COMMENTARY | COLUMNISTS | PHIL BAKER

What to do about outsourcing

Outsourcing has become a hot topic during the current presidential campaign. It's being blamed for our high unemployment rate and the lack of job creation.

Recent examples are jobs moving to India to staff call centers that provide customer service and support. This has touched a nerve because we all come in contact with these services when scheduling an appointment with GE to fix our washing machine or calling Dell (Nasdaq: DELL) to get computer support.

With cheap broadband communications and lower wages, well-educated, English speaking India residents are impacting our service and software industries just as the Far East has impacted the hardware industry.

While outsourcing is disruptive to many industries, it has been one of the driving forces of growth for America's economy. When companies outsource successfully they invariably grow and create new jobs in the United States.

For example, largely as a result of outsourcing to China, the leather goods company Coach (NYSE: COH) has seen its annual sales over the past three years increase an average of 12 percent, to $893 million. Earnings rose an annual average 72 percent, to $134.1 million, as it continues to expand the number of stores and sales employees.

Small, entrepreneurial-led companies benefit, as well. A client invented a clever computer accessory, but had only $200,000 to invest. He tooled the product in China for $70,000, about one-third the cost of doing it domestically, and used the remaining funds to build a Web site, hire sales and marketing help, and finance his inventory. His sales have soared and the product is now being distributed by an international company.

I happen to be writing this week's column from Shanghai and Taipei, where I'm helping several clients outsource their hardware products, something I've done for over 20 years. My clients want to bring their products to market quickly and cost effectively so they can be competitive, provide the best value to their customers and be profitable.

Unfortunately, the United States is not competitive at building high-volume consumer and computer products, and there is often no choice but to outsource. U.S. companies are usually much more expensive than their counterparts in China. In contrast, Taiwan and now China have developed an infrastructure of suppliers that can produce parts and products much less expensively and much more quickly. While the Far East's initial advantage was cost, it's now also engineering and design skills, time to market, quality, a deep infrastructure of suppliers, aggressive employees and skills in key areas such as molding and electronics assembly.

Some of this success can be attributed to their government policies. While the U.S. government has never taken the strong initiatives necessary to create a strong local consumer manufacturing industry, the Taiwan and Chinese governments identified computers, electronics and software as strategic to their economic growth and set up policies and programs with industry and educational institutions to develop their expertise and talent. Their industry was also more willing to look at long-term growth than ours, which focused on short-term financial results.

In 20 years, Taiwan went from building boom boxes to designing and building advanced notebook computers. Now as manufacturing jobs in Taiwan are being outsourced to lower-cost China, the Taiwanese government is requiring companies that export manufacturing jobs to create other job opportunities, such as R&D and engineering positions. Quanta Computer, the world's largest manufacturer of notebook computers, has moved its manufacturing from Taipei to Shanghai but is now building a huge R&D center in Taiwan that will create 7,500 new R&D positions.

Here's what I would do to address the erosion of jobs in the United States.

1. Bring broadband to all Americans using a combination of cellular technology, fiber optic cabling, Wi-Fi and satellites. Encourage the use of VOIP to make voice communications nearly free. A society that has access to these resources will become more productive and smarter, with access to more training and educational programs.

2. To compete with service jobs outsourced overseas, encourage through the tax code the establishment of privately run service centers in the United States that can provide better security to process sensitive data such as medical records, tax returns and the like.

3. Insist that any country we outsource to play fair and eliminate tariffs on products they buy from the United States and respect our copyright laws and intellectual property.

4. Require companies that move jobs out of the country to use a portion of their savings to replace those jobs by investing in job training programs and new R&D, much like Quanta is doing.

5. Insist that the companies that do the outsourced work in other countries provide a safe working environment and meet basic environmental standards. These are not meant to encumber these companies, but to let the workers know that American companies care.

Outsourcing a product is analogous to water always seeking the lowest level. Government regulations can fight it, slow it down, sometimes even stop it, akin to damming a river, but the products will be built and services performed wherever it's most efficient, just as water will eventually seek the lowest level. It's time to stop complaining about outsourcing and start using our innovativeness to create the policies that will encourage job production and competitiveness in the United States.


Baker has developed and marketed consumer and computer products for Polaroid, Apple, Seiko and others. He is the holder of 30 patents and was named San Diego's Ernst & Young Consumer Products Entrepreneur of the Year in 2000. He can be reached at phil.baker@sddt.com.

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