Western companies have become keenly aware that the outsourcing strategies in th

Question

Western companies have become keenly aware that the outsourcing strategies in the past 20 years have created unintended consequences. Recent studies point out, as western companies outsource manufacturing to emerging economies such as China, Brazil, India, they also give away innovation capability. This phenomenon is not new -- SONY, Samsung, and LG were contract manufacturers in the 1970s and 1980s. These days we see Leveno, Foxconn and Wanxiang America (a Chinese automotive battery maker) are playing an increasing role in engineering innovation and product design. Please identify and discuss the reasons how certain outsourcing strategies have led to diminishing innovation capabilities of the buying (U.S.) firms and even the whole industry sectors in the U.S.

Explanation / Answer

In few recent years we have seen that most of the manufacturing technologies have been outsourced from US to either China or India or Brazil. This is done due to cost cutting advantages and cheap labour. For a single unit production cost in US is around $10, the same amounts to $6-7 in Asian countries. This is due to the fact of mass production, cheap labour and low maintenance cost as compared to US. Employees working in this outsourced production companies doesn’t provide the same amenities to their workforce as a US production company would do. Furthermore government policies and cheap electricity and raw material along with free waste dumping ground is also available.

Since the outsourcing is done for cost cutting, companies do provide better technology and this has resulted in increase of technological advancements in the field of production. We see these companies nowadays following six sigma and lean method for their profitability and cost reduction.

We take an example of manufacturing firm like Foxconn. In recent days we have seen that this single firm manufactures all the mobile handsets of Apple, Samsung, and Sony etc. It has achieved target production at lowest possible cost along with uninterrupted supply of manufactured phones. Its dedication along with help from parent firms has helped it to develop mass production lines along with negligible defect. While we take companies in US, the whole of us manufacturing firms wouldn’t be able to supply that amount of phones which Foxconn does even when provided with 10 times the time limit. This is due to the fact the facility in US doesn’t support such mass production capabilities as of now. In recent days we have seen all the call centre and support being shifted to Asian countries for the same reason.

In recent news we could see that Apple is about to make a production unit in Andhra Pradesh in India due to mass production capabilities and work culture present. Nokia is also to revive its plant in Chennai, India along with one in China. US firms had now been lagging behind in production and have rather focused on technology and development part. For a business its best to work in the function you can deliver the best at an optimal cost. This has be the main reason for outsourcing production.

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