Myth: Offshoring is Done to Give Us Consumers Lower Prices

Not true, and we probably don’t even get lower prices anyway. It’s done so that zillionaires can obtain higher profits.
Who wins, who loses?
US consumers: Wash. Same price no matter where shirt is made.
US workers: Fail. They lose all their jobs.
Overseas workers: Hard to say. They get to slave for 20 cents an hour in horrible conditions with no health, safety or environmental regulations, but supposedly this is better than living in the sticks.
US zillionaires: Win! If they made them in the US, they would still have billions, just a bit fewer billions. Can’t have that!
From the comments section of the great The Left Coaster (left wing of the Democratic Party blog). The lie that’s being refuted? Some traitor from India, in favor of offshoring, said that that $10 shirt would cost you $70 if it was made in the US, hence we need to offshore to save the poor trod-upon consumers!

Suppose we are talking about a $10 shirt from Walmart, using their house brand “Faded Glory”. (No, that really is their house brand name. I mean, talk about unintentional irony.) Any idea how much they pay the distributor for the shirt? Anyone? Try between $3-$5 — the rest is profit for the reichwing Walton brats.
Of course the US distributor has to take a cut, too. And the US company that designed the shirt and organized the process. So how much of the shirt price is left for the manufacturer? Usually less than 50 cents.
Now you start seeing the problem. The materials themselves, bought in bulk are going to eat up most of the manufacturing costs, so labor has to be cut to the absolute bone — literally less than 10 cents per shirt, probably less than 5 cents.
Using modern automated manufacturing, how many shirts can a single laborer manufacture in an hour? This is a little complicated because of the multiple steps in the process — from accepting the material delivery to loading the packaged and finished shirts in the container for sending to the U.S. But still, the number is probably 20-50, depending on complexity, per laborer per hour.
So, choosing the low number, 20, and say the labor costs are 5 cents, then you see why $1/hour labor is required.
Now, let’s try an experiment. Suppose you manufactured same shirt in the US at minimum wage plus benefits. Let’s say your net cost is $12/hour. Let’s use the numbers above — that means they have to increase the labor cost per shirt from 5 cents to 60 cents. So you increase the cost of the shirt by a whopping 55 cents. Actually, more like 50 cents, since you gain something back due to the much lower shipping costs.
So the $10 shirt goes to $10.50, not $70 like suresh alleges.
But, and here is the REAL kicker in the whole equation: although classic microeconomic theory holds that costs are a factor in pricing (but not 1-1), in modern microeconomics where pricing can be extremely complex and dynamic, prices are set to maximize revenue, period.
Thus, the $10 shirt is still $10. What happens is the Walton brats have to accept 50-cents-per-shirt less profit. They still have their billions, but not quite as many billions.
And THAT is why every company uses offshore manufacturing. To enrich the richest, not to give us lower prices. There was a time, when offshoring began, when companies found they had to move offshore to compete, but that was largely because they had bloated company structures on-shore and usually outdated equipment. That is, they needed a reset on their whole approach and going offshore gave them that chance. But now it’s all about enriching the rich at the expense of everyone else.

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0 thoughts on “Myth: Offshoring is Done to Give Us Consumers Lower Prices”

  1. Yes but labour expense is much cheaper in countries like China and India so even though they are both geared for maximum profit products made in China can better in a better position to lower there prices in a competing market as the profit loss ratio margin would be less of that of a product made in the US.
    Also less likely the company would go bankrupt as it has fewer expenses used to actually run the company and put more money in things like advertising.

  2. “Now, let’s try an experiment. Suppose you manufactured same shirt in the US at minimum wage plus benefits. Let’s say your net cost is $12/hour. Let’s use the numbers above — that means they have to increase the labor cost per shirt from 5 cents to 60 cents. So you increase the cost of the shirt by a whopping 55 cents. Actually, more like 50 cents, since you gain something back due to the much lower shipping costs.”
    No, you have no understanding of the shirt making process. A single worker doesn’t make 20 shirts all by his lonesome in one hour. It takes at least 5 workers (cut, sew, die, wrap, ship) doing different parts of the shirt plus the supervisor and manager to produce a shirt. The more accurate math is $12 x 5 + $20 (super’s salary) + ($25 manager’s salary) = $105. Divide not by 20 because 7 people cannot produce 20 shirts in one hour even with automation. More like 6 shirts, and this is a fast rate. 105 / 6 = $17 per shirt.
    That’s a big savings.

  3. ” A single worker doesn’t make 20 shirts all by his lonesome in one hour. It takes at least 5 workers (cut, sew, die, wrap, ship) doing different parts of the shirt plus the supervisor and manager to produce a shirt. The more accurate math is $12 x 5 + $20 (super’s salary) + ($25 manager’s salary) = $105. Divide not by 20 because 7 people cannot produce 20 shirts in one hour even with automation. More like 6 shirts, and this is a fast rate. 105 / 6 = $17 per shirt.
    That’s a big savings.”
    Excerpt from the book: “Hacienda: My Life in a Korean Sweatshop.”

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