Outsourcing Pays Off at Home

Outsourcing Pays Off at Home
By Rich Smith, The Motley Fool
August 23, 2004

China: the low-cost provider
According to CNET, for the first five months of 2004 the average price of a DVD player made in China was $40.80. The average cost to produce it, including operating costs, was $39.80. (Just five years ago, it cost at least $500 to purchase one in the U.S., guaranteeing huge profits to its manufacturers. Clearly, the profit margins to manufacture a DVD player have fallen dramatically.) In those same five months, China manufactured 41 million DVD players on outsourcing orders from a variety of firms, such as Sony, Philips, and Matsushita Electric Industrial Company's Panasonic.

Japan: winner of the last trade war
But notice that none of these companies, which outsource production to China, are American. Chinese DVD player manufacturers aren't threatening American jobs because the American electronics industry lost its trade war with Japan long ago. Which puts us in the interesting situation we find ourselves in today. According to USStuff.com, a website devoted to promoting U.S.-made products (preferably by U.S.-owned companies), there are no U.S.-owned companies manufacturing DVD players in the U.S. (or VCRs, TVs, and so on), and only a handful of companies here assemble such products, manufactured abroad.

There's no disputing that the demise of the U.S. electronics industry was tragic for hardworking Americans at firms that once made TVs and related products. Still, the fact of the matter is that, well, it is a fact. The war is over. We lost.

A war not worth winning
But guess what? Despite waging and losing the trade war with Japan, the Republic did not fall. Bankrupted businesses were bought out, or they disappeared and were replaced with new ones. Laid-off employees retrained and found new jobs in other industries. Meanwhile, the rest of the country benefited from the downfall of the U.S. electronics industry. Yes, benefited. Prices for TVs, stereos, and other electronics fell, and they continue to drop.

Outsourcing creates jobs
That's right. Outsourcing creates jobs. And I'm not talking about the kind that workers retrain for and step into once a factory closes. By driving prices down, outsourcing drives demand up. It's a simple tenet of economics that low prices increase demand for a product. To meet increased demand, firms that sell, store, or transport a product (which now costs less) have to hire workers.

And that's just the start. Lowering the price of goods through outsourcing spurs job creation in related industries, too. Just one example: The more DVD players come down in price, the more people can afford them. And the more people can afford DVD players, the more people will want to buy DVDs. When you add up all the jobs gained from lowering costs through outsourcing, there can be little doubt that they outweigh the few that are lost. So the next time a talking head comes on TV and tries to tell you that outsourcing is bad for America, don't accept the easy answer.