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  • Writer's pictureGurudas Nulkar

The externalized costs of outsourcing

A few decades ago, Six sigma, lean manufacturing and several such practices showed corporate US how to produce more efficiently and in turn increase profitability. US businesses very quickly embraced such techniques in the scramble for “maximizing share-holder value” – another way of saying “paying out more to those who purchase my stock”. But as it happens when everyone discovers a secret, everyone gets benefitted to the point that there’s no difference. And the quest for differentiation continues.

Some time back corporate US stumbled upon a better way of making even more money – shift manufacturing bases to the emerging countries and reduce manufacturing costs by unimaginable amounts. Indeed this seemed to work well for everyone. The firm benefitted with low manufacturing costs and consumers benefitted by low sales prices. Retailers and manufacturers could both make more profits because of the ridiculously low costs. Incremental improvements in operational efficiencies had stopped translating into more profits and thus this idea seemed just what the US industry wanted. Jobs were killed, yes, but surely that can be compensated someplace else. Like cheaper goods for example?

Why emerging countries?

How can products be made cheaper in emerging countries? The obvious logic – lesser wages, more unemployment, lower costs and fewer taxes! The US has none of this and thus it’s more expensive to make things in the US. Or so the US consumers were made to believe. The real reason behind why this is so is never revealed to consumers.

  1. Compensation for workers is at the lowest level in the world. Some people would take up these jobs when they have absolutely no other choice. At such compensation levels, in the US, there would be hardly any applicants for the job.

  2. The work hours are more than their US or European counterparts. It’s quite common to work for 10 or 12 hours a day, and even on weekly holidays. The slightly higher compensation offered in these extra hours is enough to attract the poor labour.

  3. Working conditions are inhuman in some cases. Take the example of the windmill blade making units. Employees in these factories have to work on the shop floor in a confined space filled with excessive levels of styrene. Styrene is a hazardous chemical used in fiberglass production. In the sanding section, the air is so clouded, that one can barely see a few feet. Windmill blade makers have been recurring offenders in OSHA regulation in the US. Windmill making has now shifted to India. Another industry which is popularly ‘outsourced’ is the chrome plating of metal parts. This is one of the most hazardous industries known to mankind! There are employee health hazards and environmental hazards closely associated with this. Yet, the electroplating activity from emerging countries is far cheaper than in the US. Simply because there are weak laws and even weaker implementation of them in these countries.

It’s quite obvious then, that labour and environmental laws in emerging countries are easier to comply and even easier not to comply. This works well in favour of US firms, since the manufacturers here end up spending less on “non-value added activities”. Economists call this the externalized costs. It is then very easy to leave such externalized costs of production in the countries where the goods are produced. Externalized costs are not counted anywhere in the manufacturing costs, because they don’t seem to affect the US consumers, retailer nor the US brand owners.

  1. How does it concern the iPad buyer in downtown New York that someone has worked for 10 days in a row and has been paid inadequately for it?

  2. Or that the waste chemicals generated in making the kitchen faucet have been dumped in a stream without worrying about what it does downstream?

  3. The insurance company in US which has outsourced its back end data in Mumbai needs its records to be safe and always available. It is not concerned that this is possible because of unequal distribution of power in India. That some villages have to go without power for days together so that Mumbai gets uninterrupted supply.

  4. Or that the US Travel company can offer its prospects 24×7 human voice support because thousands of village youth have agreed to being uprooted from their homes and gone to work in Gurgaon?

It’s a no-brainer to guess that consumers are not aware and that US firms will not want them to be aware of such externalized costs. Its quite understandable – in a free market economy, some one from India has offered to serve the US client, and is obviously making a choice, so why bother?

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