Offshoring is the practice of obtaining products or services from another country or relocating production to another country. This practice has often been condemned by those in political circles and in the public. It’s practitioners have been blamed for the loss of jobs in the home country and sometimes even labelled unpatriotic. This is based on a ubiquitous and fallacious belief by most governments and politicians, who believe that businesses have national identities and should be protected as citizen of a nation. Business owes no loyalty to any nation or national identity but takes up residence where ever it is most likely to thrive. In recent years, the Chinese labor market has been an offshoring haven for multinational manufacturers, for several reason, which we will explore through out this paper. We will also explore the economic rationale behind this business practices and how it has benefited the cost saving and value stream interest of both the multinational manufacturers and their consumers.From an economic standpoint, businesses exist to maximize profits. To reach this end, business owners look to strategically position themselves within their respective industries to gain a sizable amount of the industry’s market share. Businesses often go about the objective of profit maximization by opting for strategic options for remedying a cost or value disadvantage. By performing a value chain analysis, business owners can ascertain cost or value disadvantages relative to key rivals and use the information derived from the analysis to craft strategic actions to hedge against any such disadvantages and improve profitability. “There are three main areas in a company’s total value chain system, where company managers can try to improve its efficiency and effectiveness in delivering customer value and increase profits: (1) a company’s own internal activities, (2) suppliers’ part of the value chain system and (3) the forward channel portion of the value chain system” (Thompson et. al. pg. 105).
However, we will explore the profit maximizing effort/strategy by examining a company’s own internal activities, and how it could be coordinated to help the business maintain optimum levels of profitability. One way of improving internally performed value chain activities, to generate maximum profits, is through outsourcing and offshoring. Although this business tactic remains controversial, and occasionally berated in the political and media sphere, the fallacious pessimism isn’t one shared by the vast majority of business savvy professionals. The concepts of outsourcing or offshoring are usually misused, or often used interchangeably, to mean the same thing. Both involve a conscious decision to abandon attempts to perform certain value chain activities internally and instead to farm them out to outside specialists (Thompson et al., pg. 167). Offshoring is the practice of obtaining products or services from another country or relocating production to another country; outsourcing, on the other hand, involves locating people outside of the primary firm who specialize in a process and contracting the external party to complete the work. The geographical location of the expertise in question does not matter when outsourcing or contracting third parties. Outsourcing, or offshoring, certain value chain activities makes strategic sense whenever an activity can be performed efficiently or more cheaply by outside specialists. It improves organizational flexibility and speeds time to market and allows the company to assemble diverse kinds of expertise quickly and efficiently. Businesses have employed these tactics for the purposes stated above.
In turn, they have realized outstanding profit maximization in the years since they began outsourcing activities. They have been able to achieve impressive profits by regulating the external activities, which could be completed by outside sources at a cheaper cost, without jeopardizing the core functions of the business, hence producing or providing the business’s goods and services, without sacrificing its quality. One industry that has stood to benefit from its offshoring practices has been the automobile manufacturing industry. Due to the labor-intensive operations necessary to manufacture automobiles, savvy manufacturers have been on a mission to find the most cost-efficient means of manufacturing their products, without compromising quality, to boost their profit margins. Offshoring has given them the ability to capitalize on the low manufacturing cost provided by skilled labor abundant markets, who are best situated to take on the labor-intensive operations within the industry.
In recent years, one cannot think of manufacturing, of any sort, without thinking of China and its impressive labor force. No matter what your perspective is regarding Chinese labor market dominance in the global manufacturing sector, everyone has benefited from lowered market prices courtesy of the cost reductions realized by multinational organizations who have capitalized on the cost efficient and cost-conscious practice of offshoring these operations to China. In the United States Census Bureau’s list of top 10 most populous countries in the world, China is listed as number one, with its current population at 1,384,688,986, out of the 7,469,746,340 inhabitants of the planet. The country accounts for roughly 19% of the world’s population. However, the size of the Chinese population is not the sole factor to their market dominance in the manufacturing industry, they offer a stable business environment with the necessary infrastructure and technical amenities required to ease the hassles of business operations.
For comparison, Nigeria, who ranks 7th in world population on the US Census Bureau list, also has the skilled labor necessary for manufacturing but the country ranks low in providing a stable economic and political climate and does not have the necessary infrastructure required for business operations. These advantages, have helped in maintaining the Chinese labor market’s strategic advantage as the global manufacturing and export hub for multinational corporations, including automobile manufacturing companies. A prime example of multinational corporations using the strategic advantages of China is the American car company, General Motors (GM). By utilizing the cost efficient Chinese labor market, the American auto manufacturing giant has managed to significantly boost its profit margins.
By 2004, GM had about 10,000 employees in China, and it operated six joint ventures and two wholly owned foreign enterprises. GM had participated with its joint venture partners in investments of over $2 billion in China. With a combined manufacturing capacity of 530,000 vehicles, GM and its joint ventures offered the widest portfolio of products among foreign manufacturers in China. GM’s major joint venture partner, SAIC, had been founded in 1956, and, by 1997, had grown to become China’s largest manufacturing plant (Cadieux, Pg. 2). In 2004, sedans represented 44% of motor vehicle sales in China, with trucks at 30% and buses at 26%. In was in the sedan component that growth promised to be most rapid and where profits appeared to be most substantial. In 2003, Volkswagen had dominated the sedan market with a 36% share. However, by June 2004, GM and its joint venture partners were selling more sedans than Volkswagen, with their joint ventures accounting for 40% of the total sedan market (Cadieux Pg. 3). As illustrated above, the joint ventures and offshoring activities by GM and other multinationals has been beneficial to their profit margins, but it has also provided employment and a source of income to the individuals comprising of the large Chinese labor market.
The move to China for cost efficient labor is not just a rational step to maximize profits but also a sound economic decision based on tried true economic theories. Two of which are the comparative advantage theorem and the Heckscher-Ohlin theorem. Comparative advantage is the ability of a nation’s residents to produce an additional unit of a good or service at a lower opportunity cost, while the Heckscher-Ohlin theorem states that relatively labor-abundant nations will export a relatively labor-intensive good, while relatively capital abundant nations will export relatively capital-intensive goods. Following these complimenting theories it is easy to surmise how and why China, and not Nigeria, is currently positioned to be the global manufacturing hub. One reason would be the fact that the resources of the latter nation are not equipped to tackle some of the endemic issues plaguing the nations sense of stability which hinders their attempts at upward mobility. Political issues such as poor access to education, pollution, poor infrastructure, and access to advanced technology would need to be overcome to make Nigeria a viable option. Due to negligence and a vast array of issues, Nigeria has rendered themselves unable to compete for a sizable amount of the global market share for manufacturing of finished consumer goods against China. Although a lot of countries have comparable population sizes, the lack of other necessary amenities and a conducive business environment, essential to easing business operations, has put countries such as Nigeria and Pakistan at a comparative, disadvantage to China, in the global manufacturing sector.
With everything else, especially with global trade, size matters. The mammoth size of the Chinese labor market cannot be overstated. Apart from the country’s relative political and economic stability, it’s advanced infrastructure and technology, which serve as key factors in ensuring its comparative advantage amongst its equally populous peers, the country still has the greatest concentration of skilled labor, on the planet. Going by the Heckscher-Ohlin theory, the fact that market forces has designated China as the global manufacturing hub, should not come as a surprise. It has all the necessary factors, to enable it to sustain such labor-intensive demand of the global manufacturing sector. With an army of skilled labor worker, unmatched in size and cost efficient due to its abundant supply of skilled labor, it makes perfect economic sense for manufactured goods to be produce in China, if a company decides to be globally competitive.