Let me come right out and say it, America. Outsourcing is here to stay. It's not just a fad. It's a historical fact. Outsourcing and its economic philosophical daughters, competitive advantage and comparative advantage, have been with us since before Adam Smith first regaled us with the parable of the pin maker. What's more, outsourcing is good for America -- and I can prove it.
China: the low-cost provider
According to CNET, for the first five months of 2004 the average price of a DVD player made in China was $40.80. The average cost to produce it, including operating costs, was $39.80. (Just five years ago, it cost at least $500 to purchase one in the U.S., guaranteeing huge profits to its manufacturers. Clearly, the profit margins to manufacture a DVD player have fallen dramatically.)
In those same five months, China manufactured 41 million DVD players on outsourcing orders from a variety of firms, such as Sony, Philips, and Matsushita Electric Industrial Company's Panasonic.
Japan: winner of the last trade war
But notice that none of these companies, which outsource production to China, are American. Chinese DVD player manufacturers aren't threatening American jobs because the American electronics industry lost its trade war with Japan long ago. Which puts us in the interesting situation we find ourselves in today. According to USStuff.com, a website devoted to promoting U.S.-made products (preferably by U.S.-owned companies), there are no U.S.-owned companies manufacturing DVD players in the U.S. (or VCRs, TVs, and so on), and only a handful of companies here assemble such products, manufactured abroad.
There's no disputing that the demise of the U.S. electronics industry was tragic for hardworking Americans at firms that once made TVs and related products. Still, the fact of the matter is that, well, it is a fact. The war is over. We lost.
A war not worth winning
But guess what? Despite waging and losing the trade war with Japan, the Republic did not fall. Bankrupted businesses were bought out, or they disappeared and were replaced with new ones. Laid-off employees retrained and found new jobs in other industries. Meanwhile, the rest of the country benefited from the downfall of the U.S. electronics industry. Yes, benefited. Prices for TVs, stereos, and other electronics fell, and they continue to drop. Consumers who made do with a single B&W TV in the 1970s now have two or more color sets -- each costing less than the first B&W one did.
Losing the trade war with Japan allowed us to rise above the "fog of war," to see clearly the benefits of outsourcing products to China. That's important, because when American jobs are at stake, emotions can easily obscure facts. Consider the case of Chinese furniture imports.
When good companies embrace bad policies
Back in February, the American Furniture Manufacturers (AFM) filed a complaint with the U.S. International Trade Commission (ITC) against "dumped" Chinese bedroom furniture. Now, many U.S. furniture companies, including Motley Fool Hidden Gems pick Hooker Furniture (NASDAQ:HOFT), outsource much of their manufacturing work to China. But this didn't stop them from turning around and filing a complaint with the ITC about other Chinese furniture imports they hadn't ordered being sold cheaply in the U.S. and competing with the products they didn't outsource.
Hooker rationalized its double standard by saying that although it used Chinese manufacturers to lower the costs of many of its goods, it still felt a duty to protect the jobs of its bedroom furniture makers (Hooker makes its bedroom furniture in the U.S.). But there was a flaw in Hooker's argument: In protecting some American jobs, it was hurting all of its American customers. Hooker ultimately changed its mind and dropped out of the ITC charge after customers complained that they didn't want to pay the high price of Hooker's protectionist sentiments. (The brouhaha was ultimately resolved.)
A complaint in search of a complainer
Which brings us back to China's DVD player manufacturers. Just as consumers like cheap furniture, they also like cheap DVD players. American consumers should be in favor of Chinese DVD player makers producing inexpensive goods for our consumption. No American jobs are at stake, so no complaints will be filed. In all likelihood, this is both the first and last time you'll hear about the Chinese "dumping" cheap DVD players on the U.S. market. Which is a shame, because...
Outsourcing creates jobs
That's right. Outsourcing creates jobs. And I'm not talking about the kind that workers retrain for and step into once a factory closes. By driving prices down, outsourcing drives demand up. It's a simple tenet of economics that low prices increase demand for a product.
To meet increased demand, firms that sell, store, or transport a product (which now costs less) have to hire workers. The lower the price of a Chinese-made DVD player falls, the more customer service reps, website techies, and accountants Amazon.com (NASDAQ:AMZN) must hire to keep up with the buyer traffic on its site. The more sales people and warehouse workers Best Buy (NYSE:BBY) needs to employ to stock and sell its goods. The more drivers get jobs at FedEx (NYSE:FDX) to move the goods around the country. In fact, by increasing the number of goods in circulation, outsourcing even stimulates the hiring of manufacturing employees at companies such as packaging maker Sonoco (NYSE:SON).
The domino effect
And that's just the start. Lowering the price of goods through outsourcing spurs job creation in related industries, too. Just one example: The more DVD players come down in price, the more people can afford them. And the more people can afford DVD players, the more people will want to buy DVDs. Think moviemaker Pixar (NASDAQ:PIXR) here. Think Netflix (NASDAQ:NFLX), disc provider to the masses. When you add up all the jobs gained from lowering costs through outsourcing, there can be little doubt that they outweigh the few that are lost. So the next time a talking head comes on TV and tries to tell you that outsourcing is bad for America, don't accept the easy answer. Be a Fool. Dig deeper.
For more Foolish coverage of the outsourcing debate, read:
- Brian Gorman discusses the biotech industry's investments in India.
- Mark Mahorney examines whether offshoring is all it's cracked up to be.
- Rich Smith looks at the option of onshore outsourcing.
- Selena Maranjian looks at which companies are profiting from outsourcing.
Amazon, Best Buy, FedEx, and Pixar are all Stock Advisor Picks and have been analyzed to within an inch of their lives. Take a free trial subscription to Motley Fool Stock Advisor and see what all the buzz is about.
Fool contributor Rich Smith owns shares in Netflix but in no other company mentioned in this article. The Motley Fool has a disclosure policy.
