Currently, in some industries, the difference in the cost of labor is such that they have no choice but to outsource to, say, China. But in other industries, the choice is not always so clear. My feeling is that in many cases not all costs in terms of increased risks are taken into account. One of the problems is that we don’t have good metrics for operational risks. If a company engages a supplier in China to do something, there’s no way to quantify that this company went from 0.71 to 0.73 on some sort of risk index or operational risk ratio. The appropriate metrics don’t exist yet.
Some managers have a general awareness of risk. Clearly they know that taking a supplier in Indonesia is not like taking a supplier in Kansas City. It’s easier to keep tabs on what’s going on in Kansas City than in Indonesia. But there’s no way to quantify the difference. So people make the decisions based on what they can quantify, and what they can quantify are labor costs, landed costs, or whatever the knowable cost might be. And since financial analysts also lack the tools to quantify the increased risk, this is not reflected in the stock price. My feeling is that much of the offshoring is done without proper comprehensive analysis of the consequences.