America's comparative advantage

America's comparative advantage

Summary: As it turns out, America's manufacturing sector -far from withering in the face of foreign competition - is actually thriving. There are lessons to be drawn from the reasons for their success that relate to outsourcing.

TOPICS: Outsourcing
It has become conventional wisdom that America's manufacturing base is withering in the face of foreign competition. Problems at GM and bankrupt auto parts manufacturer Delphi would seem to bear that theory out. Much of this belief rests on a simple accounting of income differentials.  How can America compete with labor in poor countries that charges a fraction of what is necessary to hire an American worker?

Of course, our biggest competitor in manufacturing is often the Japanese, a country that is hardly poor. But more to the point, this "wisdom" is based on a false premise, as described in the July 1st, 2006 issue of The Economist:

...someone forgot to tell American manufacturers the bad news. Most of them have enjoyed roaring success of late. Net profits have risen by nearly 9% a year since the recession in 2001 and productivity has been growing even more rapidly. The country's various widget-makers, moreover, show no sign of losing their innovative edge.

Companies like GM and Delphi are more exceptions than the rule:

Capital equipment and durable goods makers such as Caterpillar, General Electric, and industrial conglomerate, and Boeing, and aerospace giant, have always been the strongest bits of America's manufacturing base. Their position is the most secure, says James Womack of the Lean Enterprise Institute, a think-tank in Cambridge, Massachusetts, because there is so much knowledge embedded in what they make. Even when a company such as Boeing stumbles over its efficiency, as it did a few years ago, its intellectual property gives it room to recover. These days, however, American manufacturers of all sorts - not just the big durable-goods makers - are quickly improving their efficiency.

The engine of American manufacturing strength is productivity growth, which is often an indicator of an economy's ability to integrate new technology into production. Between 1995 and 2000, America already outpaced other rich nations with a productivity growth rate of 4.0%. After 2000, however, American manufacturers accelerated even that rapid pace, raising it to 5.1%.

Gordon Hunter, chief executive of Littlefuse, a maker of - you guessed it - fuses and other equipment related to the electrical systems in automobiles (a sector of the economy that is doing quite well supplying foreign carmakers such as Toyota and Honda), believes that American firms will maintain this high rate of productivity growth "due to a business environment that embraces innovation."

"Being flexible and willing to learn are skills that America still excels at..."

I've argued in the past that outsourcing poses little risk to American programmers because only certain kinds of development gets outsourced - namely, maintenance tasks or small additions to existing software that can afford the disconnect which must exist when dealing with programmers halfway around the world. This leaves more time - and resources - for domestic programmers to do what they do best, which is create new software.

This understanding is bolstered by an awareness of American ingrained flexibility and willingness to learn. Flexibility is essential to new software development and is less important in maintenance tasks where the general structure of a program is already well-understood.

Even though a CEO might type faster than his secretary, his time is better spent doing the things that CEOs do. The CEO's comparative advantage, in other words, dictates that the most value is derived from spending more time on tasks that he is uniquely qualified to do, even though he might do quite well at other tasks.

If new software is our comparative advantage, then it makes sense for us to concentrate on new software. That would be a good lesson to be derived from signs of a slowdown in outsourcing. We now understand where outsourcing best fits in our software development toolkit. Onwards towards the productivity gains to be derived from that rationalization.

Topic: Outsourcing

John Carroll

About John Carroll

John Carroll has delivered his opinion on ZDNet since the last millennium. Since May 2008, he is no longer a Microsoft employee. He is currently working at a unified messaging-related startup.

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  • A rationalization, yes.

    The Comment ends:

    We now understand where outsourcing best fits in our software development toolkit. Onwards towards the productivity gains to be derived from that rationalization.

    The definition of rationalization (thank you, Merriam Webster):

    Main Entry: ra?tio?nal?iza?tion
    Variant: also British ra?tio?nal?isa?tion /"rash-n&-l&-'zA-sh&n, -&n-&l-&-/
    Function: noun
    : the act, process, or result of rationalizing; especially : the provision of plausible reasons to explain to oneself or others behavior for which one's real motives are different and unknown or unconscious

    The best use of US skills follows on an understanding that cheaper is not always best. That's a flimsy substructure in a quarterly-returns based economy.
    Anton Philidor
  • "Outsourcing" is a euphemism

    "Outsourcing" is properly the delegation of functions traditionaly done internally to other businesses. The proper term for the practice under discussion is "offshoring", that is, the practice of moving jobs from high-wage to low-wage countries for the purposes of saving money.

    Since the latter term has developed negative connotations, its advocates avoid it, but that's no excuse for ruining a term that already has a different meaning.
    John L. Ries
    • Very well put.

      I work for an IT services company. We provide IT services to companies that do now want to have large, internal IT departments.

      This is outsourcing, and there's nothing wrong with it. US workers supporting US companies.

      This article is talking about OFFSHORING, which I consider very damaging to the US economy.

      But he is right about one thing. All that seems to matter these days are the quarterly reports. The overall health of the country doesn't matter. Not even to our current administration.
      • Absolutely!

        Actually, I think you'll find that even the companies that have large internal IT departments are better at maintaining existing systems than developing new ones. Even the largest outsource, for very good reasons.
    • You are correct...

      I'm obviously talking more about offshoring than outsourcing.
      John Carroll
  • The fault of the logic used...

    The premis of of how outsourcing is good or doesn't harm programmers assumes there is no value in the "maintenance and support" of the existing code or new code.

    I agree that you put your star coder out front, but you must also provide a vehicle to create your next star programmer and that is usualy done by giving entry level people the very tasks you speak of to "cut their teeth on" and demonstrate their ability (or lack of it) to move to more demanding tasks.

    I beleive you will find this very situation existed in the Unix/Big Iron world. New coders/system admins were not being trained/created (for various reasons) and today we see a big problem where the old school guys are retiring and there is no one to take their place.

    There is also a very real value in having coders that had to deal with customers and customer issues. A year of customer support will give any coder a different view of what a great application requires. I think that is 50% being a great coder, making the task easy for the user.

    We talk of the now, but I also know we must be concerned with the kids coming out of school with a freshly minted degree and hopes of finding entry level work. If we don't, no one will invest in the education.


    As an aside, you picked an interesting subject when it comes to manufacturing. Being efficent sounds great and in many respects it is. But do understand that manufactures do it by eliminating manufacturing jobs through automation. Out sourced or automation, the result is still the same to those losing their jobs.
    • Teaching a Pig to Sing

      A couple of points:

      Someone said:

      We are getting down to about two jobs in the US.

      1. Being Consumers.
      2. Supporting Consumers (in some way or another).

      That's a truism. ALL jobs support consumers. Especially manufacturing.

      Someone else said "What is good for industry is not necessarily good for workers."

      While it's true that some workers suffer during cutbacks and lay-offs, workers ~as a whole~ are better off when companies increase productivity. Of course, no one wants to beleive that (despite it's being true). Trying to get people to understand economic principles is often like trying to teach a pig to sing. It never works, everyone gets frustrated, and more often than not, you wind up in the mud.

      However, in an eternal attempt to try and illustrate some of these principles, when you say that "What's good for industry is not necessarily good for workers", or "Jobs are more important than profits(or efficiency, or whatever)" I ask:

      Which workers are you talking about?And why are those workers more important than others?
    • On automation

      I've always seen automation and job creator not job killer. Sure it changes the work done but it always create more work to do.

      This just from what I've seen. If you have a group of people doing one task that automation makes more productive you usually increase work loads in other areas.

      At the same time I've seen companies make the mistake of just laying people off after automation then piling the extra work on the remaining employees. Then they experience tons of problems as no one like to do the work of two people and get paid for one. They also burn out quicker and get very disgruntled. Then mistakes start happening and the downward spiral to bankruptcy occurs unless things change.
    • writing an interface is 50% of coding?

      wow, again, you know nothing. 95% of coding is
      usable is for the interface guys and shouldn't be
      done by a coder. you don't have the builders
      designing the house.
      although, if you want to get picky, you could say
      that the best jobs are done through
      collaboration, with the "designer" and coder
      communicating to ensure that the project is both
      well written and easy-to-use
      Scott W
  • You make it sound

    as though there were an effective market in action. By observation, this is simply not the case.

    Item: Many countries (naming no names) subsidize domestic industries, often to the tune of billions of dollars spent to induce a corporation to build a plant in their country. The observed result (and probable intention) in at least some cases is to concentrate enough manufacturing that foreign competition dries up. Think of it as predatory pricing at the national level.

    Item: Far too many management decisions ignore rational economic analysis to reach the desired conclusion. Example: $CORPORATION compares engineers in the US vs. $HOME_COUNTRY. US engineers earn higher annual salaries, therefore $CORPORATION shifts engineering jobs out of US into $HOME_COUNTRY -- despite the fact that payroll taxes are higher there, there are more paid holidays, per-employee overhead is higher, and the workday is shorter -- to the net effect that the net employee expense per working hour is actually slightly higher in $HOME_COUNTRY.

    That might be justifiable, but the really insane part was that the analysis [i]made no comparison between actual results[/i] -- which were overwhelmingly in favor of the US engineers, partly because the only survivors were all very senior (thus, in part, the higher pay.)

    Productivity is hard to measure, costs aren't. It's not encouraging to see how many decisions are based solely on costs. A great many companies are run according to the maxim, "They know the cost of everything and the value of nothing."
    Yagotta B. Kidding
    • A bit more complicated.

      Perhaps more important than subsidies are contracts let or approved by governments which mandate that the winning bidder do at least part of the work in that country. Some also demand access to technology.

      You wrote:

      "Many countries (naming no names) subsidize domestic industries, often to the tune of billions of dollars spent to induce a corporation to build a plant in their country. The observed result (and probable intention) in at least some cases is to concentrate enough manufacturing that foreign competition dries up. Think of it as predatory pricing at the national level."

      Foreign competition is often limited by anti-dumping rules. The principle is to prevent what you suggest by assuring that a domestic industry is not ruined by excessively cheap imports (which could afterwards increase in price).

      Problems arise with calculating the "fair" price of the imports, particularly if the costs of producing the item are estimated.

      Countries which game the system can still succeed despite mechanisms designed to prevent predatory behavior, but I think they have to work harder than you suggest.
      Anton Philidor
  • I'm afraid I just don't buy it...

    Finding "Made In America" is damned near impossible these days.

    We are getting down to about two jobs in the US.

    1. Being Consumers.
    2. Supporting Consumers (in some way or another).
  • Not in my experience

    Your note...

    only certain kinds of development gets outsourced - namely, maintenance tasks or small additions to existing software

    ...does not accord with the organizations I have been associated with in the past few decades. I see more instances of success outsourcing the really innovative, forward-thinking programs to the IBMs, EDSs, CSCs, where the critical mass of state-of-the-art technicians reside than in the in-house staff. The situation is that even the largest of enterprises - GM, Exxon, Army whatever - generally cannot cost-effectively train and educate a complete development staff in the latest, while simultaneously maintaining the current portfolio of IT systems. When you get right down to it, John, that is why outsourcing grew up as a business segment in the first place.

    When the new system is completed, tested and proven, the in-house staff can efficiently keep it going and make those small additions - the converse of your statement. Interesting that you would have observed the opposite model, I can't see it being successful.
  • Confusing industries and workers

    American industry is doing well for the most part, but it is a mistake to conclude from this workers in those industries are doing well. American manufacturing will grow, becoming more productive, and produce more output, but it will continue to shrink as a portion of GDP, and as a portion of the workforce. As a result, workers in those industries may maintain their nominal pay, but it will probably diminish in real terms, and the number of workers will likely shrink as well. What is good for industry is not necessarily good for workers.
  • It's strange that Americans refer to the plight of GM...

    when talking about their motor industry competitiveness. Many
    foreign car companies have set-up manufacturing in the US and
    are very successful.

    Clearly it is not that the US auto manufacturing is uncompetitive,
    but that GM (for various reasons) is uncompetitive.

    It is not that different from the experience in the software
    industry. One company has problems producing new products
    whilst its competitors are releasing great new products every
    quarter. The difference is that in software the unproductive is a
    protect monopolist in the US with increasing revenues extracted
    through, what the EC competition regulator has found to be, its
    past and continuing market abuses.

    USA continues to demonstrate its competitiveness across most
    industries. It is those industries where competition is allowed to
    prosper where the US comparative advantage is best displayed.
    Richard Flude
    • Auto Plants

      When Toyota builds their newest plant, they will have more manufacturing plants in the States than any American auto company.

      Yes, the profit from my Honda will go to a foreign company, but it was built by Americans.
      Patrick Jones
      • Small correction

        "Yes, the profit from my Honda will go to a foreign company, but it
        was built by Americans."

        Honda is a publicly traded stock (NYSE:HMC). Anyone can own
        shares in it, and many people do indirectly through their managed
        funds and retirement accounts. The profits from your Honda go to
        the shareholders of Honda, many of them will be US citizens.
        Richard Flude
        • Good point..

          Patrick Jones
  • It's about the number of jobs...

    In the main the concern about the manufacturing sector of the American economy is not about the profits of those companies, but about the declining number of jobs available, especially "blue collar" jobs, which provided a good way for those without a college degree to support their families with a reasonable wage.

    All of those people are either being displaced to lower paying jobs, reducing their standard of living, or in need of retraining, putting a strain on retraining systems.

    Sure, the president of these companies may eat as much steak as they ever have, but a lot of his/her former employees are now flipping burgers.
  • Catching a plane...

    ...will respond at length in the morning.
    John Carroll