Photo… All rights, Newsweek

(Previously published in Outsourcing Magazine, 11/4/2017)

Offshoring and outsourcing don’t exist in a vacuum. These are processes that take advantage of and are influenced by technology, politics and the larger economy. Look at the last big round of offshoring at the start of the century. It didn’t just “happen”, without any reason. Very specific changes that facilitated this age of outsourcing.

The three biggest changes… globalization, ubiquitous computers, and cheap telecommunications… created an environment that uncoupled work from work management. Managers could stay in their traditional locations (onshore factories, corporate headquarters) while the work was moved around the world. Initially, work was outsourced to nearby cities, then to other states. Eventually, it went offshore, spreading to nations around the world. This process of “uncoupling”, over greater and greater distances, allowed work to keep moving, in search of still lower wage locations.

Another wave of change is now approaching! Intelligent automation and artificial intelligence. Call it, “The Robot Revolution.” Now, human labor, in both manufacturing and knowledge work (accounting, law, software programming, financial analysis, etc.), is being uncoupled from the local labor market. As machines replace people, the cost of labor is essentially the same everywhere. The same robots, with the same cost of operation, can be installed anywhere.

There will be a few instances where the cost of electricity is a deciding factor. But it will be the cost (and time) of transportation that is the deciding factor. Today’s outsourcing, at least of physical products, requires shipping materials and finished products around the world. Avoiding any part of shipping reduces costs and brings products to market more rapidly.

When shipping matters, the best place to manufacture is in the home market, where the products are sold. Outsourcing moved work to China and India years ago. Since then, both complex electronics and simple textile manufacturing have been moved even further, to the lowest cost locations on earth… Cambodia, Vietnam, and Bangladesh. The next round of outsourcing must come from efficiency, not wage arbitrage. That’s why robots and artificial intelligence will drive the next relocation. However, it is not just the lower cost of machines vs. human labor that is driving work back home.  

Political Risk Is Back – In the early days of 21st-century offshoring, moving work to India or China was still a radical idea. Corporations wanted to quantify the level and cost of risk, but there were no clearly established risk metrics. Still, there were discussions about the range of Pakistani nuclear weapons, if you wanted to outsource to India. The C-Suite wanted to know if China’s communist government would be overthrown. Or if both countries would reverse their recent movement towards globalization and one day nationalize western factories. 

The outsourcing industry has continued to be deeply interested in risks such as rising wages and international currency exchanges, but after 5 or 10 years of successful operations, meta-issues like global stability tend to be forgotten, or at least discounted. Now, political risk is back.

China, as we all know, has become far more expensive in a very short time. A contract with China could lead to sub-contracting to Vietnam or Cambodia. Or you may be tempted to move to the Philippines when your contract renews. Now that parts of China, India, and Russia, and all of Japan, and Taiwan… fall (or will soon fall) within the range of missiles from North Korea, will this affect your outsourcing choices? On October  30th of 2017, we found out that 200 North Koreans were killed in an accident near a nuclear test site. It was probably a tunnel collapse, but it may have released radiation. We’ll see.

The general instability has Japan seriously considering rearmament, possibly building nuclear weapons. In recent years the China Sea has been the site of regular military conflicts between China and just about all other local nations, plus the United States.  Ongoing conflict is degrading the value of these locations.

Cyber Security – One of those “early days of outsourcing discussions” was, “What if your outsourcer steals your information?” Sometimes it took the form of, “What if your outsourcer has bad data security and they let in hackers who can steal your data?”  

American and European corporations have been repeatedly hacked, often by China or independent hackers in Eastern Europe. European hackers usually wanted money.  China wanted technology and the ability to silence anyone interfering with “internal Chinese” issues. When the New York Times wrote about Chinese government corruption, they became targeted by the cyber warfare division of the Chinese People’s Liberation Army. 

One very clear message from repeated attacks from China was this… even if you are a big, internationally known corporation, your cyber defenses will not stand up to an attack from foreign military hackers. Yet, Richard A. Clarke, one of America’s best-known authors of cybercrime books, said that China wasn’t the threat that we should keep our eyes on. Instead, we should watch Russia, the only other nation in the world that could match the US in cyber spying. Just a few years ago when he said this, everyone thought, “How can that be? we’re constantly hearing about Chinese spying, but we never hear about Russia?”

Clarke’s answer was… That’s because only America and Russia are good enough at this to steal data without leaving a trace.” And then we had the 2016 Presidential elections. We’re still trying to sort that one out. There was direct hacking by the Russians, but also the “not-yet-illegal” use of social media to spread fake news.

The newest news from Russia comes via Israel. It seems that Israeli spies, who were possibly spying on US computers, noticed that these computers were sending data to Russia.  The computers had Kaspersky’s Anti-Virus installed, which was made in Russia. Kaspersky denied infecting the machines. That leaves Russia. Did they have spies in the factory or did they add hacking tools somewhere in transit? To add insult to injury, the Israelis said that the hacking tool that Russia used was stolen from the NSA (National Security Agency), American’s top spy group. So now it’s spies, spying on spies, who get caught by other spies. Great.

Did you know that most popular anti-virus tools come from Eastern Europe or Russia? Other communication and server maintenance tools were written all over the world. Big corporations have tools from global banks and organizations. Apparently, we really don’t know what is on our networks, especially if our data is “in the clouds”. Add to that whatever we will learn about how Russia was involved in the 2016 US Presidential Elections, and we all want to lock away our data in a lead-safe at the bottom of the ocean.

Like it or not, firms will outsource massive amounts of data to cloud services to stay competitive. But, given the rising number of government based cyber hacks, a growing number of customers may want “onshore only” storage. There are enough onshore risks. Plenty of hackers in your own backyard that you need to worry about. The best hackers are the biggest threat, and these hackers appear to be government sponsored. The best protection against having a foreign government placing spyware in your data is to not send your data offshore. Banks, media, utilities, hospitals and other prime targets in a politically motivated cyber attack will increasingly look for cloud services that offer an option for “home shore only” data centers.    

Logistics – We’ve already discussed the cost of shipping goods around the world. When goods are manufactured where they are used, there are big savings in transportation. However, goods may still need to be shipped between offshore sites for final completion. The US and Europe are about to have a huge drop in internal shipping costs.

Before the turn of the last century, the US Post Office partnered with Rail Road companies to provide low-cost shipping of mail-order catalogs. Nearly a century before Amazon, Sears, Roebuck and, Co. created America’s first virtual marketplace. Sears grew into one of the world’s largest firms, even though they would not open a physical department store for another 30 years. Everything had to be shipped to customers, from pocket watches to full-size prebuilt homes.

FedEx and other “overnight” carriers launched a new age of logistics. When the speed of business picked up in the 1980’s and 1990’s, customers couldn’t wait for slow rail deliveries. They wanted overnight delivery. FedEx, DHL, and others firms gave customers what they wanted.

Then, email drained revenue as many of their most profitable corporate customers. Instant mail was better than overnight mail. Luckily, online shoppers picked up the slack. Internet purchases could be made anywhere in the world, but you needed your purchases to be delivered to your hometown. Now we’ve come full circle, and we’re back to the days of the Sears’ virtual store.

Now, a new age of driverless vehicles is dawning. Drones, self-driving cars, electric planes, and other vehicles will be both more energy efficient and (without the cost of a driver) far less expensive to operate. This will not only reduce the time and cost of any local transportation, it will also make logistics one of the top outsourcing industries for the next decade.     

Logistics looks at the efficiency of “total” transportation systems… cars, planes, trains, ships, etc. 

The market is looking for a combination of UBER and Amazon. UBERzon? It would take over advertising, marketing fulfillment, and delivery. Amazon already performs these functions and is looking to add drones for delivery. UBER wants to take over ALL vehicles in the US, replacing individuals and corporations as the owners of vehicles and vehicle fleets. UBER has piloted services where a single vehicle is both a taxi and a UPS delivery truck… with a personal messenger service rolled in. UBERzon would need to eventually compete with (or buy out) FedEx and DHL, for national and international air cargo deliveries.

Offshoring Goes Both Ways: A lot has changed in how we outsource. Offshoring used to be defined as moving work from the West to lower cost geographies, especially China, India and nearby countries. However, when modern offshoring took hold a couple of decades ago, “offshore” countries had no brand name recognition in the west. Now offshore brands, especially Chinese brands, have strong name recognition in the West.  

Lenovo (formerly IBM laptops) is a top-selling Chinese computer brand. At about the time that Microsoft and Apple abandon China and build the products back in their home markets, we can also expect Lenovo to do their equipment assembly in the US and Europe. Huawei, China’s leading hi-tech phone manufacturer, is expected to win a big slice of the Android market with their flagship Mate 10 Pro. By the time the Mate 12 is released in a few years, expect Huawei to assemble phones in the US.

China is already heavily investing in the US and Europe. Hotel chains (Hilton), media firms (Dreamworks, Legendary, and Lionsgate), General Electric’s consumer goods and just about everything else. In the UK, over 280 firms have been bought out by the Chinese.

In the last round of outsourcing, these relationships existed. Relationships were awkward and there was little certainty.  Now that both sides have a deeper understanding of each other,  many more deals in many different forms are possible. While no one knows exactly what form new alliances and contracts will take, it is almost certain that they will be much more complex and multi-layered.

China VS. India: China and India both became offshoring powerhouses, with China dominating in manufacturing and India in knowledge work (especially IT services). China went on to aggressively invest in the west. India, however, has made few visible investments and does not seem to be actively pursuing the next wave in offshoring. 

China has done more than merely invest in western corporations. They prepared for the next wave by building out its expertise in robotics. Today, China buys more robots than any nation on earth. Soon China will manufacture most of the world’s industrial robots.

Today, China is the premier global manufacturer, giving them significant control over the global manufacturing workforce that builds the goods the world buys. As offshore manufacturing fades, China will switch from providing workers to providing robots. Soon, robots will build the goods the world buys. Then,  regardless of where work is performed, China will have even greater control over manufacturing across the entire globe.

India, on the other hand, has not invested in the west or created partnerships in the US and Europe at anywhere near the same rate as China. Instead, India is “all in” on traditional outsourcing. Accenture, TCS, and Wipro have become recognized brands among the Fortune and FTSE 500. Regulations make it difficult to take money out of the Indian economy to invest abroad. Still, if India does not invest in other areas, it may be shut out of big outsourcing deals by China.

Ironically, much of the talent that is creating new AI software comes from India. Work outsourced to India is building many of the most advanced AI and machine learning systems. In raw numbers, the 43,000 patents India creates annually are a great improvement over the past. However, it pales before the 578,000 from the US or the 928,000 from China. Furthermore, according to the Times of India, 80% of the patents that India has secured are for foreign corporations doing work in India. Indians have been pivotal to the development of the AIs that will rule the world, but unlike China, India may not directly benefit from this achievement.

Brave New World: Twenty years ago, modern offshoring caught fire and became a massive, global business. There were earlier waves of offshoring, but each new wave becomes bigger than the last. In the coming wave, offshoring from the west will recede, as a wave of offshoring approaches from China, South Korea, Japan and the rest of Asia. 

We don’t know how this new outsourcing will express itself, but the earliest forms we will see in the next year will be more sophisticated than the most complex contracts we saw this year. Especially if onshoring is super-charged by tariffs against offshoring in 2018.

Foxconn, the largest employer in the world, is finalizing a $3 billion incentive deal for a mega-factory in Wisconsin. Will Foxconn completely manage the construction and operation of this factory complex? More likely, the government of Wisconsin will negotiate co-management to stimulate local businesses and employment. This is just the start of the new onshore mega-deals. If you’re ready to step up to a new level of outsourcing, a whole new world of opportunity is about to come knocking on your door!