McKinsey Consulting published an article, Time to Rethink Off-Shoring in the September 2008 edition of the McKinsey Quarterly that may be a silver lining in the current U.S. economic recession. McKinsey identifies three factors in the current economic conditions that may cause firms to re-evaluate off-shoring practices. The consultants believe that energy costs, wage inflation, and the weakness in the US dollar are factors that firms should evaluate as part of their off-shoring analysis.
Energy costs According to the article, CIBC World Markets estimates that in 2000, when oil prices were near $20 a barrel, the costs embedded in shipping were equal to a 3 percent tariff on imports. Today, that figure is 11 percent, representing a threefold increase in shipping costs since 2000. The article goes on to point out that increasing energy costs not only impact exports but also increases the price manufacturers pay for raw materials. As an example, McKinsey points out that it now costs about $100 to ship a ton of iron from Brazil to China-more than the cost of the mineral itself.
Wage inflation McKinsey states, that in dollar terms, annual wage inflation in China has averaged 19 percent since 2003. An average production worker paid $1,740 a year in 2003, makes $4,140 today. By contrast, wage inflation in the United States has averaged only 3 percent.
McKinsey suggests that the combination of increased shipping expenses driven by higher energy costs, wage inflation in off-shore countries, and the weak U.S. dollar has eliminated the cost benefits that many firms sought by off-shoring jobs.
Ralph Bach has been in IT long enough to know better and has blogged from his Bach Seat about IT, careers, and anything else that catches his attention since 2005. You can follow him on LinkedIn, Facebook, and Twitter. Email the Bach Seat here.