[prajeshbhat]

Hi,
Offshoring is a hot topic these days. It seems as if China has become the factory of the world. For the past three decades, US companies have been offshoring their manufacturing to third world countries where labor is cheap. Many people believe that this could be the reason for the enormous American deficits.

I personally think that the purpose of the economy is to use the available resources efficiently to generate maximum profits. Why then, do companies get their manufacturing done on the other side of the world? How does it conserve energy.

Here's my take on it. A worker in USA probably lives 30 miles away from where he works. He will come to work in his own CAR. So that's 60 miles of car journey every day for every worker. Multiply that by 5 million, or whatever the number of jobs USA has lost to offshoring. A factory owner in USA has to pay wages that can support that kind of an energy intensive life-style. Whereas a worker in Indonesia or China or India will probably sleep within the factory premises or come to work on a bicycle. Part of the reason why labor is cheap in these countries.

As far as transportation of the manufactured goods is concerned, they are usually transported in bulk. Thousands of tons of goods are laden on a ship and transported via sea. On a per unit basis, i guess transporting goods is practically dirt cheap.

But you cannot transport workers in bulk. At least not in USA. It's a CAR culture.
Everybody owns a CAR there. I may be wrong on this one. But i believe that offshoring manufacturing actually conserves energy for USA. Correct me if I am wrong.

[Pops]

I was just thinking about this. The main reason for off-shoring is of course cheap labor, nothing new in that at all. The US had a strong union presence early in the 20th and virtually no manufacturing competition after WWII so wages were very high. Capital jumped on containerization as the means to greater profit by firing the people who bought their product.

I am reading a book at the moment that discusses the fall in shipping costs as a result of containerization. The cost of consignment cited is around 1.5% of value ca 1998 which was down dramatically from 10% or more just 20 years before. A can of beer could be shipped for a penny.

Oh, yea, we imported about $50 billion in oil in March.

[pup55]

Let me tell you my limited, and dated experience:

I once had to go to a big industrial plant in China, they had about 5000 employees. They told me the capacity of the place, and a typical US plant that produces exactly the same quantity per day of about the same thing has about 2000... maybe less now, I don't know, like I said, this is all kind of dated.

We went into the place and there were zero conveyor belts and zero forklifts in the place... no, I take it back there was one forklift, it was used to move big, hot objects. Everything else in the plant was moved from place to place by a couple of people pushing a little cart. This includes big 2000 pallets of raw materials which were moved by 6 people pushing and pulling a little cart.

There was a big dormitory next to the place, and that is where the workers lived. Their commute was zero. There was a big cafeteria, in which they were fed their 3 free meals a day. There was a school, for the little kids, and also for any of the workers that chose to get a little education so as to better themselves. There was a marriage in the plant one of the days I was there. The bride went out onto the production floor to show off her dress. It was expected that most of them would have some initiative, get some education and then move to a slighttly more hi tech place. this is one of these old so called smokestack manufacturing plants.

Safety equipment? Ventilators? Cleaning? Maintenance? Forget it. The equipment was western design, and you can see where all of the safety stuff, exhaust fans and everything else were removed, there were panel boards for the controllers with wires sticking out...a US OSHA inspector would have just done an about face when he or she entered the front gate.

So, the plant was the home, workplace, school, medical I suppose, and means of support for this 5000 people and their immediate families. I guess they gave them $4.00 a day or something as pay, so for them, it was an opportunity. They could get some work experience and credentials, and try to better themselves. They were willing to work like dogs under these conditions because it was the best they could do.

This image you have of China as the gleaming cities, flashing lights, and traffic jams, all that is fine for the big cities, but when you get out into the countryside it is a little rough... or at least it was. Like I said, my knowledge is dated now, it might be different.

So, in that instance it is much, much more energy efficient and cheap for them to do that stuff.

[Lore]

There are several factors for making off shoring attractive. Primarily the cost of labor and the cost of doing business in general. The latter being regulation, taxation, reduction in administration and access to world markets. As Pops mentioned, globalization and the easy transport of raw materials even with higher fuel prices makes it economical to produce goods where ever in the world the other factors assist in reducing cost.

Times have changed in China out of necessity to increase productivity and quality while attempting to keep costs down and remain competitive globally. New factories there use some of the most modern equipment and advanced techniques in the world. Most people underestimate the power of modern automation in combination with cheap labor markets. Part of the failure in the US was to chase labor down without business making an investment in new automation technologies.

[pup55]

I suppose it depends on the industry, and it also depends a lot on what relationships the local companies have over there with their western counterparts. The place where I was actually was working with an italian company at the time, and they had built a separate building for the joint venture in the plant compound, and you open the door to go in there and it was like you are stepping into another world: Air conditioned, lighting good, people walking around in lab coats, all of the latest equipment in that industry....

So you are right, the new high end place, with the western engineering was comparable to the western stuff. But, I also have to say that the workers in there also did not just fall off of the turnip truck either. College grads, advanced degrees, most knew english, young and industrious, and I suppose they had to make more than $4 a day.

So you have to wonder. My guess is that there is still a lot of low end stuff being made over there, and some of it is making it over here to compete with the high end fully engineered stuff. Whether the actual cost and energy consumption will be any different at all, in the long run, with everything being equal is questionable because you have to compare items with equal quality. Engineering is, after all engineering.

Now, if they take shortcuts, to produce cheaper and less durable items, like they do, well, that is a different issue.

[smiley]

I think labor costs are a major factor, but also raw materials, and policy. Otherwise the rapid expansion of China does not make sense as there are many more countries with low wages.

While the costs of shipping products has reduced, the cost for shipping raw materials has increased. Generally the useful content of ores has decreased over the past decades, which makes them more expensive to ship. Combine that with depletion of deposits in North America (increasing reliance on imports), the averse policies towards heavy industries in the west, and subsidised production in china, and it is logical that the ore processing and heavy industries move to China.

China now controls a large pie of the world raw materials market and therefore the basis of the value chain. Combined with low wages and a reasonable education level that puts them in an excellent position to slowly reel in the higher value jobs.

This has been a deliberate strategy of China. They have been quite open about the fact that they wanted a major stake in the resource market, and they have been investing in this for years. We (the west) on the other hand have been deinvesting in the simple manufacturing jobs under the presumption that much bigger rewards were to be found in the service economy.

China has a good set of cards and makes good use of them, we on the other hand have a mediocre hand and play it badly.

[pup55]

The company I worked for was one of those resource conversion businesses... they started up a joint venture with a Chinese company over there. They provided the engineering, control systems and that kind of thing, the Chinese provided the land, the labor, which is a relatively minimal cost of the overall operation even in North America, and I believe the split was 51-49. Financing was jointly done somehow.

It was key what assumptions they made when they went in. They assumed that the China market would steadily grow at 10 percent a year or whatever, for the length of the project, so the installation was the maximum volume and efficiency that they knew how to make it from a production and engineering standpoint. They assumed that the economics would take care of themselves.

Contrast that with trying to retrofit a similar operation in Ohio, in a shrinking market, with increasing environmental constraints, starting with 1970-s era equipment. Any debottlenecking or anything else had to pass strict rate of return protocols, they resisted any big expansions and only did the work that they knew would pay back in a couple of years.

So any work done to the Ohio operation was built to be the most "economically" efficient, with the investment and rate of return assumed to be the key, instead of the most "engineering" efficient....

So at least in this case, in the resource conversion businesses, the operations over there using Western technology are a bit more efficient based simply on the assumptions they made when they designed the equipment.

[TheDude]

This thread prompting to search one more time for some info on bunkers as a cost of shipping, and voila:



Ballooning bunkers blister bank balances. From September 2008. Looks like the spike in crude in July '08 lead to bunkers accounting for 70% of shipping prices a few months later, there being a lag between crude and product price. Jeff Rubin alluded to this in his book, how unbearable shipping prices will lead to Your World Becoming A Lot Smaller. I've Mentioned This Remark In Various Comments On Blogs/Forums Since Reading That, always being curious how the curve pans out. Notice how fuel became much less of a matter overnight in Nov '07 - how'd they do that? Simple - they jacked the price of shipping up...not really a solution, is it?

Presumably shippers are feeling the pain at the moment as well, which doesn't help economies anywhere do that booming they're so fond of. This is all tangential to the subject at hand but thought I'd share it with y'all anyway.

Other side of the coin is that you have to have a viable consumer economy to ship your now-cheaper and presumably-less-energy-intensive goods back to. We hear a lot of hair being torn out about how the US has become some bloated decadent society dependent for its very survival on mindless consumerism; but, sad to say, 'twas ever thus:



True Consumption as Percentage of GDP. Of course we also built more stuff in the olden days, so this argument has a bit of a ring of truth to it.

I think of other nations we've offshored to as the new version of those sections of town which people used to say were on "the wrong side of the tracks." Grime, broken glass, hookers, bums, industrial noise, clattering boxcars. You get the picture.

[bratticus]

My impression was that during the 80s the US started moving factories into Mexico not to "conserve" energy so much as to make the problem of powering them someone else's namely Mexico's. This was a reaction to post 1971 US national peak oil declining energy.

NAFTA was about how the US could get their hands on as much of Mexico's oil and Canada's natural gas while offloading domestic energy demand from factories into Mexico.

Under the pretense of giving Mexico jobs and industry the US compensated for critical shortages that made the pre-1971 way of doing business impossible to continue.

When the limit of what could be done in North America were reached China was the next one in line and the game continued. But since 2005 the problem of peak oil has become a global one and the game is falling apart. Economic bubbles are the new normal as there's no way to avoid them. In the past rising commodity prices made the development of energy resources possible but it's clear that isn't possible now as we have had two massive price surges since 2005 while world crude oil production rates stay very flat.

BTW my avatar is all images from Koyaanisqatsi

[prajeshbhat]

Here's a video where the guy says it's all over for offshoring.
http://www.youtube.com/watch?v=5ZwCDYLClPM

On the other hand here is an article citing famous economist Paul Krugman who thinks that in the next stage globalization is going to be slicing into job opportunities and wages at the high end of the labor market.

http://www.businessinsider.com/paul-krugman-gets-it-half-right-on-whats-wrong-with-americas-economy-2011-3

Who is right?

[radon]

But you cannot transport workers in bulk. At least not in USA. It's a CAR culture.
Everybody owns a CAR there. I may be wrong on this one. But i believe that offshoring manufacturing actually conserves energy for USA. Correct me if I am wrong.

On one hand, this logic implies that the manufacturing outsourcing should result in a reduced car usage in the US, which has not been happening.

On the other hand:

1. Direct labor costs are only one component of the total factory costs. Other inputs, like electricity or material inputs, also include US-borne labor costs embedded in the price of the domestically produced electricity, materials and so on. Even the imported oil has a component of the US-borne labor costs, as this oil has to be unloaded and delivered over the US territory to the factory gates.

So the total cost saving from outsourcing is not limited to the reduction of the direct labor costs, and can be potentially much greater than those.

2. Outsourcing of manufacturing is a way to import non-fungible energy inputs, like electricity or heating, which for various reasons, whether peak oil related or not, may be cheaper or substantially cheaper than those in the US. In this sense outsourcing "conserves" energy for the US, as it provides cheap energy imports unavailable otherwise.

3. And then there are all sorts of other costs - regulatory, environmental and so on, as discussed.

[radon]

Who is right?

Break-even point for outsourcing is where:

Domestic Labor - Foreign Labor - Transportation/Logistics Costs - Set up hassle + Environmental savings+ Tax/Regulatory Savings = 0

So who knows. A lot depends on the specific industry, perhaps.

[pedalling_faster]

the analysis can be done either way.

Chinese workers consume a lot less energy in their lifestyle. it would be normal to do the analysis using their energy consumption as a component of the products manufactured.

BUT - while the Chinese workers are working, their American counterparts are driving around looking for work, home watching post-Oprah, or working at a store possibly selling those inexpensive Chinese goods.

the Americans would be consuming energy anyway - to the limits of their income & debt. if they had a job to finance more energy consumption, they would expend more.

so, whether the system overall consumes more energy because the manufacturing is off-shored - you need a LOT of data.

if i was working for Rand or Foundation X, i could make a convincing case either way. probably take weeks (or months) to gather the data.

during which time i would also be consuming energy.

[prajeshbhat]

Here is energy analyst Gregor Macdonald whos says that US economy has not become energy efficient at all. It is just borrowing energy through outsourcing:-
http://gregor.us/coal/phantom-efficiencies-us-economy-still-running-very-slow/