Your job may be safer than you think in 2007.The great tide of offshoring that has sent millions of U.S. jobs to low-wage countries such as China and India seems to be slowing. If I'm reading the signs correctly, U.S. workers are facing lower odds this year of seeing their jobs sent overseas in the name of corporate cost-cutting than at any point in this decade. We all vividly remember headlines like these: "3.3 Million U.S. Service Jobs to Go Offshore" or "Near-Term Growth of Offshoring Accelerating." And we remember projections like the one in a research report from Forrester Research that 3.3 million U.S. service jobs are headed overseas by 2015. Those headlines and that report are from 2002 and 2004, reflecting a huge increase in jobs sent overseas in the early years of this decade. But they don't tell us much about what's going on right now. Recent evidence shows that we're seeing a deceleration in the rate at which jobs are being shipped abroad, mostly because of a crisis in global logistics, the systems that get stuff from here to there on time. The evidence could even indicate that we're headed for a pause in offshoring as companies cope with the consequences of the rush to move everything -- from manufacturing to assembly to customer service -- to low-wage countries.
My evidence, largely anecdotal, falls into two categories. The first examples are a few representative companies deciding now whether to keep jobs at home or send them to low-wage countries. The second category is evidence that the costs of offshoring are rising and the benefits shrinking, which will lead more and more companies to rethink their offshoring plans in the coming months.
Europe, Then the U.S.Because the manufacturing sector was the first to send massive numbers of jobs overseas, it's also the source of my examples of companies that have reached a balance between high-wage and low-wage countries. And because European companies are under greater pressure from unions and national governments to preserve jobs at home than companies in the U.S. are, my examples at this stage all come from European economies. But I think the evidence will soon show similar changes among U.S. companies. Take Luxottica Group ( LUX). The company has jumped into manufacturing sunglasses in China big time, with its second factory in that country going into production in 2006. But the company isn't shipping existing jobs from Italy to China. Luxottica is using production from its low-cost Chinese factories to meet new demand created by rising sales in China and other markets. The existing six highly automated factories in Italy continue to run full-out. This isn't some altruistic gesture by Luxottica, either. The company's big Italian presence allows it to keep on top of trends of the moment in a fashion business. Being "just down the road" from Italian fashion capital Milan and from the fashion brands that it licenses -- such as Dolce & Gabbana, Ferragamo and Prada -- enables Luxottica to supply better service to these "customers" and to the retailers that actually sell these high-end labels.
Luxottica isn't unique by any means. Germany's Putzmeister, the world's biggest maker of the giant pumps used to shoot concrete up hundreds of feet during the construction of office and apartment towers, splits its production between high-wage Germany and the U.S. and low-cost Shanghai. The Shanghai plant mostly serves the booming Chinese construction industry. German and U.S. operations meet the demands of developed-world construction companies for specialized machines. Both the high-wage and low-wage operations, then, are close to the customers they serve. Employment at the company as a whole climbed by 418 workers (18% in 2005), with 166 new jobs created in the high-cost German economy. I expect more companies to follow this path -- not because CEOs around the globe will all one day wake up and say, "Hey, wouldn't it be neat to save jobs in high-wage countries?" but because the economics of operating a global business push them in this direction.
Devil in the DetailsSending jobs by the millions to low-wage countries has a simple logic at its origins: Companies can make products or provide services for less when they pay their workers lower wages. The slowdown in offshoring that I see has a similarly simple origin: The benefits of making products and providing services in low-wage countries disappear when you can't get products to customers on time or when the product doesn't work as expected when it finally does reach the customer. In short, what's causing the slowdown in offshoring is a crisis in global logistics. You've probably been a victim of this crisis over the holiday shopping season. I was.
That's what led me to start thinking about a slowing of offshoring. I got hit with a big problem in getting a SpongeBob Lego to my daughter for Christmas. But you had much the same experience this shopping season if you tried to buy Ugg boots or other products. This isn't simply a replay of the shortages of hot products that always plague holiday shoppers. It was more conspicuous at Christmas, but the problem has been with us all year. For example, in October, English T-Mobile dealers couldn't get enough of popular Sony ( SNE), Nokia ( NOK) and Samsung Electronics phone handsets. And it has swept over whole industries and whole countries. In Japan, for example, falling quality in the products produced by national flagship companies such as Sony and Toyota Motor ( TM) has set off a national crisis. Sony has been rocked by problems with exploding batteries and excruciatingly inadequate supplies of its key PlayStation 3 due to manufacturing problems. Quality problems with Toyota's cars and trucks have become so serious that in June, Toyota came in behind Hyundai Motor of South Korea in the J.D. Power quality survey of U.S. car buyers. That has led to calls by Japanese politicians for schools to refocus on the basics -- traditional discipline and memorization of ancient Confucian texts -- and for companies to stamp out American-style pay systems based on individual performance.
More Moving PiecesWhen the problem takes in Danish, U.S., Finnish, Japanese and Korean companies, though, I think you can safely conclude that something more is afoot than a crisis in traditional Japanese values. My candidate for finger-pointing is an overstressed global supply system. The more functions a company outsources, the harder it is to keep everything coordinated. And when that outsourcing is actually offshoring, that challenge is even greater.
Companies have to keep factories -- their own and those of outside suppliers -- at different stages of the production process coordinated and then manage very, shall we say, idiosyncratic transportation systems so that everything arrives at assembly points and then at resellers or retailers on time. And all over distances that can readily exceed thousands of miles. And the outsourcing and offshoring of so many customer-service functions has actually made the process much, much tougher to manage, since often critical information from customers that might indicate a problem isn't flowing into the company itself but into a call center staffed by workers who not only are reading from scripts to solve problems but also don't have the knowledge of the local market necessary to see a developing problem in complaints from individual customers. I found it shocking, and still do, that a company as good at reading its customers as the "new" Lego initially told me that I faced a back-order problem of a few weeks' delay and then a quality control problem of a few months' delay -- and then actually delivered my order 10 weeks "early." This kind of logistical foul-up is harder to cost than a simple rise in wages, perhaps, but companies do eventually get it when a late product results in smaller than projected sales or higher returns, or a loss of market share. (Rising wages in low-wage countries is having an effect on offshoring, but the biggest effect is a result of higher wages adding even more strains to global logistics and not from the jump in wage costs itself.) And companies that get the message are taking a breather on offshoring as they try to figure out how to solve this logistics problem.
The Cure Is a Symptom, TooThe last piece of anecdotal evidence that I'd add to this picture is the mad rush now going on in the logistics sector as companies try to snap up competitors in order to build true global networks that can simultaneously operate in local markets around the world and on a global basis.
In India, for example, Shreyas Shipping recently added "& Logistics" to its name and is looking to buy other logistics companies. Germany's Schenker Logistics is shopping for Indian trucking and freight-forwarding acquisitions. FedEx ( FDX) is in talks to buy an Indian trucking company, and in November it bought Prakash Air Freight, a company based in Mumbai, India. C.H. Robinson Worldwide ( CHRW) bought Triune Group, a Bangalore trucking company. There's a similar rush going on in China, where, for example, Schneider National of Green Bay, Wis., recently bought a Chinese logistics company. My conclusion from all of this is that offshoring will take a pause as companies reconsider the costs and benefits and then proceed at a slower and more cautious pace as CEOs try to make sure that they are saving money -- and not dooming their companies to endless problems with unhappy customers -- when they send jobs offshore.
Fed Has Lost Control Over Interest Rates : The economy grew at a lower-than-expected revised revised rate of 2% in the third quarter of 2006. (That's down from the revised figure of 2.2% but up from the initial 1.8% read on growth.) But while it's clear that the slowdown in the housing sector has taken a bite out of growth -- growth would have been about 1.2 percentage points higher except for the slowdown in residential construction, economists estimate -- no one yet knows if the decline in home prices will spill over into the economy as a whole. Certainly there's a lot of bad news that could produce enough gloom to get consumers to snap shut their wallets. The number of people paying their mortgages late or not at all rose in the July-through-September quarter to 4.7% from 4.2% in the second quarter. The situation was much worse among subprime borrowers (those with previous credit problems). Among that group, delinquency rates climbed in the quarter to 12.6% from 11.7%. Subprime borrowers with adjustable mortgages were even more likely to be delinquent with a delinquency rate of 13.2%, up from 12.2% in the second quarter. At the time of publication, Jim Jubak did not own or control shares of any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.