Global outsourcing is the death of your high paying US salary in 2020
The Internet giveth and the Internet taketh away. If you have been enjoying big salaries at your middle class or tech job, might be time to consider cashing in your chips. The remote worker revolution might not be your friend after all. Consider this a warning.
I wrote about this a long time ago. I’ve also spoken about it on my podcast and I’ve spoken about this on other people’s shows.
The long term problems of COVID may not be just physical - and they are not that the economy is horrible and it will take years to get back on its feet. The truth is that COVID reshaped how companies do business and specifically with their hiring.
When employees are forced to remain at home, “shelter in place” and can’t come into the office, companies adapt. They turn to technology to solve this - the Internet, online collaboration technologies like Zoom, Skype, GoToMeeting, etc. They were already doing this with the Cloud and shared file hosting. People don’t use the post office that much anymore, favoring email over letters and in the case of bills, you pay them all online. We had already been on a steady path towards total Internet life.
And it seems that we like it - most workers that are working from home have a positive perspective on that. They don’t miss the office and the office politics, the endless and pointless meetings because someone needs to feel “safe” on their project, etc. They don’t like having to wear a tie or those stupid water cooler conversations. “How was your weekend, Bob?”. Like anyone actually gives a crap. I mean the phrase, “How are you?” is never asked by someone wanting a literal answer - it is just customary. Talk to anyone in Germany about that for some perspective. But I digress...
The Internet gave rise to the “sharing economy” with the power of companies like Uber, Lyft, AirBnB, etc. showing us that we can take our physical assets and share them to others, in return making some income from it. And with the pandemic closing down a lot of small businesses and restaurants, many that were normally getting a paycheck from their job as a bartender, cook, etc. turned to things like Instacart or DoorDash to make money. Again, thanks Internet - you came to our rescue yet again.
But be careful with your praise. The “Inter”net means “International”. This network makes it as easy to send an email from San Francisco to Bangladesh as it does to Springfield, IL. Sharing files sees no regional boundaries. I can pay all my US bills while I’m traveling in South Africa if I have an Internet connection, and now that companies are being squeezed over the reduction in revenue from COVID19, they are looking to the most obvious place to reduce costs even further - labor.
You see just as you can take advantage of the Internet, it can take advantage of you. In 2019, the US Administration started to significantly cap the number of H1B Visas that allow international workers to come to the USA and work at companies. Politically, this supported the anti-immigration policies of the Trump base. And there may be a case for it - the H1B program was being abused by about 5 major Indian corporations, making billions of dollars acting more like “pimps” than responsible corporate citizens.
They would take the abundance of Indian labor, often well educated labor that had access to free or affordable universities - something US workers don’t have, and their willingness to come to America. They would lobby to get all the H1B Visas that were on offer each year, and then hire to those VISAs and make a ton of money on the arbitrage of the US salary vs. the Indian worker’s salary. Although they were not “supposed” to do this due to the long history of indentured servitude in the USA, they found legal ways to skirt around this, and consequently they made out like bandits. I mean you pay $80K per year to them, and they give $20K a year to the Indian worker for the five years they have to remain employed before they get to be eligible to petition to a Green Card, and you are making big bucks. Multiply this but 100,000 or 200,000 workers, and you have a massive industry.
But in 2019 Trump tried to shut this all down. I guess that is a good thing, but here’s the problem - the unintended consequence of this was that since the USA was not producing enough engineers out of a “for profit” based college education system, huge companies like Facebook, Google, Microsoft, Amazon, etc. all relied on this seaming less endless supply of offshore workers to fill the jobs. If you take away that resource from them, and since they basically control and invent the Internet we live with, what do you think they would do?
They would simply hire offshore workers directly and using the Internet, keep them offshore. Problem solved. Take advantage of the international Internet and distribute your workforce all over the planet, particularly to regions that have an abundance of cheaper labor and ideally good universities and education.
So many companies I know and have worked with in Phoenix have been doing this for years. One company (that shall remain nameless) moved about 25% of their IT department to Chile, because of the cost savings. They work with the Chileans in relatively similar timezones and all business is done in English. To most of the rest of the world, they understand that the language of business is English, so they study it. When I was in Guadalajara, Mexico in 2019 to have major surgery, I found that every medical worker (from doctor to nurse) spoke English and asking them about this, I found it was core curriculum in University. Therefore if you go to university, you will speak English.
I predicted that with COVID we would see the remote worker environment expand beyond borders and into regions that are less expensive than in the USA, particularly for work that could be done on the Internet. This has represented a huge portion of our middle class, and although I think the prevailing wisdom was that those jobs may be replaced with Artificial Intelligence (AI) or some robots, the reality is that there is a middle ground between a US salaried worker and a robot. And it is an offshore remote worker.
The thing is that demand for goods & services will drop a bit in the USA, but still is strong. Think of a supply chain for this....
- Goods are designed in the USA by a company
- Designs sent to China for manufacturing
- Goods shipped back to a US port - payment for goods made by electronic funds transfer
- Third party fulfillment center near the port take delivery and inspect goods
- Orders from customers sent to the fulfillment center for processing
- Customers get goods after paying online for them
- If customers need support, they call a 1-800 number and are transferred to offshore call center for tech support
The only part of this supply chain that has anything to do with the original company is Step 1 - the design of the product. The intellectual property associated with that design may determine ownership of the asset, but the other 6 steps are outsourced.
The only parts of this that are involving US centric workers occur in steps 3-5. The rest is outsourced and can be outsourced to a local company. Even the distribution center part is outsourced - Amazon FBA (Fulfillment by Amazon) is one of the fastest growing businesses for this, and although the money to be made using it is less than it was a few years ago, it has helped maintain the income of digital nomads all over the world that private label things they create on their laptops.
US workforce income is at risk
First, the idea that US workforce income is at risk being a bad thing isn’t uniformly embraced. Sure, if you are on the end of being fired because they sent your job to China, you probably have a pretty negative sentiment to this. But if you are a farm worker in China that gets to be moved to the middle class by this, you probably like it.
The thing is that with change, there will always be winners & losers. It is how nimble you are to being on the right side of the equation that makes the difference.
I wrote and talked about my future predictions on remote workers in early 2020. And I was 100% correct in regards to this. Here’s the mainstream proof:
When companies get a taste of the savings of sending work out to remote workers, they are not thinking about you - the US person in their suburban McMansion house in the suburbs. They are thinking of how to replace you with Rakesh in Bangalore, or Jose in Puebla, or Lisa in Thailand. Because each of those people will work for about 20% of what you need. Their living costs are so low, but they have available Internet. They will work at night for corporation X because they have to. And maybe those that are blessed to be in close timezones with the corporation, can do this over a normal work day. But again, at 20% of your salary.
In early 2020, before the COVID19 thing started, I had a big medical client in Arizona come to me and asked if we could amp up our services for data center hosting to them. This led me down a rabbit hole that taught me a lot about what was going on. They wanted 24/7 support and I couldn’t expect to find local US workers that would work night shifts in the IT space. So I started researching other countries that could do it. I contacted Philippines companies, Indian companies, etc. They could do it, but the language barrier, accents, and Internet latency was prohibitive.
Then through one Google link to another, I stumbled upon a company in Mexico that had 30,000 workers for this, and offices that were within a 5 hour drive of Phoenix, just on the other side of the US-Mexico border in Sonora. I spoke at length to their sales reps about this. One thing that I realized was that Arizona, where my clients were, originally was Mexico, and 67% of the people here are of Hispanic decent. They are used to hearing Spanish accents all day long. Hearing that on a phone isn’t going to be a big deal to them.
Plus thanks to Carlos Slim, Mexico had fiber optic Internet laid all through it. Internet speed there is excellent - more than enough for Zoom meetings, VoIP, etc. And then I discovered that as long as I was willing to full-time employ a person there, and provide them with adequate coverage for holidays, sick leave, etc. there were companies that would provide them with office space, cubicles, etc. and manage them for me. Total cost of 1 worker here was about $2,000 a month (USD), compared to the same person in the USA cost.
The USA cost is scary - first there is salary. An entry level IT support person here will need about $60K in Phoenix. Clearly if I were in California, you can double these numbers. Then on top of that, I have to provide them with health insurance. That is another $20K. Then there are workers compensation insurance, a desk to work from, computer, phone, and probably some 401K retirement fund. I mean by the time I fund all of this, that worker is a $100K per year sunk cost to me. Compare that to $20K for the same worker in Mexico.
Let’s get real - what would you do?
It is one thing to be all patriotic about US labor, but are you going to pay $20K for something or $100K? And why is it that every one of the big Tech firms - the ones that are powering your Index fund investments and the S&P 500, all think like this? Would they be doing the right thing to the shareholders if they spent 5x the amount on labor?
Hell no. They will do it cheaper. Which is exactly what the Yahoo Finance segment states.
And here’s the thing - the workers in Mexico ARE IN THE SAME TIMEZONE as the corporation. Even better, the Mexican government provide them with healthcare for free. It is part of their social contract to them. They want them to be rising to the middle class, but unfortunately for the US worker, it will be at your expense.
The same could be true of any region up and down the Americas. From Patagonia and Argentina, all the way to Ontario and the North West Territories. These are all able to support the US corporations - all they need is to speak English and an Internet connection.
So now let’s get real again - what DO you do?
Firstly let’s recognize the lesson in all of this. A competitive workforce that can provide a valuable supply of services to a market with demand is about to out compete the US worker because of three things:
- Low cost of living and a willingness to work
- Free or affordable education at the tertiary level, with the ability to speak English
- Free or affordable health care so that the hiring corporation isn’t paying for that
You know that I’ve been going on and on about the evil that are US student loans, and criticizing universities for a lack of efficacy in their studies. That the bachelor degree program is simply a permission slip for employment. This twisting and distortion of reality here is comiing back to bite us all.
And you know what lengths I have gone to and will continue to go to, to find affordable and quality health care with great outcome. No one can be expected to afford that in the USA, and when your salary is being scrutinized by your employer, when compared with sending your work to Mexico or Philippines, you better know that they are also bundling in the thing that you forget about - your health insurance costs. Yes, I know that it is unfair that you get branded as being too expensive for something that you never see, or have on control on it.
Well sorry to say this, but “suck it up buttercup”. Your lack of affordable health care is now coming back to bite you. Think that since you don’t pay for it directly, that you don’t have to care about it? Wrong - think again. You do and you should. Because your legal and HR department at your employer is comparing your “total cost” with the same in offshore regions. And your demonstration of willingness to work from home, and their infrastructure investment to do this, now means they don’t need you anymore.
Yes, I’m being harsh. Why? Because if I don’t scare the shit out of you, you won’t do anything to protect yourself. If this hasn’t happened yet, it will. Unless you have some direct human labor service that you need to be in the USA to provide, you will be outsourced. Either by some AI or robot, or by a human being in a less expensive part of the world.
The answer? Easy. Move to a less expensive part of the world. There - you’re welcome.
I know - by now you are finding every excuse as to why you can’t do that. “My family is here” or “But what about my home and all my pets?” or “I can’t just up and leave - I’m American and I want to stay right here”.
Trust me, I have been through the same thought process. That’s why we have decided to move to Mexico over the next few years. And I will be blogging about this transition as we go through it. We are not abandoning the USA, as we will keep property here but as we have been spending 50% of our time traveling every year anyway, it isn’t a stretch to move your primary domicile to another country.
The thing is that we all have to learn to be more mobile. We need to invest in a good laptop and understand all the tricks to be an International person, rather than just identifying ourselves of one country. There are so many risk mitigation reasons for this, but more importantly if you are relying on generating income, you have to remember the key rule I am always saying.....
IT’S NOT WHAT YOU EARN - IT’S WHAT YOU KEEP
If you embrace that, then you can earn less in a place that costs way less, and you get to keep more. That’s the key part of this. Live like a king or queen in Thailand, and keep the bulk of your earnings, and you have it made. With that, you can afford routine flights back to the USA to see family, etc. Or you can afford to fly them to you once a year. We’ve done that with my wife’s parents for about 15 years now. They loved it, as they got an all expenses paid vacation in their post retirement years in a new country and kept them engaged, challenged and vibrant. It became a regular Christmas thing.
Additionally with the extra money you get to keep, you can acquire real estate outside of the USA and either live in it or rent it out. You can give back to the local region of where you are domiciled by way of education, charity, help, etc. and something where you bring money and skills to a region that needs it. They, after all, want to advance just like we all do and you can be a catalyst to help them on their journey.
I’ve been through this before
In 2001, after moving from Australia to California, the Dot Com crash happened and I unexpectedly got called into the manager’s office of the corporation that gave me a multi-year contract to do software development work, to be told that they sent all the work to India and were terminating the contract.
That quickly too. I just bought a $750K house in California only 3 months prior to that. You can imagine how pissed and stressed out I was. But I rose to the occassion, sold the house and packed up the family and all our belongings and moved to Arizona where it was cheaper. Best thing I did after it was over. I found a state that was far more accommodating to business, better tax policy and more freedom. I’ve built up a large portfolio of rental properties here and this place has been good to me. I don’t need to leave it, but when it comes to the very same things that are making other countries more competitive (particularly health care), I can’t justify staying here. At least not for the majority of the year.
So having migrated (twice) from Australia to the USA, and once from California to Arizona, we’ll now do the same from USA to Mexico. Not sure if that will be the final move or not, but life is one big adventure. If you embrace it as that, and you protect your freedom and you really embrace being unconstrained, you can have that adventure too.
I heard the most valuable statement by a wise man (actually just a guy I follow on YouTube, but whatever...). He said this:
MAKE SURE THAT YOU ARE BEING PULLED TOWARDS SOMETHING, RATHER THAN BEING PUSHED TO IT
What he meant was that if you find yourself without work, or salaries cut, or jobs sent offshore, don’t get bitter. You should have been looking for places that are pulling you to them, rather than being worried about being pushed out from behind. I know how horrible a job loss or a termination of a work contract is. You get stressed out. How will you pay the mortgage? What about the credit cards? How can you afford to pay for health care without an employer? How do you put your kids through college now?
All of these issues cease, if you move to another country. Think of it like shedding your skin. We all need to do this once in a while. It is good for the soul. Fear of the unknown is something we make up in our heads. Once you know what is on the other side of the mountain, you start to realize that there are not any dragons there that will kill you. Then you laugh at your former self for doubting yourself all along.
Reply | Quote and reply
Reply | Quote and reply