In Thomas Friedman‘s 2005 book, “The World is Flat,” he argues that globalization has created a new global economic era, fundamentally different than the business world of even a decade earlier. Just a few years later, in his newest book, “Hot, Flat and Crowded” Friedman describes another era: the Energy-Climate Era.
The evolution from the first book to the second demonstrates the global trend from financial-bottom-line thinking to the sustainable-economy imperative, and this paradigm shift requires business leaders to intrinsically rethink their companies.
Friedman claimed the realities of a “flat world” affected every business decision and any business leader ignored these realities at their peril. In a world constrained by climate change and energy limits, those business decisions need to be examined again. Let’s explore the new realities with the most prominent decisions of the Era of Globalization: outsourced manufacturing from the United States to foreign countries.
Considering purely the financial benefits, locating manufacturing overseas has proven to be a winning strategy. Wages are dramatically lower, labor operates under less-costly rules, and the cost of transporting material and goods is relatively nominal. With the global information infrastructure, running a widely distributed supply chain is possible and profitable. But in the Energy-Climate Era, the calculus changes.
In this era where sustainability is integrated into the bottom line, the business rules set by nations are rapidly changing the outsourcing equation and, as a result, the strategies need to change.
Let’s start with transportation. The basic calculation was that a 10 times or more savings in labor was more than worth the cost of transporting materials and finished products halfway across the world. But what happens when the cost of transportation jumps dramatically? The simple fact of peak oil guarantees that long-term fuel costs are going to be much higher, notwithstanding the spikes of the last couple years.
More importantly, what happens when carbon emissions are considered? Carbon price policies may directly impact the manufacturer or the transportation company depending on who must pay for emissions. Also, even if a company or its partners aren’t directly regulated, a widely distributed supply chain results in a large carbon footprint and a company’s carbon footprint is a cost to an integrated bottom line and potentially, the brand.
Beyond direct transportation costs, the sustainability issues that arise from placing operations in a different cultural and political environment are much more significant. When sustainability factors are included, cheap labor turns out not to be so cheap.
For starters, What is the carbon footprint of the overseas factory? The power to run the factory may be cheap, but in many countries, there’s a good chance that the utility has a higher percentage of coal powered energy than could be found in the United States. An analysis done by Cooler found, for instance, that 25 percent of the carbon footprint of an iPod is in fact due to the energy required to power the manufacturing of the iPod in China.
Now, let’s consider the human dimensions of sustainability. If a company is reporting it’s corporate social responsibility according to the Global Reporting Initiative standards, these dimensions must be addressed everywhere a company does business. Adhering to sustainability standards in locales where the culture isn’t necessarily resonant with those standards can be more costly than one might expect. While the costs of falling short on working conditions have been well publicized, the scope of concern is much broader with making the whole supply chain sustainable.
How much would it cost to bring not just the company-owned factories, but all the relevant suppliers up to sustainability standards? Despite many high profile incidents, the culture in which these factories operate often still fails to support best practices with sustainability of labor. Consider that in just one year, China saw 51,000 labor protests across the country.
If nothing else, how much would it cost to train the entire supply chain on sustainable business practices? Even without cultural or political barriers, the ignorance barrier can be expensive to climb over. To the extent that awareness of sustainable practices is growing in the United States, it seems finding supply chain partners who are already up to speed should be much easier here than in many of the developing countries.
All these new factors seem to make a strong case for the argument that companies should keep their operations domestic. But every situation is different, and this review is just intended to highlight the new considerations in this Energy-Climate Era that should cause companies to reconsider their decisions.
Interestingly, from a fully holistic view, this new era also provides an argument for more outsourcing to developing countries. Beyond the financial-bottom line, outsourcing can help attack the bigger, more important problem of global warming. The more U.S. companies invest in a developing country, the more leverage those companies have to help that country develop in a low-carbon way. And if it’s a country such as China where, for all our sakes, we need the biggest change, there’s an opportunity to make a major difference.
After 12+ years as a technologist in Silicon Valley, Ted Ko is actively exploring the intersection of IT, government policy and cleantech entrepreneurship while studying at the Presidio School of Management MBA Program in Sustainable Business. He can be reached at email@example.com.
This is Ted’s first column in a new Sustainable MBA series published with Sustainable Industries.