Drury 1 Cara Drury MAT 425 April 25, 2008

Outsourcing Introduction In the United States today, money plays one of the most important roles. Businesses are run by many CEO’s that only have concerns over budget– unaware of the welfare of their employees. Companies are now turning to something that has been around for many years, but now has taken on a new evolution: outsourcing. Outsourcing is when high cost manufacturing locations such as the United States and Europe and also regional trading partners like Mexico and the Caribbean shift production to low cost manufacturing locations like China and India– in order to cut costs. In 2005, there was a dismantling of quota system which greatly affects the use of outsourcing in the textile industry to countries such as India. On January 1, 2005, the quantitative restrictions band tariff barriers were phased out which caused the industry to move toward global integration. In India, the workers are very skilled and require only low wages in textile production. India is also the third largest producer of cotton in the world. It is projected that India’s economy will export $50 billion by 2010 in the textile industry (Shah). These staggering facts are a growing topic for debate on the minds of many US workers and political leaders.

Drury 2

History The United States maintained a self-sufficient economy before World War II began in 1939. It was able to produce most of the products that the nation needed to suffice its consumption patterns (for example: fruit and apparel, meat and machines, steel and automobiles). The only items that needed to be imported into the country were coffee, tea, spices, bananas, mineral ore, diamonds, designer dresses, fine china. After the war, international trade began to develop as well as global communications. The government decided to help the economy recover from the war by increasing imports from Europe and Asia and reducing tariffs. Presidents Harry Truman and Dwight Eisenhower sought to help rebuild Japan’s economy in the 1950's– especially in the textile industry. The US began to import large quantities of textiles from them as well as South Korea, Hong Kong, Taiwan, and the Philippines. Importing of textiles eventually led to the importing of easy-to-manufacture items. This was still considered importing rather than outsourcing– these purchases were done by importers and middlemen. The American manufacturers still had not moved operations or contracted out overseas. In the 1960s and 1970s some American textile and apparel companies began contracting out to producers in Asia to furnish some of the textiles and garments that previously had been manufactured in the United States. This is the time that importing evolved into outsourcing. Many other American companies soon followed, including some shoe retailers that had their own domestic manufacturing operations. Sneakers and shoes were being contracted with companies in South Korea, Taiwan, and other countries. In the 1980s, outsourcing accelerated and soon companies were looking to Central America and South America, as well. Better transportation by air and water, as well as improved global communications through the internet and new

Drury 3 technologies has continued to spread the use of outsourcing among the nations (Outsourcing).

Economic Status & Textile Involvement

It is said that outsourcing is just a “new way of doing international trade,” and while that may be true, this new way of trading is causing more harm than good for the United States economy (Warner). Of the 2.5 billion people that make up the population of China and India, many of them are very well educated and willing to work at lower wages than Americans. In the US, an information and technology professional with 3-5 years of experience will earn about $75,000 whereas in India they are paid around $26,000. This creates a competition for jobs (Colander 481, 490). In order to even out this competition, inevitably, there are two possibilities at hand: one is to raise wages in India, China, or any other country that has the outsourced work, or two, the United States’ exchange rate will fall (Colander 491). Either of these adjustments will cause outsourced goods to increase in price and make the goods produced in the US cheaper, therefore defeating the purpose of outsourcing. (Colander 491). In order to keep products cheap, China is suffering while its economy is steadily growing. I learned in my Consumer Issues class that pollution is a major problem in China. This problem stems from their government allowing factories to pollute in order to keep products cheap whereas in the United States we have laws regulating against this type of practice. In order to have a successful economy, its citizens are paying the price because they must drink dirty water, breathe filthy air, and deal with cancer. So the issue of outsourcing is not only a disadvantage to the

Drury 4 United States’ workers who lose their jobs, but also to the workers of China that receive the jobs but forfeit their health. In the United States there is an increasing amount of workers losing jobs. In 42 months, the US has lost 2.8 million jobs in manufacturing (Warner). This not only affects the lesseducated. According to Basheer Janjua, CEO of Integnology Corporation, he receives resumes on a weekly basis from “desperate high-tech workers, many of them with masters degrees from Stanford and Berkeley” who have lost their jobs due to companies outsourcing (Hyman). As it states in the book, Exporting America, by Lou Dobbs, due to a security gap foreign textile manufacturers have been able to falsify labels on their products. For example, they may label a piece of clothing as “made in Honduras” when in actuality it was made in China (Dobbs). This act makes the product appear of higher quality than it would from a China manufacturer. A way that companies have discovered how to complete more research in a smaller amount of time is to have part of the research outsourced. Someone in the States will research and work on a project during normal work hours, and then a hired worker from another country will pick up where they left off when that person is done for the day. It seems like a great idea, but upon returning the next day, he/she has to figure out where the other company left off. What if the software or computers aren’t functioning? Time is lost until the problems can be fixed and no work can be done. This time that has been lost is another way to drive up costs that they are trying to cut. Even services are becoming very impersonal for the consumer, even X-rays are being sent overseas to be analyzed. The new companies overseas that they have hired to “displace low-wage, manual kinds of labor with higher-skill, higher-tech, higher-education-content labor” are the ones who own

Drury 5 everything: the land, the factory, and the raw materials (Ortiz). Some business leaders have thought of this factor as an advantage: they do not have to worry about personnel issues, and they have no responsibility if something goes wrong: the other company is doing all the work. But they don’t even know that these companies aren’t stealing their ideas-- they have no control over security. China is a country that is often in trade with companies because of their cheap wages, yet China is also known for stealing ideas and products. This directly leads companies that outsource into a pitfall because China learns to produce identical technology and sell it cheaper. A company that hires another company in India to produce their product, only owns the final product, which could also be of various quality. There are no supervisors, from the American companies, to check up on the workers therefore they become dependent on these other companies to do the job accurately, efficient, and of high standards. Companies that are outsourcing require, of course, for products to be tested for quality before they are sold to consumers, but this action does not always prevent faulty products. Recently, Lexmark had a 50 percent return on printers made from outsourcing. The company that Lexmark outsourced its products to reported a “good quality” in the 99 percentile range (Drury). So how is it that this company reported such good results when 50 percent of the consumers who bought the printer are returning them because they are faulty? It happens like this: the company has various assembly lines, products are supposed to be picked randomly to achieve an accurate report on quality. This company in particular, handpicked the printers to be tested from a certain line that produced the best quality, therefore each one they tested, most likely had a “good” result. When the product is sold to the customer, there is the chance that they are buying from one of the other lines that produced the printer, not necessarily the one that produced the tested product.

Drury 6 This, in turn, provides Lexmark with inaccurate information, over which they have no control. Language barriers is an unavoidable problem that has come up with outsourcing. Employees can be trained to speak different languages, but that doesn’t necessarily mean it is in a distinguishable speech. Accents affect the way people speak, it is an issue that will always stand. Whether it’s between customer service in India and customer in America, or employee in America working with employee in India. Companies often create 24-hour research groups between its U.S. and international employees. Someone in the States will research and work on a project during normal work hours, and then a company hired will continue the research when that person is done for the day (Drury). Extra research is done in shorter amounts of time. Factory jobs have been cut by 1.9 million since the beginning of year 2000, and 1.3 manufacturing jobs have been outsourced overseas since 1992 (Hagenbaugh). During the first quarter of 2004, the Bureau of Labor Statistics totaled the number of jobs lost to “overseas relocations” to be 4,633 (Santosus). Compared to fifty years ago when a third of the country’s employees worked in factories, “a little more than one-tenth of the nation’s 131 million workers are employed by manufacturing firms (Hagenbaugh).” Even these statistics are inaccurate– they do not take into account the people that are not drawing unemployment and have simply given up hope. These statistics are based on numbers from companies that laid off more than 50 people. Charles McMillion, president and chief economist at MBG Information Services tells CIO Magazine that these numbers, “represents maybe 3 percent of the job turnover at any given time,” and that the accurate numbers cannot be captured in the BLS report (Santosus). It is estimated that by the year 2015 the number of U.S. computer jobs moving overseas will grow from

Drury 7 approximately 27,000 to 472,000 (Gilbert). The information on how outsourcing is healthy for our society being presented to the public, provoked a freelance TV producer, Greg Spotts, to start a film. Spotts explains to the Christian Science Monitor, that seeing many of his friends lose jobs to outsourcing lead him to 19 cities across the U.S. to find others, who like his friends, have been affected by such business. “It was Clinton who signed NAFTA ( North American Free Trade Agreement), and 700,000 textile jobs have been lost in the U.S. since then,” Spotts claims. He also states, “How can companies say there’s a shortage of skilled labor in the U.S. and out source work when the unemployment rate among tech workers here is growing to record highs (Business Week)?” The middle class is seeming to be targeted. Businesses have now gotten rid of the poverty stricken “sweat shop” types of environments, but now they are targeting the next step up: the middle class. Recent Census data states that the median household income has fallen by $1,500 between 2000 and 2003. The pretax income consisting between $25,000 and $75,000 makes up the middle class, and the percentage of households in this bracket has fallen by 1.2 percent since President Bush took office. This caused the lower class to grow by 1.5 percent, and those making more than $75,000 declined by 0.4 percent (Francis). Greg Spotts explains further that through his interviews and research he has grown to believe that “ a significant erosion of the middle class, a lot of people whose talents are underutilized or unutilized,” will lead to, “. . . India and China become more like the U.S., (and) the U.S. becomes more like India and China . . . We might see more and more people working for subsistence rather than to achieve the American dream of affluence (Business Week).” Soon our economy will grow equal to that of China and other countries if we are not careful– we will have the rich and the poor, no in-between. Donald Wilson

Drury 8 a chef at the Century Plaza Hotel in Century City, California, states to the Christian Science Monitor that corporations are, “squeezing the little guy and shrinking the middle class which can’t live on these tiny salaries. . . Jobs are disappearing while the CEOs are getting richer and richer.” The president of the AFL-CIO, John Sweeney, also tells the Christian Science Monitor that the middle class is being damaged by things such as overtime rules, increased number of workers not covered by health insurance, reduced benefits, and outsourcing of jobs overseas (Francis). At Eastman Kodak, four years ago, after 26 years of work the materials engineer was laid off after 26 years with the company. He was merely two months away from being eligible for full retirement benefits, and by being fired, his slate was wiped clean (Ortiz). Sending these types of jobs will promote a higher education in our country, but corporations must take into consideration that there is a generation that is still in the workforce that weren’t handed as many opportunities as today’s generations are. This generation is still raising families and supporting them, and they are the ones who need these jobs the most. One community in Tennessee, Celina, was struck hard. The OshKosh plant located there outsourced their work to Mexico, leaving 1,200 people without jobs. Some of those employees had worked there for nearly three decades (Dobbs). With this large manufacturer gone, the unemployment rate in Celina rose to 15.5 percent and its per capita income has fallen to $13,000– all due to outsourcing (Dobbs). According to Lou Dobbs, these communities that have been affected by outsourcing, there has been a rising problem with taxes. Because of the fact that many of the citizens are no longer making income, they are unable to pay their taxes. And because these companies are leaving, they are also taking the tax money that they are required to pay to the community, with them (Dobbs).

Drury 9

Conclusion There is no direct correlation between outsourcing and industrial job loss, but the American Electronics Association found that between January 2001 and December 2002, “more than half a million U.S. citizens lost their high-tech jobs (Hyman).” There were 37 textile factories that were closed in one year just in North and South Carolina (Dobbs). Businesses can cut costs and deliver cheaper products to the consumer because of outsourcing, but the consumers in the United States will be directly affected– they will not have the money to buy products if they have no source for income. Outsourcing has evolved from ridding ourselves of sweatshops to depleting the middle class all together. John Edwards once stated, “Today a member of his (President Bush’s) cabinet said that outsourcing American jobs overseas creates jobs. Like most Americans, I have no idea how they could say that (Lieb).”

Works Cited

Drury10 Colander, David C. (2006). Microeconomics: 6th Edition. New York, NY: McGraw-Hill/Irwin. Dobbs, Lou. (2004). Exporting America: Why Corporate Greed is Shipping American Jobs Overseas. Warner Books, Inc. Drury, Carroll. Personal Interview. 22 September 2004. Francis, David R. “Salary Squeeze threatens middle America.” Christian Science Monitor. Vol 96 Issue 199 (2004): 3 Gilbert, Alorie. “Labor Activist picket outsourcing event.” 18 September 2003 (published) 15 April 2008 (accessed) . Hagenbaugh, Barbara. “U.S. Manufacturing jobs fading away fast.” USA TODAY 19 April 2008 (accessed) . Hyman, Gretchen. (March 19, 2003). Overseas Outsourcing Hurts U.S. Economy, Says Firm. Retrieved April 23, 2008, from://hwttw p w.atnewyork.com/news/article.php/2118191. Lieb, David A. “More U.S. Jobs being gained than lost.” 2 September 2004 (published) 19 April 2008 (accessed) . Ortiz, Carlos. “Eastman Kodak workers in Rochester, N.Y., have been losing jobs as the film maker closes plants.”

"Outsourcing." MSN Encarta. Microsoft Corporation . 24 Apr 2008 . Santosus, Megan. “Job Stats Undercut Offshore Fears.” CIO Magazine August 2004 Shah, Sangita. "Textiles to be the next major outsourcing area." Rediff: India Abroad 26 DEC 2003 23 April 2008 . “The Story of American Jobs.” Business Week Online. 10 September 2004 (published) Warner, Margaret. (March 11, 2004). Jobs Moving Overseas [Television broadcast: NewsHour]. PBS.