WHAT’S WRONG WITH TRUMP’S TIRADES ON OUTSOURCING
While Donald Trump was still the President-elect, he announced a major deal with United Technologies for its Carrier subsidiary to hold on to 1,000 jobs that were originally scheduled to go to Mexico. In the process, his inept handling of that deal demonstrated much of what is wrong about Trump’s – and the U.S. government’s – fight against outsourcing.
In this case, then candidate Trump had gone on record as saying that he was going to force United Technologies to keep a total of 2,100 jobs originally planned for transfer to a Mexican plant. Carrier ended up keeping only 1,000 of those jobs and only after receiving special tax breaks in return for keeping that much-smaller number of jobs here. For Trump, it was an opportunity to check that off as a win for the manufacturing people, which it was not – except for that ~1,000-person pool who will keep their jobs. For United Technologies and Carrier it was definitely a win as they were given the opportunity to ship the majority of the jobs from that plant to Mexico anyway. And they also received a nice tax break bonus from Uncle Sam.
The tough part about this is that even though jobs were saved, this was all about politics and leaving a “win-win” on the table for both parties rather than addressing the real issues underlying why outsourcing happens at all.
In the Carrier case, though some will certainly argue otherwise, it looks very much like Trump just wanted to make it appear that he could be tough on a company and it would cave in to his demands. What is needed instead is a better understanding of why companies outsource and how government can or should intervene in the process.
Why Companies Outsource
Companies outsource for many different reasons. And despite what Trump and others may want the public to hear, although many reasons do have to do with money, far fewer have to do with going after cheaper labor than most might imagine.
Consider these often-cited top reasons for hiring
outside a company to get work done, regardless of where the jobs are specifically acquired.
Access to skills or talent not available locally
In the past, companies would recruit from a distance and relocate individuals to work in an area, but that is becoming more expensive for all parties involved and is also not necessarily the right way to go. Instead it is often far more efficient to hire from a distance.
Access to world-class talent and/or facilities that would be too prohibitive to develop or set up “at home”
This is a variant of the first reason but emphasizes more the kinds of work that are possible for teams already trained elsewhere and with access to the right skills and facilities.
Examples of this kind of outsourcing certainly do include hiring companies like Foxconn (a highly-skilled electronics manufacturing company with headquarters in Taipei and major facilities in China and throughout the world) or some of the Mexican factories Carrier has set up across that side of the border. But there are many other outsourcing examples where the idea of “hiring an expert” who is already set up with people, software, infrastructure, methodologies and more is just the best way to go. Some of the more common of these include:
Accounting services: Even in large companies it is becoming more common to hire outsiders
to manage the daily, monthly, quarterly and annual drudgery of keeping the books straight.
Payroll services: Except for the smallest companies, it is the norm now to outsource this essential service, which is more than just writing checks and includes automatic transmittal of payments and deductions every pay period.
IT services: This includes management of all things connected with computers of any kind in a company. It can include managing networks, ensuring easy transition when software upgrades are propagated, buying mobile devices (laptops and smartphones) in bulk, setting up websites, handling specific bug fixing for released software (more common than most realize), protecting companies from malware intrusions and more. This is an area where India’s Infosys made much of its earliest inroads into American business.
Accounts receivable and collections: More and more, these services that no company wishes they even had to bother with are now being handled from overseas. The growth of BPOS (business process outsourcing hubs, or “call centers”) and the availability of low-cost international VOIP services have made this possible.
Help desk and customer support: This is the other major part of what BPOS do right now.
The above types of outsourcing exploded during the period when companies began looking hard at what they uniquely do best. Those capabilities, which included things like industrial design (Apple), proprietary semiconductor and microprocessor design (Intel) and battery technology (Tesla), set those companies apart as well as the need to be kept “close.” Routine IT services, provided there were safeguards to protect the company’s most private data, could be easily outsourced, even to a company as far away as Infosys in India, provided there were some local resources available.
Partnering with others to co-develop a skill or technology
This is behind many outsourcing operations, which foreign governments will often even subsidize at considerable percentages to attract these kinds of businesses.
Building overseas to avoid many costs and taxes for products that will never be sold or consumed within U.S. borders
For companies with a major global presence (such as Apple again, just as one example), building products outside the United States that are then shipped solely to foreign customers can save considerable money in multiple ways. One of those ways that disturbs many but is part of why companies do what they do – legally – is that they can avoid U.S. taxes on income not earned within the borders of the United States.
Unwillingness of available workers to work for the wages offered in each area
In some cases, where a company may have its central hub just may happen to be in a place where the prevailing wages are so high, even for less-skill-intense jobs, that it is just not financially sound to hire locally. No amount of bullying or incentivizing by government can usually do much to change that.
Government policies, including tax policies, or formal trade agreements that encourage outsourcing
It is hard to argue with the logic of this one from the side of company management. After all, if the laws actually favor outsourcing over keeping things at home, sometimes it is just impossible to do anything else.
This is the one that Trump beats on the most. But trade agreements and tax policies are complicated beasts. Making one change to encourage certain industries to stay at home might cause another part of an agreement to fall apart. There has been talk, for example, from liberal representatives about imposing a tax on companies equal to what they save when they outsource. That might seem like good policy, but besides that it is possible this may violate the treaties that allowed for the savings, it also would likely create counter-responses that would create a major trade war between countries with far more damage likely to happen.
The Need for a Systemic Approach
The reality is that it is a combination of doing “what’s right for a business” anyway and international government policies (including the U.S. government) that are the reasons companies outsource. This combination is also why the local public, especially in the United States, goes crazy when they hear about a General Electric or an Apple with hordes of cash stored outside the country from profits that were earned 100% outside the country (and therefore are not touchable within the borders, at least up to a point).
To change things so more jobs are retained and created at home in the United States, multiple things need to happen:
Create a clear vision of what specific changes are desired: what industries, what jobs and what locations are to be preserved.
Define the policies the U.S. government – perhaps in tandem with state governments – can create on its own to encourage those changes to take place. This is about far more than tax credits. It is about training, subsidization of targeted skills and/or industries, and transitioning of out-of-date skills to the new priorities.
Define changes to trade policy and/or existing trade agreements that will support these policies. Determine legislative changes that will support these policies, and get them drafted. Executive orders are not enough because they are too easily changed.
Analyze the impacts to everything and fine-tune the results.
Negotiate with all parties, including international partners.
Approve treaties, pass and sign off on legislation and proceed.
What one cannot do is try to make big changes like this by just winging the “vision” part of the process by bullying (one of the more common approaches now in use), getting a group of company CEOS in a room together to agree on it (because it’s far more complicated than a single meeting could cover) or handling the issue one company at a time.
This will take time to carry out but has a much higher probability of long-term success than working to negotiate in ways such as the current situation with Carrier was handled.
It is unfortunate for the current administration too, but to manage this process requires a much more experienced economic modeling capability, understanding of international trade issues and highlevel legislative management skills than the current President has either in himself or in his surrounding staff.