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The age of insourcing

The US backlash against outsourcing will move from words to action. India may not get a foot in through the door. Samar Halarnkar writes.

columns Updated: Mar 29, 2012 07:36 IST
Samar Halarnkar
Samar Halarnkar
Hindustan Times
Milwaukee,Master Lock,global markets

It may be hard to believe, but the US once tried to stop its citizens from drinking alcohol. During this age of prohibition in the 1920s, a time of gangsters, rum-runners, bootleggers and general chaos, a little five-man company called Master Lock was born in the city of Milwaukee.

Federal authorities were locking bars and clubs, and they needed padlocks that could not be easily broken. Master Lock supplied government agents with these locks, laminated bank-vault-like layers of solid steel, unlike the hollow locks of the period. Today, Master Lock (2010 sales: $3.2 billion) is the world’s biggest manufacturer of padlocks, building global markets from outsourced factories in Asia, particularly China.

Recently, Master Lock took away 100 jobs from cheap Chinese contract labour and brought them back as full-time union jobs to Milwaukee. Now, when more than 12 million people are unemployed in a superpower wracked by self-doubt and witness to the death of full-time blue-collar, unionised employment, 100 new jobs appear insignificant.

Yet, the underlying trend that created these jobs should worry India (and, of course, China). Master Lock’s returned jobs have become something of a cause célèbre for US President Barack Obama.

“You’ve all heard enough about outsourcing,” Obama said in a state-of-the-union address two months ago. “Well, more and more companies like Master Lock are now insourcing. They’re deciding that if the cost of doing business here is no longer much different than the cost of doing business in countries like China, they’d rather place their bets on America.”

Obama urges a reorientation of the US economy towards manufacturing. “I don’t want America to be a nation that’s primarily known for financial speculation and racking up debt buying stuff from other nations,” he said at a recent ‘Insourcing American Jobs’ forum. “I want us to be known for making and selling products all over the world stamped with three proud words: Made in America.”

This is good rhetoric, but here’s why it won’t be easy:

For a few decades now, the US has been making the transition to a services-based economy. Currently, US consumer spending is the weakest since World War II.

About 8 million jobs were lost during the recession of the last decade.

Skilled labour is declining, the skilled-labour workforce is aging, and wage growth is falling, depressing consumer spending.

In the short-term, there are signs of revival — nearly half a million manufacturing jobs have been added in the last 12 months, and manufacturing employment rose 31,000 in February — but is this momentum enough to push the US towards Obama’s Made-in-America paradise?

Let’s understand Master Lock’s reasons for bringing jobs back. There are economic reasons: the shortage of skilled labour, logistics and rising labour costs; and there is the emotional reason — “overall economic benefit to the company’s home state of Wisconsin” — as a company statement reveals.

So, this much is clear: The merging of economics and emotion will increasingly dominate US public debate and politics, and companies will go the extra mile to get to that the made-in-America destination.

Quietly, goaded by Obama, more companies are bringing jobs back to the US. Among them: Intel, Caterpillar, Ford, GE and Honda. The bets they are placing are still small, but so were the bets US companies placed on China for manufacturing and on India for information technology. India has already felt the backlash against IT outsourcing — Infosys, TCS and Wipro plan to hire locals by the thousands in the US — and if the made-in-America manufacturing idea catches on, there is reason to fear that the world’s largest market may turn its back on globalisation.

Either way, the US, which is doing distinctly better than Europe, will remain the world’s most important market for some time. China will overtake Japan and be the world’s second-largest consumer market by 2015, but it will still trail the US, says a BCG Consulting report.

For India, the gaze inward comes at a good and bad time.

Good because China’s manufacturing sector shrank this month for a fifth successive month, according to an HSBC index. Bad because with economic growth faltering, reforms stagnating and inequality growing, India is not in the best position to exploit this stutter.

The Indian economy grew 6.1% in the last quarter of 2011, a sharp fall from the 7.45% per quarter average over the last decade. There are other significant hurdles. Over the last two decades, half a million jobs were created every month in India, says a World Bank study, but up to a third more people, especially women, will enter the workforce. And while India’s manufacturing growth over the last decade was second only to China’s and we are one of the 10 top global manufacturers, our level of industrialisation is very low: India’s per capita manufactured value — a measure of the manufacturing income generated per person — was a sixth of Brazil’s and an eighth of China’s in 2010, according to a UN report.

Manufacturing can and must be greatly expanded, for it is critical for future growth, employment and poverty reduction. It does not help that India leapfrogged directly from agriculture to services, which now account for half of India’s output (but only a third of its labour force) and suction up most of the skilled population. Only sweeping reforms can push manufacturing back onto the economic centrestage.

As insourcing gains momentum in what is the most important future destination for Indian manufactured goods, the window will close faster than we realise. Obama has launched the rhetoric that could reshape the US. Who will start the debate in India?

The views expressed by the author are personal.

First Published: Mar 29, 2012 00:12 IST