Off-Shoring's New Victim: Infrastructure
In my last post, I wrote about the practice of outsourcing production to low-wage countries in connection with "the tragedy of the commons." This economic theory argues that there are many situations where individuals making good, logical choices for their own business end up hurting the entire industrial sector to which they belong, and ultimately themselves. The story of what happened to Howard Shaffer is a classic example.
Last month, as reported in the Wall Street Journal, Shaffer was forced to close his shoe factory in Florida after 13 years. It ultimately failed in spite of the fact that, by conventional wisdom, he did everything right.
Having learned Mandarin in the U.S. armed forces, Shaffer had spent ten years helping Nike, and then other U.S. manufacturers, set up shop in China. The weekly flights to China and back proved too grueling, and he decided to open his own factory in the U.S. After having difficulties marketing middle-of-the-road sneakers, he switched to the high end niche, selling running shoes for as much as $450 per pair. This, of course, is one of the most commonly mentioned winning strategies for U.S. manufacturers – pursuing a high-end niche.
Shaffer's problem wasn't sales. It was supplies, or, more precisely, the industry-specific infrastructure to provide them.
According to WSJ, "almost 99 percent" of the shoes sold in the U.S. come from overseas (86 percent from China). Because of this situation, there are few remaining suppliers in the U.S. for the various components of a shoe (soles, laces, etc.), and those that are still around won't accept the kind of small orders that small businesses like Shaffer's could offer them. For example, he wanted to buy 5,000 eyelets with his company logo molded into them. The supplier wanted a minimum order of 100,000.
Looking at the bigger picture, what's happened is that one by one, individual shoe makers acting logically and in their own best interests have moved their manufacturing operations to China or elsewhere overseas. At a certain tipping point, being a US-based supplier to the these companies became an untenable business for all but a few – those who could somehow afford to turn down small orders.
With no ability to obtain supplies in small quantities, small companies can't succeed. This means there are no start-ups in the sector that could eventually grow to be big. The ultimate victim is the American economy, including all the workers who once worked in the footwear industry.
As well all know, this isn't just happening in the footwear sector. But in the end, it does no good to lament the migration of production to low-wage countries. Businesses have to make business decisions that keep them in business! (And, by the way, here at AllBusiness we provide plenty of how-to information about outsourcing.)
Still, if you're a small business owner in a large value chain, you might do well to support policies (and candidates) who are taking a hard look at the consequences of free trade.
My own personal opinion is this: The migration of some jobs to low-wage countries is inevitable, because investment capital, like water, always finds the lowest level. But we should do everything we can to slow down this process and control it, to minimize the dislocation for the tens of thousands of U.S. workers who are losing their jobs every month, and the small business owners whose OEM customers are gradually vanishing.
