Why cheap labor isn't

Some time ago I introduced the Three Ds of Robotics: Dull, Dirty and Dangerous. If any manual task exhibits any one of these three characteristics, it’s a candidate for automation. Soon thereafter I added a contra-indicator: Fun. If it’s fun for humans to do, you shouldn’t automate it.

Another characteristic has hit the media recently that enters into the debate for whether you should look to automate a given task. I’m not sure there’s a one-word indicator for it, so I’ll just explain.

Offshoring is the business strategy of setting up production facilities to take advantage of cheap labor in less-developed countries. As John Fluke, Jr. explained to me a couple of decades ago, offshoring directly competes with the strategy of automating production in a domestic facility.

Both strategies attempt to lower per-unit production cost by investing up-front capital costs to lower long-term variable costs. In the case of automation, the up-front cost is for developing and installing the automated equipment in a domestic facility. In the case of offshoring, the up-front cost is setting up an overseas facility.

At the time John, Jr. explained all this to me (around 1990), he claimed that the supply of highly skilled labor needed to set up and maintain automated equipment was far more available in the U.S., which obviated for onshoring production previously done elsewhere. He pointed this out as the reason his company (Fluke Instruments) had begun onshoring their production. That advantage has been eroded in some offshore locations, such as Malaysia and Korea, as those economies have built up their local talent pool.

Companies opting for offshoring have another strategy available: overseas contract manufacturing, which avoids the up-front part of the offshoring financial picture, but leaves the business at the mercy of the contract manufacturer’s business decisions.

Recently, it has become clear that low variable costs drive businesses to look at capital expenses for further cost-cutting activities. As the garment industry has recently discovered via spectacular industrial accidents in Bangladesh and elsewhere, skimping on capital expenses leads to sub-standard facilities-and trouble in the long run.

Another problem with the offshoring strategy, which was pointed out in a recent report in Control Engineering, is that the inordinately low labor costs attract demand for labor, which causes labor costs to rise, as seems to be happening in China, now. That wrecks your smokin’-hot low-labor-cost offshoring strategy. All the resources you spent finding a cheap-labor location to offshore is so much money down the drain as what used to be cheap-labor becomes expensive, and transportation charges pile up.

The point I’m trying to make is that investing in automation is a more sustainable strategy than trying to chase the lowest labor rate.

C.G. Masi has been blogging about technology and society since 2006. In a career spanning more than a quarter century, he has written more than 400 articles for scholarly and technical journals, and six novels dealing with automation’s place in technically advanced society. For more information, visit www.cgmasi.com.

.