The Future of Outsourcing and Offshoring

An acceleration of reshoring occurred as a result of the Coronavirus pandemic, and this may become a lasting trend. That is, after seeing significant breakdowns in their supply chains and vendor capabilities in foreign nations, many firms developed an increased interest in manufacturing domestically, or at least closer to home. For example, some American firms developed a new interest in moving at least some manufacturing back to the U.S. or to nearby Mexico. This trend can be found in North America, the EU/UK, Japan and Australia, as many companies in those regions suffered supply chain breakdowns that will lead them to moving many activities closer to home.

This reshoring effect will be particularly strong in goods and technologies that are considered to be critical in nature, ranging from items that are vital to providing health care during future pandemics (such as masks and other protective gear), to chemicals vital to the pharmaceuticals industry, to highly specialized electronics and components such as semiconductors, to goods that are critical to national defense.

If they want to continue to manufacture mostly in Asia, then many firms that previously relied heavily on China for outsourced manufacturing are spreading their supply chain out into other nations such as Vietnam. India is also being considered by some manufacturers as a way to diversify their supply chains.

India and similar mature offshore work centers will remain moderate-cost providers of services and manufacturing for the foreseeable future. Keys to continued success include the massive, local supply chain that keeps offshore manufacturers supplied with vital components, along with advanced logistics and shipping systems that quickly get finished goods to global markets.

Evolving technologies will have a profound effect on the future of the outsourcing and offshoring sectors. The most dramatic near-term change is the very rapid adoption of cloud computing. This enables organizations, including massive corporations, to move much of their computing needs from internal servers to remotely operated, highly efficient systems leased-out and maintained by firms such as Amazon Web Services (AWS). This can create stunning increases in operating efficiencies, including a very dramatic decrease in the number of people needed to manage computing operations. This trend is unstoppable, and it is having a very negative effect on outsourced computer maintenance firms.

Robotics and Artificial Intelligence (AI) are already having a significant effect on the way that warehouses and distribution centers are operated, including those of outsourced 3PL (third party logistics) companies. This means higher capital investment, but lower overall management and manpower requirements.

AI and other advancements in software will lead to the elimination of hundreds of thousands of call center jobs and other outsourced positions. These jobs involve repetitive communications tasks, such as answering customer questions via phone or email. To a rapidly growing extent, software is capable of fielding these questions.

Another significant technology being closely watched is additive manufacturing (often referred to as 3-D manufacturing). These systems have already evolved to the point that they are replacing the need for a limited number of factory workers, including offshored contract manufacturing workers. The long-term result is not fully clear at this point, but it is clear that some companies, including global leaders like GE (a noted pioneer in owning and operating advanced 3-D manufacturing facilities), may shift some manufacturing in-house via these methods.

At the same time, as their economies grow, their business structures and middle classes of offshore work centers such as India will grow, and they will offer lucrative markets for intellectual property, goods and services sold by firms based in the U.S., Europe, Japan and elsewhere. In some cases, such goods will be imported. In others, they will be created locally at facilities owned by foreign firms. (For example, Kraft has significant manufacturing plants and thousands of employees within China, where it makes processed food products that have been adapted to suit the needs of Chinese consumers.) Meanwhile, developing nations face immense challenges, including the need to build infrastructure such as dependable electricity networks, roads and highways; extend their education systems; control pollution; enhance access to basic health care services; and provide greater opportunities to residents in rural and remote areas.

Many Chinese cities are experiencing significant difficulties with pollution and road traffic. The most popular Indian business centers, such as Bangalore and Gurgaon, are experiencing daunting shortages of infrastructure of all types, including electricity, while competition for workers is driving wages higher and higher. Despite the recent construction of new highways in India, traffic delays and inefficiencies are an immense burden. The offshoring boom does not touch all residents in India or China, despite impressive growth in the middle classes. Income inequality remains a significant problem. Clearly, there is room for substantial investment, outside of major cities, in education, transportation and development of rural industries.

China, since its dramatic business and economic reforms were launched in 1978, has been a bigger beneficiary of foreign investment than has India. This is one reason why China’s economic growth has been so impressive. In recent years, Chinese firms in many cities have faced difficulties in attracting enough employees, while strikes, government regulations and worker unrest had forced employers to boost wages significantly.

The biggest advances in developing nations are yet to come. Hundreds of millions of people will rise above poverty to enter the middle class in emerging economies in Asia, Africa and Latin America in coming decades.

Fully developed nations such as the U.S. have been shifting to knowledge-based economies for decades, as automation continues to take over domestic factory floors (displacing factory workers), while much of the rest of manufacturing has shifted overseas. The challenge for developed nations such as the U.S. and Japan is to maintain their leads in such areas as intellectual property, investment in R&D and higher education. There is fierce competition among nations to foster advanced education, develop well-trained and motivated workforces, boost productivity and create high incentives for entrepreneurship and investment. Nations that succeed in this regard will invent the new technologies, services, consumer goods and business processes that can be sold to businesses and consumers in other nations. Offshoring and outsourcing will continue to play a pivotal role in the fields of research, manufacturing and business services.

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