Donald Trump: A Real Risk for Outsourcing?

Spend Matters welcomes this guest post from Raphael Demmer, of GEP.

In a recent article, Jason Busch pre-empted me in concluding that Donald Trump would make a successful yet polarizing CPO — a conclusion we had reached as well. This assessment was based on a projection of Trump’s mannerisms on the role of a CPO, not an analysis of his policy plans or business procurement practices.

But surely, if Trump stands to become president his trade policies matter to procurement as well. Ford’s CPO, for instance, might be a bit annoyed if Trump actually imposed a 35% tax on imports from plants in Mexico, as he warned he would.

Not that that would actually happen. Trump’s licensed product lines have benefitted from globalization like few others. Do you remember David Letterman calling him out on ties and shirts made in Bangladesh and China while simultaneously criticizing their trade policies in 2012? Unless, exempting himself could amount to another paradox gaffe. Plus, NAFTA and the WTO might have an issue with Trump’s ideas. Nonetheless, it may be worthwhile to devise a risk assessment and Trump contingency plan for procurement.

Unfortunately, from a macro perspective, there is not much more to incorporate into such a risk assessment than the 35% tax on corporations’ outsourced operations. It is a deliberately egregious figure, reminiscent of the much misunderstood mercantilist era.

Raw material buyers, in any case, may sigh in relief. This type of low-cost country sourcing should not be affected, although risk management and conscientious supply locale diversification should be on everyone’s agenda these days.

However, even in theory, a 35% tax on semi-skilled toll manufacturing in China, or on skilled outsourcing in India, to address concrete examples, would not endanger the bottom line, given economic realities.

India

Upwards of 3 million university graduates enter the Indian market every year. Absent supply shortages, wages in India have not been spiking. For example, at call- or IT- centres, overheads will also remain competitive for quite a while. India’s cities are exceptional microcosms, but even high property prices may currently be more reflective of inflated bubbles than long-term exclusionary rates. This should, in the medium term, not preclude establishing more outsourced operations at low cost.

The total cost of a developer’s FTE in India currently hovers around $160–$200. A 35% hike will not come close to minimum rates of $480 in the U.S. Further, the U.S. workforce, surprisingly, continues to suffer from an engineer and IT-specialist shortage. Meanwhile, India continues to be hailed, by the likes of Bill Gates, as a center for endless technological competence. TCS, for example, is currently retraining more than 100,000 workers in a new facility, in addition to college grads. In the near future, the bottom line gap from outsourced services in this area is more likely to edge outward than to close. Major outsourcers, such as AT&T, Oracle and many others, are unlikely to “return” jobs and endanger their bottom line.

As procurement specialists, we could strategize and plan our contracting and RFX pipeline and calculate budgetary savings as soon as lowered demand has levelled prices again, if Trump scared outsourcing entities, which seems unlikely.

China

Recently, some companies like Walmart, NCR or Peerless Industries have actually been reshoring manufacturing jobs back to the U.S. from China. Cheap oil in the U.S. and rising labour cost have narrowed the production cost gap to 5% or less by some estimates. This is good news for some U.S. workers in the short-term, while it does not greatly affect procurement’s bottom line. If anything it makes administrative life easier.

However, basic commodities substitute production, such as Crocs or Lever Style, is instead being sourced from alternatives in Southeast Asia. The cost benefit is similar to China a couple of decades ago; a 35% tax wouldn’t leave a big dent. As these countries mature they will also allow for fully productive, semi-skilled manufacturing. Procurement professionals will be able adjust and adopt solutions quickly. As other markets become more e-procurement savvy and accessible (a somewhat untapped opportunity for GEP and its competitors in low-cost-manufacturing countries) procurement will retain outsourcing options either way.

Once again, a 35% tax would not perturb the market, if anything Trump is a few years behind and addressing an economic trend that has evolved and moved on - by the way marine shipping oversupply, low oil prices, and the recent downturn in China should enable some mid-term bargains, before the Chinese economy matures and a new equilibrium is found.

Trump’s proposed policy will be subject to global market realities, not the other way around. Procurement should not be afraid and outsourcing in certain categories and industries will continue to afford results. A Trump contingency flow plan does not seem necessary (no savings adjustments in a post-Trump era). One cannot help dismissing Trump’s ideas vis-à-vis the risk he actually poses to procurement based on the facts of reality, and few take his tax proposition serious — he must know he cannot do what he spouts he will and it would thin his profit margins.

Nonetheless, I urge caution. Trump’s appeal is supposed to be that he is a straightforward talker. Yet his honest realistic policies are largely unknowns and unknowns are unloved in a function so heavily reliant on good specs.

For more interesting thinking on procurement, visit the GEP Knowledge Bank.

Voices (2)

  1. Bob Booth:

    Good article. I think that the US political system will offer a degree of insulation to the crazier ideas.

  2. Jason Busch:

    Raphael, you’re fired! Just kidding of course. I see-saw on Trump’s trade perspectives. Part of me likes the fact he’s wiling to take on China and others that manipulate the global sourcing system. The other part urges caution at the love of a microphone and a lack of policy grounding.

    Alas, this is shaping up to be fun to watch. I honestly don’t believe that either Hilary or Donald would be bad trade presidents — certainly better than the current administration either way.

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