Wednesday, November 23, 2011

Chasing Customers More Than Costs

Big story in the WSJ yesterday on a new suvey that details how Multinationals Add Millions of Jobs Abroad, Cut at Home. This information is no doubt going to provide additional fodder for those already attacking US companies for "shipping jobs overseas" and demanding that the government do "something" to prevent this. However, if you actually bother to read the story you find this especially relevant nugget just a few 'graphs in:

"Judging by the destination of sales by affiliates in those countries," the economists wrote in a recent survey, "the goal of the U.S. multinational corporations' expanded production was to primarily sell to local customers rather than to reduce their labor costs for goods and services destined for sale in the U.S., Western Europe and other high-income countries."

This is a critical, but often overlooked explanation of why US companies have added more jobs overseas than at home. Sure, there are indeed companies who have shut down factories in the US and now have the same goods produced at a lower cost elsewhere. But the stronger driving force is that US companies want to have operations where the new customers are.

For most American firms, the US and Europe are mature markets with steady (hopefully) but slow growth. The real opportunities for new growth are in the developing markets in Asia and Latin America (and even in Russia to a lesser extent). In order to realize this growth potential and serve customers in these developing markets, US companies have had to invest with factories, sales offices, and yes people. More and more companies have realized how difficult it is to supply global markets from one location have moved to a strategy of local supply and sourcing to support customers in particular geographic locations. This and not an absolute pursuit of lower labor costs is the primary reason that American firms have and continue to make signficant investments in foreign countries.