I never understood why companies don’t get it...if you ‘offshore’ your jobs to other countries, thereby causing massive unemployment here, how are we supposed to be able to buy your products?
I never understood why companies don’t get it...if you ‘offshore’ your jobs to other countries, thereby causing massive unemployment here, how are we supposed to be able to buy your products?
Not only companies do not understand....there are still quite a few here on FR that do not get it. If Americans are not employed...they cannot buy those foreign made products....or those products outsourced
Eventually, these companies that outsource will have nowhere to go....they will eventually lower prices, reduce services, or go out of business. The current Liberal Globalist mentality of Free Trade and Outsourcing eventually will collapse
As for Obama...he pretty much is doing what George Soros wants him too....Free Trade, Globalism, Outsourcing...and scary is that a lot of GOP support this nonsense
Oh, they ‘get it’.....but you have to understand the corporate mindset that is dictated by the Street: quarterly performance. It’s ALL about the latest quarter and how investors/financial analysts respond. Lower costs by off-shoring? You get rewarded by the Street; your stock takes a bump, you keep your cushy jobs in Mahogany Row.
American business is doing this to themselves with such idiotic, short-term thinking.
I wrote about that on FR in a series of articles:
(Vanity) Another Look at Outsourcing
(Vanity) A Falling Tide Grounds All Boats
Cheers!
Now, most people know what Accounting profit is. For instance, if the total cost of making a wrench is 5 bucks (btw ...the numbers are not accurate, just for the purposes of making a point), and you sell it for 8 bucks, you just made yourself an accounting profit of 3 Dollars. In a nutshell, accounting profit is total revenue minus total explicit cost. Makes sense so far.
However, we now have economic profit. Economic profit looks at both explicit AND implicit costs ....which means that OPPORTUNITY COSTS are now taken into consideration. A quick example of an opportunity cost is as follows:- imagine John dropped out of high school, and now works at Burger King making 7 bucks an hour. However, had he finished high school, he could have gotten a job transcribing medical data that paid him 12 bucks an hour. Thus, dropping out of school had a cost amounting to 5 Dollars per hour.
So, going back to our first example ...you have two companies. Spetz's Wrench firm, and Cat's Super-Wrench firm.
Both of them, while based in the US, have a total cost of making a wrench of 5 Dollars, and they both sell their wrenches for 8 bucks ...thus both have accounting profits of 3 Dollars.
Now, Spetz's Wrench Shop decides to move production to Indonesia, where the cost of production goes from 5 per wrench to 1 per wrench. Now, instead of making a profit of 3 dollars, I am now making a profit of 7 dollars (selling at 8, producing at 1 buck).
Now, let's have a look at Cat's Wrench Shop ...he decides to stay in the US. He keeps making wrenches at 5 bucks an hour, and selling them at 8. Thus, he is making a profit of 3 Dollars per hour! A profit ...an accounting profit.
It looks all good at first, until you look at Cat's Economic Profit ...had Cat gone to Indonesia, he would have made a profit of 7 rather than 3. Thus, while he has an accounting profit of 3, he has an economic LOSS of -4 Dollars (8-5-7).
Thus, even though he has an accounting profit, he has an economic loss.
Now, also look at it from another perspective ...the money that Spetz's Wrench Shop has made/saved, can now be used for better marketing and advertising, or by better enriching its owners, or even simply by going into some rainy day fund just in case some day the market for wrenches dips for a year or three. Furthermore, Spetz's shop is better positioned to compete with new entrants, wrench substitutes, or whatever (anything from a shift of tastes, re-tooling, to even an all out price war) as compared to Cat's shop, which would be living on borrowed time.
That is the main reason for offshoring. Sure, it can be masked under 'they are only going there because of the slave labor' and such talk, but the fact is that it boils down to the hard financial difference between accounting and economic profit.
And as long as the opportunity gains/costs are significant enough, companies WILL continue to offshore. The only way it would change is if some external factors came in to shift the implicit costs (e.g. say cost of freight becomes too high, or wage differential between, say, Indonesia and the US evens out, or say some MAJOR incentives are given for firms to stay onshore, or the heavy stupid clumsy hand of government). Also, there are some disincentives for offshoring (e.g. the fact that your customers may speak to some person with a weird accent ), but the fact of the matter is that most customers do not really care about that! Some will, and some of those will cancel the service, but most customers will not. Thus, the economic profit garnered far exceeds the handful of customers who say no mas.
Anyways, I am not here to advocate for offshoring ...however, that is the hard financial truth behind it. This is why, unless your company has a very STRONG domestic demand market (who are willing to pay EXTRA to cover Cat's Wrench Shop from its economic cost element ....say, instead of paying 8 bucks per Wrench paying 16 bucks per wrench) ...unless that happens, companies will offshore. Looking at FR, there are many who speak against offshoring, but are not willing to pay (much) extra to 100% American companies. For many people, a wrench is a wrench. Some bemoan the fact that there are no American companies left to give them that option ...the reason for that is that many went offshore, and those that did not simply died (could not compete) with those that did, and were not fortunate enough to find American consumers willing to pay (double ...at times more) much more.
One thing about our FReepers, as well as the silly DUmmies in DUmmieland, is this ...both sides of the aisle will always buy the cheapest good/service that satisfies their need. You can be certain that the cheapest good/service that satisfies your need was not made in the US of A (outside a very defined sub-set that bucks the trend).
That's the truth.
An important note: I did NOT even add some of the unique costs that can be found in the US ...such as some unique labor costs that can be both explicit and implicit. Some of these 'costs' (to take a simple one, say Unions ....or say, some rather restrictive regulation) simply make offshoring all the more attractive. I decided not to include these for the purpose of simplicity. Add them, and Spetz's Wrench Shop would kill Cat's Wrench Shop even faster.
Also, I did not include the amplifier effect that would arise if both Spetz's Wrench Shop and Cat's Wrench Shop were LISTED COMPANIES. If we are listed, then suddenly our quarterly performance becomes VERY VERY VERY KEY (I am a Fund Manager ...though for emerging/frontier markets, and based in Africa, and I can assure you that analysts can definitely kill a company if your quarterly numbers buck projections negatively). Suddenly, if we are both listed companies, my stock jumps up ...while your stock first stagnates, and then plummets ...leading to very bad analyst calls, and shareholders asking why the heck you as Managing Director are not cutting your cost base, and before you know it the Board of Directors calls you in for a very short and shocking discussion about your future in the company! That is another factor I did not include that also has a significant impact.