Rethinking the Offshore Paradigm
Paradigms are Good, but Often Wrong
People rely on paradigms to make sense of the world by looking for the safety of truisms disguised as fact. Paradigms help us understand the world by giving us a set of rules or models to follow. They shape how we see things and help us organize our experiences. This makes it easier for us to make decisions and solve problems. In short, paradigms help turn confusion into understanding.
Definition of Paradigm
A paradigm is a typical example or pattern of something. It represents a model or framework that influences how people think and act.
A paradigm today could be a joke in the future. Consider some of the great paradigms during history:
Flat Earth: The belief that the Earth was flat was widely accepted until the spherical model was proven by explorers like Ferdinand Magellan and scientific evidence from astronomers.
Geocentrism: The idea that Earth is the center of the universe, and all planets and stars revolve around it was replaced by the heliocentric model proposed by Copernicus.
Spontaneous Generation: The belief that life arises from non-living matter, such as maggots appearing from rotting meat, was disproven by Louis Pasteur's experiments on biogenesis.
More Modern Examples Include:
Nuclear Power: "There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will." - Albert Einstein
Computers: "There is no reason for any individual to have a computer in his home." – Ken Olson, Chairman of Digital Equipment (1972)
Smoking: "If excessive smoking actually plays a role in the production of lung cancer, it seems to be a minor one." - W.C. Heuper, National Cancer Institute, (1954)
There’s so many more, but let’s use two examples of how a false paradigm can affect an entire industry
1) Swiss Watch Manufacturing: Despite creating the quartz movement technology in their own research labs, the Swiss Watch Industry opted to not even protect their patents, and the Japanese (Seiko, Casio, Citizen, etc.) took the technology and ran with it. In fifteen years, from 1970 to 1985, the number of Swiss Watch Makers tumbled from over 1600 to below 600. While mechanical watches are still being sold today, the decision to cling to the paradigm of mechanical timekeeping cost Switzerland billions of dollars and tens of thousands of jobs.
2) Kodak: Kodak invented the film-roll camera in the late 1800’s and dominated the global market for a hundred years. In 1975, Kodak created the first digital camera but shelved it because of their paradigm that nothing will ever replace film. In 1996, Kodak revenues were $16Bn, but the company was already in decline. Throw in an aggressive foreign competitor (Fuji) and market shifts from printing photos to sharing online, and you see a company that had the talent and resources to lead and succeed, yet tumble into oblivion by declaring bankruptcy in 2012. Kodak employment went from 145,000 in 1988 to roughly 5,000 when the bankruptcy was announced. Total failure.
We’ve now reviewed numerous examples of how paradigms can be wrong – history provides clarity – so let’s look at some paradigms that justified offshoring forty years ago.
Paradigms Past – The Old Case(s) for Offshoring
Let’s travel back forty years to examine the top three paradigms for offshoring:
Paradigm 1: Lower Costs: Forty years ago, "Cost Savings" was the primary driver for offshoring manufacturing due to the significant reduction in labor costs. Developing countries offered much lower wages compared to industrialized nations, allowing companies to drastically cut their production expenses while maintaining or even increasing their output. Even though raw materials often had to be imported into these countries, making the raw material costs higher, the savings on labor more than compensated for these additional expenses.
What’s Changed – Labor costs in Japan rose dramatically, so production shifted to China and India in the 90’s, now both of those “developing nations” have much higher labor costs and the companies that practice offshoring are chasing the falling knife of labor costs by moving to Vietnam, Cambodia, and some Latin American nations.
Suggested Shift – By reshoring, we build back our manufacturing plant and provide a stable labor rate, although higher, but will be offset by other factors described in the next section.
Paradigm 2: Focus on Core Competency: Focusing on core competency was a significant driver for offshoring 40 years ago because companies used the rationale that they could better excel by specializing in their primary strengths like design, innovation, and marketing, rather than diverting resources to manufacturing. By offshoring production, businesses could leverage specialized manufacturing expertise and capabilities abroad, often at a lower cost (there’s that cost word again). For example, Apple concentrated on product design and user experience, while outsourcing production to skilled manufacturers in countries with a strong industrial base.
What’s Changed – This rationale was always a little bit dubious; more of a smokescreen for the fact that offshoring was a money-saver. “Focusing on what we do best” always should have included mastering the means of production.
Suggested Shift – More companies need to admit the false notion that they aren’t supposed to “make stuff” and embrace the notion that keeping manufacturing close to design teams drives down many headaches in other areas.
Paradigm 3: Our Suppliers are “Stable”: Forty years ago, companies perceived China and India as stable offshoring locations largely due to their growing but still relatively small economies, which offered a vast pool of low-cost labor and emerging market potential. Both nations were in the process of economic reforms, making significant strides toward industrialization and improving their infrastructure. Moreover, government policies in these countries were favorable to foreign investment, ensuring smoother business operations. Over time, these factors contributed to their rapid economic ascent, and today, both are in the top five globally in GDP, positioning themselves as superpower contenders. This economic transformation validated the initial perception of stability, making them attractive destinations for offshoring.
What’s Changed – In 1989, China was the 9th largest economy in the world by GDP, and India was not in the top 10. By 2019, China had jumped to the 2nd largest economy behind the US. Over that time, China’s GDP grew by 3850%, while Japan’s stayed pretty much flat at 36%. India entered the top 10 for the first time in 2019, landing at #6, and now sits at the 5th largest GDP in the world, with over 1024% growth. In other words, these formerly developing nations, grateful for our investment, now boast massive manufacturing bases, and are positioning themselves to challenge the US as a global superpower. They are not our friends.
Suggested Shift – We need to get our collective heads out of the sand and see the massive growth of these two competing economies as a threat to our global leadership position. We can’t solve all the issues with excessive consolidation of power, but we must be sure we can meet our own needs.
Conclusion: Time has proven these paradigms to be dubious, if not false. It’s time for a paradigm shift. Let’s proceed.
Definition of Paradigm Shift
A major change in how people think about or approach something. It's when new ideas and methods replace the old ones, leading to a completely different way of understanding or doing things.
Shift The Thinking – Where We Go from Here
There are new ways of looking at offshoring that create compelling reasons to reshore product manufacturing back to the US. Four new ideas should replace the dusty paradigms of the past. Remember, if Albert Einstein can be completely wrong, so can the paid consultants and industry wonks that suggested wholesale offshoring of industries somehow was “good for America”. We should ask for a refund.
Paradigm Shift 1: Government Action without Cronyism: This paradigm shift involves collaborative efforts by Federal, State, and Local governments to implement policies benefiting the entire manufacturing sector, rather than just favored industries like solar, EV, and chips. A key strategy is to streamline and reduce regulations that currently pose significant barriers to domestic manufacturing. Additionally, the government can apply strategically targeted tariffs to protect domestic manufacturers from unfair foreign competition, and providing incentives, such as tax breaks and grants for infrastructure development, encouraging companies to reshore production facilities. These incentives should be accessible to all sectors, ensuring a broad-based uplift.
Paradigm Shift 2: ESG is Here to Stay: Today, Environmental, Social, and Governance (ESG) factors are essential considerations for shareholders and activists. Forty years ago, manufacturing decisions rarely accounted for environmental damage. However, the rise of ESG has dramatically shifted this outlook. The worst pollution is caused by manufacturing in China and India—two of the world's biggest polluters, which makes these locations less attractive. With heightened awareness and stricter regulations, companies face immense pressure to adopt sustainable practices. This shift encourages businesses to re-evaluate offshoring strategies, focusing more on environmental responsibility. If you want to be as “ESG as Possible”, you need to manufacture in the US, period.
Paradigm Shift 3: Globalization is Ending: The retreat of the U.S. from ensuring safe ocean travel via the U.S. Navy marks the beginning of the end for globalization as we know it. This shift is leading to increased instability in global supply chains, driven by a resurgence of state-sponsored piracy and territorial disputes affecting key shipping lanes. The reliability and security of international trade routes are diminishing, making it risky for businesses to depend on offshore manufacturing. As these geopolitical challenges escalate, the imperative to reshore production becomes clear.
Paradigm Shift 4: Eat the Frog: The concept of "Eat the Frog" advocates tackling the toughest, most significant task first, ensuring nothing worse can disrupt your day. This principle applies to reshoring manufacturing as well. Reshoring may appear daunting for retailers, buying groups, and startups, yet it is crucial for long-term success. Adapting to this new paradigm requires a shift in mindset—accept the difficulty and embrace the challenge. In essence, it's time to "eat the frog" and bringing manufacturing back home. Do it today! Call HermitCrab! Shameless advertising!
Thank you for Reading!
Paradigms are always shifting, and we can use the past to help envision our manufacturing future through reshoring. We hope this was an informative read. Tomorrow’s topic, Economic Impact, will help show the benefits of reshoring for the entire health of our nation.
Thanks for reading,
The HermitCrab Team
