The Future of Outsourcing.

There was once a time – only a couple years ago, in fact, – that it seemed as though the outsourcing problem would always plague American companies. Wages would always be cheaper in the Third World. Overseas workers would always accept contracts with no pensions and long hours. Governments would always be more receptive to large-scale factory construction. For any company in the apparel, technology, or manufacturing industries, it seemed inevitable that domestic jobs would always be lost to outsourced labor.

But outsourcing has taken repeated hits over the past months. First, economists began publishing reports last summer suggesting that China’s competitive advantage would not last for more than another decade. Due to rapidly rising wages in coastal Chinese cities coupled with higher transportation and energy rates, companies are expected to save less than 10 percent on outsourced production in 2015. That number, according to these reports, will then quickly approach equilibrium over the proceeding years.

Then, a spike in global cyberterrorism, practiced by both government agencies and groups such as Anonymous, created a situation where doing business overseas increasingly became a dangerous proposition, especially when sensitive intellectual property is concerned. Business managers who travel regularly to China need to fastidiously erase computer data, turn off cell phones, switch between devices, and utilize encryption techniques such as symmetric key management. In short, doing business in the developing world now often looks like something straight out of a spy movie.

Finally, the outcry in recent weeks over the working conditions in factories owned by Foxconn Technology, a contractor that works heavily with Apple and Dell, has led to new oversight measures and considerable wage hikes for Chinese workers. Since major Western companies increasingly care to present themselves as social and compassionate, we can only expect to see many more such reactions in the future.

All these developments should be taken in context of the global economic downturn, which has led to wage deflation across the Western world at a time when transportation costs continue to rise. It is now cheaper, in many respects, to manufacture a product in a low-cost Western region such as the American South. It’s no surprise that automobile companies have been putting up plants in Tennessee, Mississippi, and Alabama in recent years.

So does this all mean that the era of outsourcing is coming to an end? For now, the business world seems content to continue raising outsourced wages, take extensive security precautions, and overlook the productivity potential in the Western economies. But, in the long run, we can only expect that the slow move towards global equilibrium will push many American firms out of China. Some will go elsewhere in Southeast Asia. Others may explore Sub-Saharan Africa. And others will undoubtedly move production back home. Outsourcing won’t disappear, but in the long run it will probably become much more diffuse and much less of a certainty. We may be seeing the beginning of this change in our current economic climate.