FINANCE TODAY | ISSUE NO.4
At the height of the COVID-19 pandemic in April, personal protective equipment (PPE) was in high demand. Healthcare workers were forced to work in dangerous environments with minimal PPE, with some doctors and nurses having to use the same masks and gloves for up to three days due to shortages (Chase, VanderKlippen, 2020). Canada did not manufacture any masks domestically at the time. As a result, the federal government had to compete with numerous other countries and finally secured a shipment of one million KN95 masks from China. However, upon arrival, the masks were deemed non-compliant with specifications for healthcare settings, and could not be shipped out to Canadian hospitals which were in desperate need of PPE. This is one of many examples that exposes just how reliant Canada is on other countries for essential goods like PPE, a problem many other first world countries had to endure as well.
APPEAL OF OFFSHORING
The practice of basing some or all of a company’s processes overseas is known as offshoring. Since the 1980s, manufacturing has steadily been declining in developing countries, and in 2010, China overtook the U.S to become the number one industrial powerhouse of the world (Smith, 2020). Technology, globalization, and the rise of free trade are the main driving factors behind offshoring. The economic theory of specialization also works favourably for offshoring since different countries can focus on various aspects of production, thereby enabling more efficient manufacturing. The three main additional benefits of globalization and offshoring are explained below:
Expanding into new Markets
China has a population of 1.4 billion citizens, and India’s population continues to grow steadily from 1.3 billion. These population numbers illustrate the large and mostly untapped foreign markets that present a great selling opportunity. Moving production facilities to these countries allow easier and more cost-efficient distribution of products within these areas.
Cheaper Labour and Raw Materials
The average hourly wage for a factory worker in China is $1.36 USD per hour. This is in contrast with the average American factory worker, who commands an average of $23.32 USD per hour (Kavoussi, 2017). Raw materials for many products are also sourced for a far lower price in foreign countries.
Increased competition and Innovation
This is one of the most controversial benefits of offshoring production. This claim revolves around the fact that increased competition from foreign and offshored businesses will stimulate innovation in domestic producers. However, this is not always the case.
This visualization illustrates the population size and growth of China and India from 2008 to 2020, two of the countries with the largest volume of offshored manufacturing. The large populations also offer an opportunity for sales.
PROBLEMS WITH OFFSHORING
While globalization has undoubtedly brought the world together in many ways, it has also created numerous issues:
Reliance on other countries
This threat has been illustrated clearly by the COVID-19 pandemic. Understandably, one country cannot produce every single product domestically. However, it has gotten to the point where the supply chain is so fragile that even a minor incident can have a major impact. Canada relies on imports from over 15 countries for essential items such as medicine, refined oil, and clothing (Smith, 2020). Trade sanctions and the souring of international relations also pose a large potential threat to national security.
While increased competition has the possibility of leading to more innovative production, there is also the threat that foreign products overtake domestic ones. Foreign products have the advantage that they are produced at a lower cost which is reflecting in their selling price. Generally, domestic goods are more expensive, but make up for it with higher quality. For example, a plain white t-shirt made in India retails for an average of $8.75 CAD whereas the same clothing piece made in Canada is sold for approximately twice that, at $17.50 CAD (Smith, 2020), but is made of higher quality fabric.
Product Quality and Working Conditions
A downside of offshoring is also the lower quality of products, which many producers offset by selling the goods at a lower price. However, in some instances, the problems went far beyond quality to basic safety. In 2010, more than two million baby cribs were recalled by the Consumer Product Safety Commission because of safety defects leading to at least 32 infant deaths (Washmonthly, 2018). These baby cribs were all manufactured in off-shored plants. The working conditions in developing nations is also not as safe, with the majority of workers being underpaid and having to endure dangerous conditions.
The above graphs compare the U.S, China, and Germany in terms of the cost of employing a factory worker on the basis of an average hourly wage, the chance of workplace fatality, and overall productivity.
Talks of re-introducing manufacturing to first world countries have long been circulating, but with the events that occurred as a result of COVID-19, inshoring may become a reality sooner than we think. Former US President Barack Obama was one of the first leaders of a first world country to begin the process of inshoring manufacturing. Under his leadership, America gained 530,000 manufacturing jobs between 2010 and 2012 (Washmonthly, 2018). As a result of rising raw production costs in China and new advances in technology, manufacturing in first world countries is now more viable than ever before. Additionally, Chinese wages have doubled since 2008, and production costs have skyrocketed 132% from 2003 to 2012 (Washmonthly, 2018). 3D printing is also the solution to cheaper and more efficient production. Generally, for about $1500.00 CAD, a desktop 3D printer can eliminate the need for a foreign worker, and the product can be produced domestically (Washmonthly, 2018).
So, what would happen if Canadian and U.S companies all insured their production? Not only would it provide more domestic job opportunities, increase exports, and improve the standard of living for countless factory workers, but it would also help us maintain our innovative edge. Innovation and manufacturing are not an intuitive pair, but the research and development (R&D) necessary for manufacturing processes often lead to brilliant discoveries. This is not to say that forging international partnerships is a bad idea, but rather that businesses should proceed carefully when choosing the source of their manufacturing. Overall, off-shoring production can be a very useful tool for improving efficiency and saving money. However, the COVID-19 crisis has revealed the danger of solely relying on off-shore production, and has proven that manufacturing very well is a first world endeavour.
Chase, S., & VanderKlippe, N. (2020, June 05). Canada says one million face masks from China failed to meet proper standards, won’t be sent to provinces. Retrieved July 22, 2020, from https://www.theglobeandmail.com/canada/article-canada-says-one-million-face-masks-from-china-failed-to-meet-proper/
Kavoussi, B. (2017, December 07). The Cost Of Hiring A Factory Worker In The U.S. Vs. China. Retrieved July 22, 2020, from https://www.huffingtonpost.ca/entry/average-cost-factory-worker_n_1327413?ri18n=true
Smith, N. (2020, June 12). Don’t Give Up on Bringing Manufacturing Back to the U.S. Retrieved July 23, 2020, from https://www.bloomberg.com/opinion/articles/2020-06-12/don-t-give-up-on-bringing-manufacturing-back-to-the-u-s
Washmonthly, J. (2018, February 07). Three Ways to Bring Manufacturing Back to America. Retrieved July 22, 2020, from https://washingtonmonthly.com/magazine/marchapril-2013/three-ways-to-bring-manufacturing-back-to-america/