The things you buy are much cheaper than you think

With the rise of globalisation, businesses, both large and small, have been able to take advantage of outsourcing/offshoring production in less developed countries. This has led to a global shift in the manufacturing and industrial sector from the West to, predominantly, the East and, especially, China.

Although the country does hold the highest share, it’s keen to note that China’s grasp on the manufacturing industry has been declining. This is likely due to the superpower becoming more and more developed, with the country’s working population gaining larger interests in working in the tertiary and quaternary sector.

Due to factors such as innovations in technology and transport, (i.e. containerisation) outsourcing/offshoring has become more accessible than ever.

As a result, the majority of the things you buy are likely much cheaper than you think.

For those who need this

• Offshoring is the practice of moving (can be wholly or partially) business' operations overseas. (i.e. BT call centres in India)

• Nearshoring is, basically, offshoring but with countries a lot closer to the company’s headquarters. (i.e. Fast fashion retailer Zara)

• Outsourcing is the practice of hiring another firm to create part or all of a product/service. (i.e. Apple and Foxconn in China)

• Globalisation is the idea of the world becoming more interconnected, particularly through trade, transport and technology.

• Foreign Direct Investment (FDI) is an investment from one firm to another firm from another country.

• A Special Economic Zone (SEZ) is an area in a country or location which has unique economic regulations, primarily to incentivise FDI.

• Extortionate is when something is more expensive than reasonable (i.e. what all these companies’ markups are)

How cheap can these products be, really?

Clothes in Bangladesh can be produced for ~$3/piece compared to in the US where clothes can be produced for upwards of 5x higher. That same shirt is then sold to us for several times the actual cost.

Yes, luxury brands tend to cost more (to produce) but, as a result, the markup is even higher.

For example, a typical button up shirt from luxury clothes’ brand Ralph Lauren costs $20 to make.

The price?

$155.

According to this website, a Ralph Lauren coat has a shocking markup of 244%, even when discounted!

That’s a lot of markup for some clothes with a horse tacked on, don’t you think? (don’t worry, I wear it too)

How are they so cheap?

Have you ever wondered why you felt so much richer when travelling in another country?

It’s most likely due to the different costs of living.

The typical Western salary would make you very rich in less developed countries as it is much cheaper to live there. (some may attempt to add a ‘complimentary’ charge on the stuff you purchase as you may not notice the difference!)

This translates to manufacturing costs, too.

It’s much cheaper to produce the same thing but in a less developed country as labour costs are cheaper, materials are cheaper and other costs of production are, generally, cheaper.

For example, governments of less developed countries welcome outsourcing as it brings lots of investment into an area. Some countries actively encourage this investment. This is because it brings jobs and improves the skills of the workforce through FDI.

It’s not just developing countries, either. A decade ago, the Scottish government gave the e-commerce giant, Amazon, £2.5 million to create a distribution warehouse in Dunfermline.

They may also further incentivise FDI such as through SEZs. These zones incentivise production by giving a plethora of benefits (reduced ‘red tape’, government grants and subsidies etc) to companies who wish to set up in the location.

One example of this is China with its SEZ in Zhengzhou for Apple’s partner, Foxconn. Foxconn had received a $250 million loan by the Chinese government. Additionally, Foxconn was given even more incentives to set up production there such as (several) tax breaks and subsidies.

Now, Zhengzhou is known as ‘iPhone City’.

Finally, there is also the fact that, many of these people, are exploited. Often, they are overworked to the absolute limit, with some workers at Foxconn working 14 days straight with no days off. This, along with the abysmal pay, have likely attributed to the tragic suicides in Foxconn’s factories.