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Moving Jobs to Offshore Markets Why It's Done, and How It Works.

July 1, 1999
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You know the seamy images, the squalidstereotypes. There’s nothing pretty about sweatshops in Latin America or childlabor in Africa. There’s nothing pleasing about downsizing American jobs andmoving them so work can be performed more cheaply elsewhere.

    Daily, we read aboutcompanies that are moving offshore to take advantage of cheaper labor in anynumber of industries: apparel, toys, electronics, small equipment. There’sevidence of it everywhere, and it’s clear that searching worldwide forpersonnel - as well as production capability - isn’t a new phenomenon. It’sjust occurring at a fast-forward pace in this increasingly borderlessmarketplace.

    But consider this:Those dramatic images are only part of an intricate puzzle of possibilities whenlabor moves from shore to shore in the global marketplace. When you think aboutmoving jobs overseas, the focus is often on those who are losing jobs in theUnited States and on the negative impact American businesses may have in othercountries. But, like puzzle pieces that form an integrated whole, it sometimestakes a little distance, some perspective, and a different outlook to view theentire picture and see the positives along with the negatives. Of course, thefollowing discussion assumes that the companies seeking labor abroad areresponsible and ethical in their treatment of both U.S. and foreign workers.

    Contrary to popularthought, moving labor offshore isn’t all bad. In fact, it’s often very goodfor business. As jobs move offshore from the United States, they not only allowU.S. manufacturers to procure cheaper labor abroad, but they also free up talentwithin the U.S. that can be reskilled and used elsewhere in this tight labormarket. Furthermore, it’s not only the U.S. that’s moving jobs. At the sametime we move jobs offshore, so do other countries whose businesses are lookingfor lower-priced workers. In many cases, some of them, such as Japanese andGerman automakers, move into the U.S.

    Indeed, today’srealities intertwine strategic business and financial goals with complicatedhuman resources issues. This requires looking at HR management from a macroperspective. HR may find itself responsible for such tasks as: reallocatingtalent to needed positions, integrating offshore employees in ways that makesense to the overall goals of the company, and creating training that will helpdisplaced American workers learn new skills while accomplishing business needs.

    “It’s a verycompetitive world now, and if you want to stay in business, you have to look atthe cost of doing business and the cost of labor from that perspective,” saysPatrick Morgan, global staffing manager for San Francisco-based Bechtel Corp.“In my mind, global sourcing of workers is the next level of outsourcing. Infact, you can see it as a competitive advantage.”

 

This isn’t new
   Jobs migrating in search of cheaperlabor has been happening for decades. The kinds of jobs that migrate used to bethe ones that were low-skilled and labor intensive, such as assembly of smallappliances, apparel and agriculture. However, with the dearth of available labortoday, some jobs that are being moved overseas are more highly skilled, such aspositions within the information technology sector.

“TheUnited States has been losing textile workers for the last five decades,” saysKen Goldstein, economist for The Conference Board, based in New York City.“[American business] started moving jobs out of textile mills in Massachusettsand into South Carolina in the 1930s when it became apparent that businessescould find workers who could do the jobs and also get them to work for lessmoney per hour. After that, jobs started migrating to other countries, as well.

    “What’s going on in the ’80s and’90s,” Goldstein continues, “is that companies can find people in Hondurasor Belize who can do the work for even less. It actually costs less to haveclothes sewn and stamped in Honduras and then shipped to the United States thanto have the work performed in South Carolina and shipped to a [domestic] outlet.It’s the same as it’s always been, but now it’s between at least two orthree international borders.”

    In fact, many jobs first migrated toMexico. But there was such demand for labor in textiles and agriculture that itdrove up the cost of Mexican wages, and the jobs moved to other countries.Similarly, in Europe, jobs usually go to East Germany, and when they get tooexpensive, they move to Bulgaria and the Ukraine. In Asia, when they leaveJapan, they go to Korea and to Indonesia or Malaysia. The migration is a globalphenomenon.

    The reason? In post-industrialsocieties, such as the U.S., Japan and Western Europe, it’s simply tooexpensive today to perform low-tech, labor-intensive work. The jobs then moveoffshore, and the ones that remain tend to have their wage rates driven down tothe going rates in the global marketplace.

 

Working with the puzzle pieces
   There’s a concept called creativedestruction, in which new situations are enabled because old conditions aredestroyed, which makes room for change. You can think of it like a good puzzle;the challenge is to continually move pieces around to make room for others,which will complete the design. In this business case, when one industry goesout of business in a particular country, the money and the workforce getrefocused elsewhere.

    Here’s the way it works. As early asthe late 1950s, the United States had roughly 20 million blue-collarmanufacturing workers in a workforce of about 60 million. Today, those 20million blue-collar manufacturing workers are in a workforce of about 130million. Essentially, for over a generation, the only workers who found jobs inthese blue-collar factories were the first sons who replaced their fathers. Thesecond and third sons, and all the daughters, went to work in other industries.Because of the change in needs, the workforce had its energy refocused frommanufacturing to service.

    At the same time, when you look at thejob creation rate in the United States in the last few years, you find thoserates are higher than the job creation rates in a lot of other countries.“You’ve had a much freer mobility of these jobs than you would’ve hadpreviously,” says David Lewin, Neil Jacoby Professor of Management, HumanResources and Organizational Behavior at the Anderson School of Business atUCLA. In other words, workers are more assured of jobs because more jobs arebeing created. “By the same token, the American workforce has benefited by themovement of jobs to the States by many other countries, especially Japan andGermany,” says Lewin. “There’s also been a great rate of job expansion inthe U.S. fueled by startups and the newer entrepreneurial ventures.”

    According to Lewin, the United Statesis adding approximately 3 million jobs a year, thus increasing total employmentby 3 million on a base of about 130 million. This is a 3 percent to 4 percentincrease a year, whereas European job creation rates are 0 percent or 1 percent.“You find a much more fluid labor market in the United States,” says Lewin.“A lot of companies - both domestic and international - are attracted byemployees who easily move from job to job because it means that if there’s adownturn in demand, or other changes occur where you’d want to reduce yourworkforce, you’re able to do that with few obstacles.” The stringent laborregulations in many other nations won’t allow employers to terminate employeeswithout severe consequences.

 

How do jobs move?
   For jobs to migrate, two interlockingparts of the puzzle have to be present. First, although these are low-tech,labor-intensive and relatively low-skilled jobs, there must be a sufficientlyskilled workforce to accomplish the work. Then this labor force must have wagelevels that are low. Interestingly, the lower-wage jobs are always the mostvulnerable to migrate. So the process is a continuous one.

    Two types of jobs are less susceptibleto migration. One kind requires a highly skilled workforce, such as high-tech orscientific endeavors. The other, less vulnerable jobs are sufficientlycustomized so that operations need to be near the place where the product orservice is actually going to be used.

    For example, in Birmingham, Alabama,where a lot of customized steel is manufactured, companies are less susceptibleto job loss even though long rolls of standard steel can be manufacturedanywhere and shipped to the U.S. This is because specialty steel is cut to thecustomer’s request and is difficult to move. It’s easier to keep the productnear the customers, and therefore, the jobs stay put.

    The automotive industry, for instance,provides an example of how labor and manufacturing are part of a complex web ofactivity. Instead of manufacturing being done exclusively offshore, someautomotive parts are manufactured in Detroit and Dearborn, Michigan, thenshipped to Mexico where processing and assembly occurs, then shipped back tohave other items completed and to be stamped, “Made in the USA.” This alsohappens in the electronics industry, and even in some kinds of agriculture(although most of these jobs remain completely outside the U.S.).

 

Issues for domestic and internationalHR
    “The point is we’ve freed up laborfrom some processes in this creative destruction process, and in turn, not justcreated new jobs, but new services that people hadn’t thought of before anddidn’t even know that they wanted,” says The Conference Board’s Goldstein.“It’s irreversible. It’s not going to go back to the way it was, and allwe can do is argue about whether we can or should speed it up or slow itdown.”

    It becomes HR’s responsibility tohelp all workers change - to adapt to the new global business environment and toreskill to be valuable in the organization.

    “A positive argument can be made thatwhen companies follow these macroeconomic trends and go offshore, they create ablessing in disguise. First, they release talented, able workers into this tightlabor market. Human resource staffs within organizations can make more efficientuse of their skills. Secondly, this allows U.S. workers in low-skilled jobs tobe allocated to other areas where there’s a higher demand,” says Diego J.Veitia, chairman and CEO of Winter Park Florida-based International AssetsHolding Corporation.

    The key, of course, is training thedomestic workforce. And HR must play a role that continually allows theworkforce to learn and build their talents for the changing global organization.Twenty years ago, there were draftsmen with pencil drawings. Unless they learnedhow to do the same function on the computer, they were no longer employed.

    Another critical issue is where and howto use talented people. Bechtel Corp. is one company that’s been dealing withsourcing labor in unique ways. The company forms teams for projects that finishquickly, and then the groups are demobilized when the undertaking isaccomplished. For example, they have copper and gold mines in Chile.Historically they’d do all the engineering, design and equipment purchase inthe U.S. and send construction people to work with employees in Chile to build aplant. These days, Bechtel does the conceptual engineering in the United States,and hires Chilean mechanical and electrical engineers to do all the detailengineering in Chile.

    There are advantages to this approach,beyond the lower-priced labor. “When you start with a clean sheet of paper,you can leapfrog technology and go to the state-of-the art instead of simplybuilding on what’s already in place,” says Morgan. “It’s gotten to thestage where some of the people doing the work are so experienced that we’rebringing them to San Francisco so they can help us move to the next stage. Infact, some of the local engineers often give you a better product because theyunderstand what’s going on locally.”

    However, communicating with your staffis crucial to a successful endeavor. You want to explain the reasons whyyou’re considering moving labor and emphasize that it doesn’t necessarilymean jobs will be lost in the United States (unless that’s the case). Explainthe strategic plans and the need for individuals to develop their skill sets.

    And remember that communication ismultidirectional. In other words, you need to listen to what’s coming backfrom employees. What are their concerns? What are their reactions? Have amechanism built in to address those worries, which usually focus on the fear oflosing their jobs. Listen. And respond.

    Certainly, with the complicated,intertwined succession of global mobility leading to dissolution and creation ofjobs, the role of HR is central. Having a more complete understanding of all thepuzzle pieces can help HR professionals position and communicate offshorestaffing as a positive rather than a negative solution. And that’s somethingthat ultimately moves the workforce and the organization closer to globalizationand the emerging world economy.

Workforce, July 1999, Vol.78, No. 7, pp. 50-55  SubscribeNow!

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