component which was made elsewhere to their own factories and get the money in the process, while then locally reinvesting the profit out of the product itself.
So, bottom line, like most things in life it’s about being smart and objective about business and not passionately undergoing demagogy.