Outsourcing to Cut Costs is “Yesterday’s Game”: GE’s Immelt

GettyImages-501668351-compressorThe head of one of America’s largest and oldest companies has urged his peers to invest in high-level skills and technology, arguing that simply cutting costs via outsourcing or M&A has done little to boost national productivity.

“Outsourcing purely to achieve lower wages is too easy,” GE CEO Jeff Immelt wrote in his annual letter to shareholders. “The massive industry consolidations that we see today haven’t helped, because they have choked off innovation and reduced investments in a competitive workforce.”

Since the global financial crisis hit in 2008, many American CEOs have been reluctant to risk deploying large amounts of capital organically, though Donald Trump’s pledges to stimulate growth via tax cuts could embolden them to start investing again.

“The massive industry consolidations we see today have choked off innovation and reduced investments in a competitive workforce.

U.S. multinationals still can source labor in places such as China at much lower costs than at home, though wages in developing countries have been gradually rising. Data released this week by Euromonitor, for example, indicated that at $3.60 per hour, Chinese factory workers are now getting paid 60% more than they were five years ago.

Trump also has pledged to create more American jobs through a protectionist policy agenda that involves increasing tariffs on goods made overseas. That approach hasn’t been wholly endorsed by Immelt, who said GE still supports free trade. Nevertheless, he acknowledged that policy is becoming more insular. “For an American company, our country is diverging from the rest of the world. We will be less of a leader in trade,” he said.

GE has a presence in 180 countries and Immelt said it still can leverage its scale to grow globally, no matter what government policy it faces. “We see many giving up on globalization; that means more for us,” he said.

Immelt is walking a fine line between between championing GE’s status as a proud multinational company, while appealing to Trump’s desire to back American-made products. In 2000, the company generated about 70% of its revenue in the U.S., but that proportion has slipped to under 40% today.

GE is among a number of large exporters, including Boeing and Pfizer, that are backing House Republicans’ calls for a 20% tax on imports and a lower tax burden on exports.

Immelt said digital investment is the key to solving America’s productivity challenge, while trumpeting GE’s investments in the so-called Industrial Internet and additive manufacturing. “GE is a leader in globalization and a leader in digitization. We plan to capitalize on change to build our competitive advantage,” he said.

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Ross Kelly
Ross Kelly is a London-based business journalist. He has been a staff correspondent or editor at The Wall Street Journal, Yahoo Finance and the Australian Associated Press.

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