In the rush of the 2000’s to outsource production to Chinese suppliers, many American and European companies have lost some of their core competencies… And they can no longer in-source those activities.
I came across this passage in a book written by the always interesting Clayton Christensen that I reproduced below. It illustrates this risk pretty well.
Asus came to Dell and said, “We’ve done a good job fabricating these motherboards for you. Why don’t you let us assemble the whole computer for you, too? Assembling those products is not what’s made you successful. We can take all the remaining manufacturing assets off your balance sheet, and we can do it all for 20 percent less.”
The Dell analysts realized that this, too, was a win- win…
That process continued as Dell outsourced the management of its supply chain, and then the design of its computers themselves. Dell essentially outsourced everything inside its personal-computer business—everything except its brand— to Asus. Dell’s Return on Net Assets became very high, as it had very few assets left in the consumer part of its business.
Then, in 2005, Asus announced the creation of its own brand of computers. In this Greek-tragedy tale, Asus had taken everything it had learned from Dell and applied it for itself. It started at the simplest of activities in the value chain, then, decision by decision, every time that Dell outsourced the next lowest-value-adding of the remaining activities in its business, Asus added a higher value-adding activity to its business.
Sounds familiar? This has played out in many industries. Try to find a factory in Europe that can make plush toys, for example… You’ll have to end up buying them somewhere in Asia, probably in China.
And now millions of entrepreneurs in the West are looking for products to put their brand on and to buy on Amazon… and that supplier that you have trained to make your product will serve them just like they serve you.