The Spin Cycle of Outsourcing

When Ross Perot spoke of the "giant sucking sound" during the 1992 elections, he spoke of U.S. jobs leaving the country because of cheap labor abroad. Outsourcing has since become a watchword of corporate America's continuous and heartless quest for cost cutting and downsizing. What was the threat of Japan in the '70s and '80s became Mexico for the '90s, and more recently it has been China and India conspiring with corporate America to take our jobs and send us all to the poor house.

And yet, here we are in 2007, and despite the Internet bubble burst, despite wave after wave of outsourcing, downsizing, rightsizing and just plain firing, the bay has yet to be sucked dry. Tumbleweeds do not blow down an empty Highway 101. In fact, according to the state Employment Development Department, California unemployment levels were at a 30-year low of 4.5 percent in October, with the San Francisco County level at a minuscule 3.8 percent. What happened?

I've spent these past 15 years in the technology industry, traveling the world, alternately getting sucked out of, and spat back into, the American workforce. My first job out of college was as cheap foreign outsourced labor, working at a computer help desk at IBM in Tokyo, an inexpensive American by yen standards at the time. I migrated my way to the Bay Area, where I worked for a computer hardware company at the height of the Internet boom. But as the bubble burst, and cheap Asian competitors took away market share, my whole department was laid off.

With the "if you can't beat 'em, join 'em" philosophy, I went to work for Solectron, an outsourcing company with operations in all the "low cost geographies" of the world. I helped transfer jobs abroad and shut down factories in the United States until something alarming happened. Our company was getting outsourced. Low-cost Asian outsourcers were beating up American-based outsourcers. Margins were falling. Our own layoffs loomed. So I hit the road again, going to an outsourcing consulting company, working with all the groups involved to try to design better solutions.

But what is the solution? How do you make outsourcing not ... suck so much?

What I've discovered isn't so much a one-way drain on U.S. business, but rather a spin cycle, a whirling of people, products and places coordinated to produce our daily goods and services. To understand this process, to check to see if we're missing a few socks, I've reviewed my past 15 years of experience in places from Europe, to Mexico, to Asia and back again to the Bay Area.

The basic concept of outsourcing is that companies want to specialize in what they do best, and find another source for all the other stuff. For example, Bay Area companies like Cisco and HP specialize in designing next generation technology, and are perfectly willing to have someone else assemble the final product someplace else. At home, I have a drawer filled with severed heads. They're novelty items from the 1940s, bottle stoppers with the corked heads of pop culture figures from the day: Winston Churchill, Cary Grant, Charlie Chaplin. They were made in West Germany, not because the Germans were on the forefront of cork-gluing technology, but because the starving refugees of WWII were willing to work for pennies an hour, and thus got stuck making cheap toys and trinkets.

Germany has long since grown from the head-making, cork-gluing phase, and ceased to be a destination for U.S. outsourcing. It has now moved to the next step in the cycle -- sending its stuff abroad. Last year, I visited a semiconductor equipment manufacturing factory in Germany where gray-haired engineers in white smock coats assured me that only highly trained (and highly paid) Germans were capable of building their products. Not surprisingly, costs had already sent many German-produced products southeast to the Czech Republic, where cheaper labor turned the final nuts and bolts to assemble the items.

But the past 15 years have changed the job situation in the Czech Republic as well. Almost none of the basic manufacturing was left there, either. The Czech workers have also become too expensive, their labor laws, unions and higher standard of living dictating higher salaries, which made bolt-turning better done elsewhere. I had a beer in Prague, toured a nearly empty factory and moved farther east to Budapest, Hungary.

Budapest seemed like a fine end-of-the road destination for outsourcing. Gray skies, gray buildings, the gray river splitting Buda from Pest. During the day, thick old women lined the paths of the parks, pleading for anyone to buy their handmade lace. At night, thin young women lined the same paths, dressed in lace, pleading for anyone to buy them.

A chain-smoking driver in a duct-taped Trabant took me to a suburban Budapest-based computer assembly factory one morning. We passed graffiti-covered block houses, scrub-filled lots and finally an advanced technology factory built to take work from Western Europe for brand-name electronics product companies. Like Germany and the Czech Republic before it, the factory was half empty. What happened? "The damn cheap Romanians are taking our jobs," one worker said.

But in Budapest, like Czech and Germany, some work did remain. The factory manager touted new custom build techniques, a lean supply chain, highly trained workers and their relative proximity to Germany. It was no longer cost, but value they were selling. "It's not like we're a bunch of stupid untrained Chinese workers or something," said one worker. It is the Chinese who have been held to be the ultimate threat to "our" jobs, be they here, in Germany, Hungary or even Romania. China's near limitless supply of labor and a government dedication to business has created a massive shift of manufacturing across the Pacific and into these mysterious factories. I had visions of Roman slave ships, a huge man in a fur vest beating a drum, while another cracked a whip over workers chained to benches assembling iPods, Nikes, or those huge inflatable crayons.

When I arrived at a factory outside of Shanghai, things were unsettlingly normal. I saw the same spotless assembly lines I witnessed in Germany, in Budapest and in San Jose. Uniformed workers quietly put together pieces of cell phones, printers, cameras and other items whose guts all seemed the same to me.

And then the buzzers went off. People started moving toward the doors. Was it ... an actual Chinese fire drill? It was! I waited for the chaos, the screaming. No, orderly groups lined up in sequence of their product assignments, their uniforms lending the operation the feel of a high school pep rally. The workers themselves seemed like junior high school girls, giggly, holding hands, toting Hello Kitty lunch boxes, even taking buses back home at the end of the day, or walking arm-in-arm to the nearby dormitories.

Yet these were no junior high schoolers. To get a job at a flagship factory of an international company was a tough process. Most were well educated, having to pass a battery of tests and background checks to get such a job. At least this factory had standards. The failed applicants would be working with battery acid at some shady sweatshop in the Gobi desert.

But it wasn't just the Chinese working in China. The plant manager was Chinese, but he worked for a boss in San Jose. The finance manager was from Romania, the project manager from Malaysia and the materials manager from "the Republic of Texas," as he called it. The parts for the products were sourced mostly in China, but with bits from Europe, the United States and elsewhere in Asia. A Taiwan shipping company sent finished product across the world to customers, who were happy that the product had become less expensive. And somehow, everyone ended up making money on the deal.

I felt like a character in "Catch-22," listening to Milo Minderbinder explain that he bought eggs for 7 cents in Malta and sold them for 5 cents in Italy for a profit.

It recalled a day in Bordeaux, France, the last place in the world you would think of as an outsourcing destination ("Farthest place from the German border," said the plant manager with a wink). At an American-owned electronic products factory, a Brazilian was presenting the "Sao Paolo" technique of factory management to a Japanese customer who wanted to produce computers there for the Belgian government. The spin cycle was whirring so fast I was losing track of who I was supposed to be angry at for taking my job.

Companies brag to Wall Street every quarter about how much money they are making on outsourcing jobs abroad. But they become silent when asked for a quote reflecting that reality. The companies fear the bad press, the perception that outsourcing is somehow unpatriotic, that American jobs are being given away to less worthy people overseas.

The reality is, America is not a nation of bolt-tighteners. If jobs hadn't been sent abroad, on a regular basis over the past 200 years, we'd still be hand-picking cotton on plantations, and weaving shirts on huge looms in sweatshops in New York City, while somewhere abroad the microchip engineers would be sipping wine and watching TVs that American workers were assembling in 24-hour-a-day factories. The question is, do you want to be the place that sends out the unskilled labor jobs, or the one that receives them? According to Lou Miscioscia, managing director and technology analyst at investment banking firm Cowen & Company, "The economics of outsourcing is simple.If you don't find a place to make your products cheaply, someone else will, and they'll put you out of business. U.S. technology firms that succeed are those that can balance outsourced manufacturing with in-house product development and product knowledge."

The moral issue is not so much the loss of these menial manufacturing jobs, but the question of what happens to those workers who had been doing those jobs. U.S. CEOs usually go for the quick fix -- send the jobs abroad and fire the workers. Wall Street has the instant gratification of costs cut, and rewards the companies with higher stock prices. If anything, the CEOs who initiate such strategies should be the first to be outsourced to low-cost countries -- the strategy is the managerial equivalent of bolt-tightening: repetitive action with no thought involved.

Just as companies continue to think of innovative ways to get rid of jobs -- of menial tasks -- they need to think of innovative ways to create new jobs for their existing workers. The easy answer is to fire the old, hire the new and wait for the spin cycle to bring in the next generation of worker for the next generation of product. Retraining programs are difficult, long-term solutions whose results don't show up on corporate balance sheets in time for Wall Street endorsement. But those companies that have survived the waves of outsourcing, the waves of industry upheaval, have been able to turn the subtraction of jobs through outsourcing into an addition of jobs. It's Milo Minderbinder math.

To understand the equation, I went south to Mexico, Perot's original source of the sucking sound. They had their own drain in the past 10 years, with jobs washing away from Mexico across the Pacific to China with tsunami-like speed. Mexico was cheap, but China was cheaper. Then a strange thing happened. Some jobs came back.

"There's some basic physics involved," said a technically trained plant manager in Guadalajara. "They're here," he pointed on a map to China, "And we're here," he pointed to central Mexico. "We're the same time zone, an hour's flight from California. We can work together with Silicon Valley engineers so much easier. And there's a big difference between a slow boat from China bringing product, and trucks rolling across the border from Mexico, offloading into a Best Buy. Start adding all those things together, and it's not so cheap in China, hey?"

As Mexicans began to lose their cheap outsourced jobs to someone who was cheaper, they had to innovate. They had to train their workers, modify their factories into sources of products and services which merited higher prices than those coming from China. I toured factories in Guadalajara ("The Silicon Valley of Mexico" reads the sign greeting visitors from the airport) which bragged they were the most efficient not only in Mexico, but in the world ("except for maybe the Japanese, but look how much they cost now!" said a tour guide). Guadalajara-area manufacturers have partnered with local universities, government agencies and international firms to create a new value proposition of highly trained engineers, ultra-efficient assembly lines and innovative transport plans. And because of this creative use of the same workers, in the same sites, business is coming back to an area that was forecast to be finished.

And what of the partners to the north, the Bay Area businesses who started this whole cycle of technology outsourcing? Our evening news is quick to publicize even the smallest layoff, but rarely does it announce the new hiring plans. It just wouldn't fit into the negative spin cycle. It got to the point that when I attended an Asian business conference at Berkeley's Haas Business School, an engineering grad student came up to me and quietly asked, "So, is there any point in my getting a degree here? Really, it sounds like I should just move to Beijing, learn Mandarin and drive a cab or something."

I told him not only are local firms hiring, they're desperate for engineering talent to help design the new generations of products. For example, my former employer Solectron is battling low-cost Asian competition by offering high-touch services locally in collaborative product design, repair, and analysis for area technology firms. A quick search on their Web site shows 75 open engineering-related jobs in the Bay Area. One local manufacturing company told me that their most profitable factory, worldwide, was here in Silicon Valley. Despite having the most expensive labor, land and supplies, they were "practically printing money" in comparison to their barely profitable plants in China and Eastern Europe.

And this is the latest setting on the spin cycle. Local venture-capital startups have a desperate need for quick new product prototypes, built and modified locally, with heavy engineering input. They're willing to pay a premium for these services. And companies are willing to pay a premium to find workers who can fulfill those jobs. The student is actually in the right place at the right time, despite all the media hype that says otherwise. The spin cycle of outsourcing has given local companies the opportunity to create even more jobs, even more business -- as long as they innovate. For example, to do the wash correctly (I'm told) you have to choose the right clothes, select the right settings, add the right detergents and only then will things turn out right at the end of the spin cycle. In the same way, local firms that are clever enough to select the right product to build, train or find the right workers to add to the mix and set the timer right to meet market demand, will find themselves immune to, or benefiting from, outsourcing.

To make the final reply to Ross Perot's dire prediction for outsourcing I'll leave it to a Socialist -- Michelle Bachelet, the current leftist president of Chile. She recently addressed the Socialist International Conference with these words: "Let's admit it, comrades, modernity and globalization are not an imperialist invention. They are realities and it is up to us to turn them into opportunities."