Just like 80s brought in merger and acquisitions, 90s brought in digitization and early 21st century brought in outsourcing and offshoring, we are maybe at the dawn of a new era called “Reshoring” and “Onshoring”.
Offshoring means moving work and jobs outside the country where a company is based. It can also involve outsourcing, which means sending work to outside contractors, which can be either home or abroad. For several decades global manufacturers and service companies outsourced their work to low cost suppliers in countries with cheap labour like China and India. General Electric was a pioneer in the field when they set up a big outsourcing center in Bangalore back in 1998. Its a strategy that made sense for a while.
However, 2 trends has changed this whole business paradigm. Firstly, wages in China has been increasing 10-20% a year for the past decade, whereas manufacturing pay in America and Europe has barely changed thanks to cyclical economic activities like recession. Not only wages, but shipping and other transportation costs has been on the rise. Therefore, the whole business case of earning more by sending work to cheap labor destinations no longer makes much economic sense. Also thanks to a lot of major catastrophes like tsunami the global supply chain was disrupted resulting in increase of price for a lot of brands. As a result, businesses are making a u-turn of bringing back job to home countries. Its a process called “Reshoring”.
Until a while back, bringing back job is a PR move by political goverments. But not any more. Well known companies like Google (now doing manufacturing of Nexus in America), General Electric (now making washing machines in USA) and Lenovo (making PCs in America, which at one point in time was perceived unthinkable) are bringing manufacturing jobs back to America. The “Reshoring” trend is not that prevalent yet in Europe, and thats primarily because the European companies didnt jump into this “Offshoring” bandwagon in the first place like American companies did. In fact companies like Inditex (owner of ZARA brand) showed how by keeping manufacturing very near to home (Portugal, Spain and Egypt) you can control supply chain which can have a great impact on how quickly you respond to changing consumer trends and preferences.
Secondly, the definition of how global companies operate is changing. Companies are now opening manufacturing facilities not based solely on cost and operational efficiency, but depending on the size of a particular market and how closely they want to operate to that market. China has been shifted from a global supplier to a global market. Everyone is trying to open a manufacturing facility in China or India or Brazil because they treat those as the next big frontier markets and staying as close as possible to the market can be a huge source of competitive advantage. General Motors, despite very poor performance in USA and Europe, is still leading over its other two USA based competition FORD and Chrysler because it is the only USA based car company thats doing very well in China thanks a to a very early and strategic decision to be present in that market. This new phenomenon of staying close to your market is called “Onshoring”.
“Offshoring” and “Outsourcing” had significant impact in the way business models shaped up in the last two decades. Only time can tell, if “Onshoring” and “Reshoring” will have that kind of impact.
February 3, 2013 at 5:31 am
Good read. Weak dollars might have contributed in this shift…