The recent explosion which killed two workers at the Chinese company which manufactures the iPhone could be the wake up call to evaluate the merits of outsourcing.
The meteoric rise of technology companies like Apple, Dell and HP is underpinned by a rigorous outsourcing regime, using third world labour to deliver products faster and cheaper.
However, the spotlight has come down on the practice due to the working conditions at Foxconn, which is often referred to as “the world’s technology factory”.
Last year, it was reported that 18 Foxconn workers took their lives and recently there were more deaths because of an explosion at the plant where the iPad2 is manufactured.
Background stories can be found here and here.
The welfare of workers is at the mercy of the demands of multinationals, according to Jenny Chan and Ngai Pun, who analysed the connection in their essay 'Suicide as a protest'.
Competitive pressure from multinationals forces suppliers like Foxconn to lower their service costs but still maintain high quality and fast delivery of products, the pair argue.
They said long working hours, low wages, repetitive work, and management scrutiny puts people under intense stress with few resources, leading to depression.
Closer to home, outsourcing threatens a nation’s economic sovereignty, according to former Intel CEO Andy Grove, senior adviser to Intel and the company's chief executive officer or chairman from 1987 until 2005.
In an article in BusinessWeek he disagreed with the idea it doesn't matter what happens to factory jobs as long as "knowledge work" stays in the country.
Grove should know, in 1968 he co-founded Intel and as chief operating officer he conceived how to build computer chips in volume. This was no easy feat at a time when outsourcing was not affordable or popular,
“We had to build factories, hire, train, and retain employees, establish relationships with suppliers, and sort out a million other things before Intel could become a billion-dollar company.”
Intel’s success is said to have contributed to the growth of Silicon Valley, where a healthy eco-system of complementary suppliers and products emerged. This phenomenon was later repeated by the likes of Cisco, Sun Microsystems and Netscape.
Serial outsourcing has broken this chain of experience essential in technological evolution, he said.
Decades ago, American companies outsourced battery manufacture (a “commodity”) to Asian countries. Because it didn’t have battery building experience, the US missed the chance to build and sell lithium-ion batteries for laptops and computers, he said.
Grove doubts the US can ever compete in the emerging market to develop batteries for electric cars and trucks.
There is already evidence of a new threat.
Foxconn now employs about 1000 workers in a Houston plant that makes specialized high-end servers, according to a report in Bloomberg, and founder Terry Gou envisages a fully automated plant to produce components within five years.
“If I can automate in the U.S.A. and ship to China, cost- wise it can still be competitive,” Gou said.
In just over three decades Foxconn has grown to employ over 900,000 people.
To put that in perspective it is almost three times the size of Australia’s total IT workforce, about 300,000 workers according to the latest data from the Australian Bureau of Statistics.
There is no doubt that outsourcing is a key part of a company’s strategy to scale operations, and it also allows companies and workers to focus on the “high-value” work.
However, as Grove says, a nation won’t benefit if this work and income is being performed by a small percentage of the population, while everyone else is unemployed.
The human cost and threat to long-term growth surely necessitate a rethink of how the outsourcing model is used and managed.
