Responsible outsourcing revisited

This Insights column is an update to one I wrote more than seven years ago—“Advocate for responsible outsourcing” (November 2017)—before the COVID pandemic and recent tariff activities. At the time, I felt that some outsourcing was necessary for global businesses, however, U.S. companies had over-outsourced. And that contributed to the middle-class angst that resulted in President Trump winning his first term in office.

A discussion on the factors that lead executive management to be biased toward outsourcing was included in that column, it is updated herein. I also believed that a U.S. company is beholden to its home country, and when reasonable should keep manufacturing jobs in the U.S. The advice I provided to managers was to make sure their executive teams recognize that a company is “obligated to pay back the national debt” it owes to U.S. labor. That advice was too naive and likely biased as supply chain management and labor jobs were the ones being outsourced.       

Over-outsourcing continues unabated

My last Insights column, “Fragmented global supply chains coming?” (March/April 2025), was written to advise managers regarding President Trump’s second term tariff initiatives. It appears that these are being aimed at incentivizing domestic and international companies to do more manufacturing in the U.S. in the hopes of reversing the U.S. trend, or at least stem the tide of outsourcing manufacturing to other near and far countries—all in pursuit of lowest costs. The column postulated a potential future global trading order comprised of several trading blocs leveraging tariffs to protect industries strategically important to them. Should this happen, more manufacturing might need to be produced domestically or at least near-sourced, and intellectual property (IP) better protected.    

A recent Wall Street Journal article, published April 14, titled: “How the U.S. Slipped From Top Manufacturing Perch,” tells this story that starts from the end of World War II. The fast-paced wartime production to support the war had resulted in the U.S. having around 45% of private labor jobs in manufacturing. As an affluent middle class grew—with a significant portion of the growth manufacturing-related, the U.S. became a consuming nation. Other countries kept knocking on the U.S.’ doors, offering to produce less-costly goods by leveraging lower wages (such as for the non-durable goods industries like apparel and footwear). Thus began the race among companies toward ever-lowering costs to stay ahead of U.S. competitors. After Japan’s export reign in the 1980s, China the most populous competitor the U.S. has ever seen, joined the World Trade Organization (WTO) in 2001. This exacerbated the global competition for outsourced production capabilities, now leaving the U.S. with only 9.4% of private jobs in manufacturing.

The U.S. is divided into essentially two classes: have-more and have-less. I use these terms rather than have and have-nots because generally life in the U.S. is pretty good vis a vis that of other nations. The former class tends to be college educated and this gives its members a “protected” lucrative career. The latter class is not college educated and are much less “protected” toward having a lucrative career. The latter’s jobs are the ones that tend to get outsourced.

The have-more tend to question whether it is a bad thing that manufacturing jobs are going away. After all, they are primarily active in a “virtual world” of publications, TV, telecommunications, as well as the Internet and social media. If they want physical goods or services, they just need a credit card to get it, no effort needed. The have-less class takes pride in making and repairing things. Thus, would relish hands-on manufacturing jobs that pay well.

Factors contributing to over-outsourcing

The lack of a sound, thorough analysis and support plan is the most common factor that drives over-outsourcing. Too many companies chase cheap labor costs from country to country without considering outsourcing’s effect on productivity, product quality, demand-responsiveness, and the safety of foreign workers. In addition, some supply chain managers have had to hide the fact that they deploy an additional tier of state-side inventory to buffer against the vagaries of ocean freight coming from halfway around the world. Others flew goods that ought not be flown considering energy efficiencies and increased CO2 emissions.

Another factor leading to over-outsourcing is the executive view that outsourcing serves shareholders, and that pleases the board of directors, who incentivize them to do so. Inherently, executives focus on a return-on-assets (ROA) mindset, believing it represents what shareholders want improved. It’s a ratio: ROA equals profits (numerator) divided by assets (denominator). Simplistically, one way to increase ROA is to increase the numerator by increasing revenues and/or reducing operating costs. The other way is to decrease the denominator, deeming outsourcing as a very effective method to increase ROA. By outsourcing operations, a company often raises the numerator and reduces the denominator—doubling down on increasing ROA. In fact, if a company could shed all of its assets (e.g., including manufacturing plants), the denominator would be minimal, making ROA almost unlimited. Thus, a focus on ROA makes outsourcing attractive to executives.

Throughout globalization, this outsourcing might have led to increasing a company’s share price—pleasing shareholders and boards. In addition, an executive team with stock options might have gotten a significant boost in compensation, while employees were losing their jobs. The other side benefit of outsourcing is that executives don’t have to spend endless and inordinate amounts of time on labor relations that frequently involve endless contentious meetings with unions.

Outsourcing is attractive despite downside risks

There is a concept known as the outsourcer’s trap involving significant downside risk. It concerns cases where a company outsources manufacturing to another country in hopes of saving money as well as to market to consumers in that country. Too often the country learns the secret sauce that makes a U.S. business successful, and then uses it to sell against the company. Apparently, Apple is experiencing some of this as I write this column. A WSJ article, “Apple Loses Lead in China Smartphone Market” (April 19-20, 2025), states that “Apple lost its top spot in China’s smartphone market, dethroned by local rival Xiaomi as Beijing’s consumption-boosting subsidies help buoy demand for cheaper products.” A chart in the article shows first-quarter 2024/2025 shipments in China by company. Apple moved from the top spot in 2024 to the fifth spot in 2025.

The most high-profile case showing these risks happened in the global semiconductor market. The industry, created by U.S. companies, gave away its leadership by outsourcing foundries to Asia-Pacific countries that dominate the global market, with a significant share. A big portion of this comes from Taiwan (e.g., TSMC), leaving the world to worry about will happen to supply, if and when, China decides to take it over.

During the COVID pandemic there were shortages of the life-saving masks needed by doctors and nurses providing care in intensive care units (ICUs), overflowing with seriously affected COVID patients. Apparently masks were viewed as “cheap” hospital supplies, thus producers outsourced manufacturing to Asian countries including China. Some mask orders were late or never filled because countries needed them for their own population. (See Insights, “Supply chain heroes and lessons from COVID-19,” September/October 2020) Also, during the pandemic, retail stores were bereft of infant formula that had been outsourced to other countries to make. Many nervous new parents were forced to use less trusted formulas, adding to the stress of the nationwide shortage of diapers and toilet paper.

My Insights column, “Supply Network Compliance a Must” (September/October 2013), discussed the responsibilities that a company should have for its suppliers’ working conditions. In 2013, a Bangladesh garment factory collapsed, resulting in the death of over 1,000 workers, mostly young women. More than 100 years ago, in March 1911, 146 workers died in a fire at a New York City garment factory, and it still represents the deadliest workplace disaster in the city’s history. At that time, the U.S. garment industry learned the importance of keeping workers safe. Apparently, the outsourcing retailers of the Bangladesh factory never learned these lessons and denied any culpability for the deaths. Public opinion forced some of them to eventually compensate the workers’ families.

I once heard that a U.S. apparel maker that outsourced their manufacturing to an Asian country decided to move manufacturing to Mexico. Having forgotten all they knew about manufacturing, the maker had to outsource the operational move to the Asian firm.

One would think that these kinds of risks would deter some U.S. companies away from outsourcing. Unfortunately, in my opinion, it doesn’t when the numbers show that outsourcing will significantly improve ROA. A U.S. company’s major concern is competition with U.S. counterparts.

There might be less outsourcing with trading blocs

If the future entails several trading blocs, there might be more protectionism with less outsourcing. Each bloc would have its own rules and regulations regarding trade. For example, within a bloc, free trade might exist for basic human needs (such as food, shelter, clothing and health care) to ensure their security. Countries outside a bloc would be subject to substantial tariffs on these essential goods and services because they would not be trusted suppliers should things turn ugly.           

I suspect oil, natural gas, coal, and other commodities, such as copper and steel, would be closer to freely traded. In addition, rare earth elements used in high tech would garner stiffer tariffs, especially for non-member countries. Generally, I doubt that companies would be allowed to outsource their manufacturing into another trading bloc’s market. 

About the author

Dr. Lapide is a lecturer at the University of Massachusetts: Lowell and formerly an MIT Research Affiliate. He has extensive experience in industry, consulting, business research, and academia as well as a broad range of forecasting, planning, and supply chain experiences. He was an industry  forecaster for many years, led supply chain consulting projects for clients across a variety of industries, and has researched supply chain and forecasting software as an analyst. He is the recipient of the inaugural Lifetime Achievement in Business Forecasting & Planning Award from the IBF. He welcomes comments on his columns at [email protected].

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