Articles on Innovation, Manufacturing, Outsourcing and Off-Shoring

A series of recently published articles by MIT’s Technology Review by leading scholars such as MIT’s Suzanne Berger and Harvard’s Willy Shih, on the interdependence between innovation and manufacturing have pointed out the long term hidden costs of ongoing out-shoring and deindustrialization trends in the US manufacturing industries. Even though the ideas in these articles are neither really ground breaking nor new, they left me wondering about the reversibility of such persistent and destructive trend of off-shoring for US industrial base. More specifically, I’m thinking about how national policy and individual company could cooperate to salvage themselves out of this seemingly never ending trend of deindustrialization. However, to come to this point, one has to be clear about the difference between outsourcing and off-shoring. The common confusion or misconception of equating outsourcing to off-shoring is due to the fact that, in both cases, business operations are transferred out of the company. But, the commonality between outsourcing and off-shoring ends here.

The term “outsourcing” gained popularity in the 1980s and 1990s as a business strategy to focus on competitive business competences (Mullin, 1996). It’s a way to shed unnecessary assets and complexities that do not contribute directly on its core business operations, thereby freeing valuable resources for developing core businesses (specialization or division of works). Outsourcing can be as simple as moving operations and services that were previously done in-house to the neighboring suppliers in the vicinity (outsourcing) or to overseas suppliers thousands kilometer away in Asia (off-shoring + outsourcing). The motivations of outsourcing have been economies of scale, specialization (core-competence focused and work division) and simplification (even though controversial).

On the other hand, the term “off-shoring” means transferring business operations and services overseas. Off-shoring gained momentum in the 1980s not really due to outsourcing benefits but more a result of globalization. Lower operational costs (wages, energy, land, capital minus transport and complexity) and attractive local markets drew MNCs and SMEs from developed nations to emerging nations. The positive side effect of off-shoring of manufacturing across nations has been economical and industrial development in emerging nations around the world, while profiting developed nations handsomely (a fair trade, isn’t it?). The question remains in the sustainability of such off-shoring model, as highlighted in recently articles, especially on innovation.  

Outsourcing may not always bad for national innovation if outsourcing is kept within the national industrial ecosystem, where OEMs and suppliers can still interact actively in innovation. However, if outsourcing is going overseas, this interaction will be significantly hampered by geographical, language and national barriers. Even with modern IT technologies that facilitate remote collaboration and interactions, there will be problems. Innovation could benefit Multi-National Companies with global sites but not the local players in the national industrial ecosystem (e.g. manufacturing industries in China relative to the US).

Off-shoring may not also be bad idea if only non-core operations (e.g. commodities and back-office jobs) are off-shored. The tricky part is how companies define their core business operations.  In Apple’s case, manufacturing (including assembly) is not considered as its core business operation, keeping only R&D and services. It would be very hard to believe that companies such as Ford and Boeing would end up considering this extreme business strategy. Nevertheless, NASA’s (a governmental organization with organic R&D and production capability) recent complete outsourcing of design and manufacture of entire future space systems has already proven that this is not unthinkable.     

In my personal view, the main issue here is the different views of the business environment of individual companies and their government. To solve off-shoring induced innovation disruptive trend, individual companies and government have to align their strategies, which, in reality, a real challenge of fine balance between national and corporate fiscal risks. While it is unlikely private companies would take any risk for the sake of national industrial security, however, government could exert influence on OEMs (companies on the highest level on the supply chain hierarchy) to adjust their supply chain strategies to enhance long term industrial and innovation sustainability.  At the same time, government provides incentive and development supports to suppliers in the innovation and industrial ecosystems to enable them to remain competitive in spite of globalization forces.  

My proposal for the sustainment of national industrial ecosystem:

1) Educate and support OEMs to optimize their outsourcing and off-shoring strategies (considering greater involvement of local suppliers in national ecosystem) in view of long term sustainability of their industrial and innovation ecosystems.

2) Educate and support suppliers to maintain and improve their global competitiveness by tailoring their competences and capabilities to their upper tier customers (e.g. OEMs).


        These articles highlighted the macro-economical issues that urgently need to be addressed. It's a pity that these articles did not discuss more about the possible mitigation actions that the US government could consider. For the case of the US, the above-mentioned two-pronged mitigation actions will be necessary. For the case of other highly industrialized nations, like Germany, which has a strong and innovative SME base, a strong and continuous incentive for local OEM’s should suffice. 

Links to recent articles from MIT Technology Review:

http://www.technologyreview.com/business/37932/page1/
http://www.technologyreview.com/business/37957/?mod=related
http://www.technologyreview.com/business/37956/page1/