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Inflation & Fuel Costs Threaten Job Offshoring Profits

September 4, 2008

A commentary by E. Manning suggesting that even the “most secure” ideas often have backlash

The production of manufactured goods has moved steadily from the United States to emerging economies like India and China over the last decade. Lower wages, rapidly growing local markets and what used to be a stable global economy made for successful offshoring transitions in the minds of multinational managers. Recent turbulence in the global economy is changing the winds of promise. In fact, new global conditions and the weakened economy in the United States are undermining the profitability of job offshoring for many multinationals.

Because conditions are changing, the time to consider scaling back offshoring, moving to better emerging economies or returning jobs to the United States is a real possibility for some multinational corporations. The high cost of fuel and increasing inflation has changed global logistics and profitability, requiring a shift in strategies.

Crude oil is up since 2004, but has more than doubled from the average cost of crude oil since 2007, from $64.20 to more than $110. Because of the higher costs, moving a 40 foot shipping container has tripled.

Fuel costs have also increased the costs of raw materials over the pressure of increased inflation. The devaluation of the dollar combined with inflationary pressures has contributed to “wage inflation.” The other reality of “wage inflation” is the gradual increase of wages in a sufficiently up-and-coming regional economy to avoid worker turnover and as an incentive for improvement. Wages in an emerging economy always start out very low, but increase because of competitive pressures coupled with regional monetary issues over time.

Distance matters with the increased cost of logistics. Products made in China several years ago are no longer profitable because of freight and wage increases. The same product could be made more cost effectively at a closer location offshore or in a completely new emerging economy. Changing economic conditions can quickly eliminate the advantages of offshoring and that is the reality that multinational business is quickly running into as former emerging economies develop sophistication and business in the United States dwindles.

Will business begin to return to the United States or will multinational corporations find and victimize new emerging economies in an effort to restore profitability? Expect to see new changes and shifts in economies in a very visible way within the next year in response to new global realities. However, because of the ransacking of the very economy that most often supports consumption, multinational corporations are faced with diminished profits even with further reduced costs. The bottom line is that continually chasing and demanding top profits to the detriment of workers and consumers ultimately exhausts the system and is unsustainable for the long term. Business and economies are a continual give and take. Times change and so do realities. ~ E. Manning

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