I was discussing with a couple of folks who work with entrepreneurs and startup companies a rough design and production plan my team was planning to use in a venture we’re in the process of launching. One of the strengths of our plan, I said, was the use offshore design and production, which will allow us to sell our product at a beyond-competitive price (more than half than our next competitor). One of the people with whom I was having lunch turned to me and asked, “do you really feel comfortable with using foreign labor?” He was making a significant point with a simple question. I justified the decision, saying that I knew the people involved in managing the manufacturing facility and was aware that each employee was paid well, was provided with health care for themselves and their families, worked reasonable schedules, and worked in a safe environment. However, no matter how well the employees are treated, the fact remains that production isn’t happening in the U.S.
On one of my first major projects, I had fought for using for domestic manufacturers to produce some of our components. While the management team believed that we couldn’t get a competitive price in the U.S., I insisted that we price all of our parts domestically. The result? Most everything we priced was four-to-10 times more expensive in the U.S. than through our international suppliers. While there were arguments to be made that the savings weren’t worth the opportunity cost (time between ordering and getting the product in the door, for instance), it was almost universally impossible to make our margins work using domestic suppliers.
Since those early fights, I hadn’t really thought about domestic vs. offshore supply chain. Every project in which I’ve been involved has used an offshore provider in order to be price-competitive. I realized that I had moved on from the ‘Buy American’ value that had been passed down from my grandfather, a foreman in the famous Homestead Steel Works.
It’s not just in physical product development. At a presentation I attended at AlphaLab last year, one of the portfolio companies, a social networking web site geared toward a specific audience, openly discussed their use of Indian programmers. It struck me at the time — for a city like Pittsburgh that is so rich in IT talent, it still made sense to offshore the work.
I’m truly conflicted about this issue. On one hand, I think it’s important to support U.S. jobs in order to maintain a robust economy. On the other hand, few startups can raise the type of capital, and make workable margins, using domestic labor and suppliers. How can entrepreneurs pass on the opportunity to increase their product margins, which will make their companies more likely to be funded, financially successful, and viable? Is this an ethics issue or values issue? Do entrepreneurs really have a choice?
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