Fleeing China: How Will Returning US Jobs Impact IT?

Factors including higher US productivity, lower overall labor involvement in product creation and the rise of both Chinese wages and yuan value will all lead to the return of two to three million currently outsourced American jobs, according to a new estimate from Boston Consulting Group (BCG). The majority of these jobs are expected to be in the manufacturing sector, especially in the areas of transportation goods, electrical equipment/appliances, furniture, plastics/rubber products, machinery, fabricated metal products and computers/electronics.

Gains Expected in US Output, Deficit

BCG says the return of these jobs could add $100 billion to US economic output and lower the non-oil trade deficit by 20% to 35%. Job gains are expected to be both direct and indirect (through an increased need for supporting services), and come from both shifts in existing production and entirely new investments. The “tipping point” for this job return, when China’s cost advantage will finally shrink enough to make large numbers of US manufacturers seriously consider changing their outsourcing strategy, is expected to come in 2015.

It’s Already Happening

While a major influx of US manufacturing jobs is still at least a few years in the future, BCG says production is starting to trickle back from China. From 2001 to 2004, BCG data shows imports from China grew around 20% a year, but that rate has slowed to around 4% in the past few years. In addition, imports from other low-cost nations have flattened, and even declined in 2009.

BCG advises that China will remain a major source of manufacturing for US companies even after 2015 and that some US , yuanproduction will also shift other Asian nations and Mexico as a result of changes in the economics of outsourcing to China.

Is IT Next?

BCG’s analysis only covers manufacturing jobs US companies have outsourced to China, and not higher-level IT jobs. However, it is worth examining whether the same factors making manufacturing outsourcing less attractive may also affect the outsourcing of IT jobs.

Certainly, rising Chinese wages and continuing increases in the value of the yuan relative to the dollar will have as much, if not more, impact on the cost of higher-skilled and educated IT workers as compared to lower-skilled manufacturing/assembly workers. In addition, these knowledge jobs cannot as easily be automated, meaning that potential avenue of reducing the cost of outsourcing is largely closed. Also, undoubtedly some manufacturing-related IT jobs have been outsourced along with lower-level manufacturing jobs. Therefore, it is at least plausible, if not likely, there will be some return of outsourced IT jobs along with manufacturing jobs.

Nearshore IT Providers Can Benefit

BCG already mentions Mexico as a likely destination for outsourced manufacturing jobs that are expected to leave China, and there is no reason Mexico and other Latin American countries cannot also compete for outsourced IT jobs that US companies may be pulling back in the coming years.

In addition to wage and exchange rates that may be more favorable, nearshore providers can also offer an IT infrastructure and knowledge base that is much improved from when many IT jobs were initially outsourced to China, as well as fewer issues relating to language, culture and time zone differences. IT outsourcers based in Latin America should keep one eye turned to the East, to see what may be heading West.