Posted in Finance Articles, Total Reads: 1305
, Published on 20 February 2015
Re-shoring is the new buzzword in the industrial sector. Couple of years ago, General Electric moved their washing machine and fridge making business to Kentucky from China. This was not a one off incident. Over the last few years, companies have consistently transported back their business from offshore locations to their own backyards. If the last decade and a half was all about “Outsourcing”, “Re-shoring” could take the major chunk of the pie in the next.
Now what has prompted companies and organizations to move closer to their own backyard? Cost was a major factor in companies offshoring their businesses. Countries like China, India and the Philippines with their cheap labour proved to be a viable option. Outsourcing boomed benefitting both the organizations as well as the emerging economies like China. In recent years, China has seen tremendous growth. This has invariably lead to increase in labour costs as well prompting major firms in the U.S to rethink their outsourcing strategies. According to a report there was a 10.7 percent increase in China’s wages in 2013. Wages are expected to increase by 11% this year as China moves towards a more service oriented economy. The “One Child Policy” has also taken its toll as the demographics of the country have taken a hit. China has an ageing population. This has opened a window of opportunities to neighboring countries like Vietnam and Myanmar where labor is cheap.
A major factor that has prompted firms to “Re-shore” their activities is the need to maintain the quality of the goods. There has been widespread criticism in the West that in search of cheaper labor and more profits, many of these firms have compromised on quality. This is partly true. Most of the emerging economies have relatively lower quality standards compared to the West. In China which is the hub of mass manufacturing, quantity often puts quality to the backseat. This can have a disastrous impact on the customer base. A great example is the call center phenomenon. Customers in the U.S know that when they dial a customer service number, they will be answered by someone in India and Philippines speaking in a weird accent. This has led to disillusionment among the customers who don’t trust the product anymore. Problems like counterfeits and other intellectual property related issues that are associated with production in foreign countries are some other concerns that the manufacturers have. Also the customers, when purchasing a good want to know whether the product will last. Quality is increasingly becoming a crucial decision in customers’ decision to purchase. By moving their operations back to their native countries, companies can count on certain aspects of production. They can be sure that the workforce will have a certain amount of training and education. Also the machinery used will be top notch and according to the standards demanded by you and your customers.
Another major reason that has led to increase in the recent Re-shoring activities is the turnaround time. For any business to respond quickly to the tasks, challenges and opportunities prevalent in the market they need to have a short supply chain. The closer the manufacturing operations to the market the better it is for the business to flourish and grow. This is particularly important in sectors like fashion, interior design and textiles. Achieving such a supply chain structure isn’t an easy task when the company’s manufacturing operations are oceans away. For example, many Chinese manufacturers don’t ship the goods unless they have been paid for in full. As a result of the longer shipping times, the cash flow get strained and it becomes difficult for the manufacturer to replenish the cash spent by him on production. So there are payment issues as well. Therefore, reducing the turnaround time enables businesses to serve more customers and respond more quickly and efficiently. Apart from shorter lead-time and convenience reasons, Re-shoring is also done to increase the sales. Since due to shorter lead-time or turnaround time, the business can respond quickly to market forces without any compromise on the quality whatsoever, the sales go up.
Another crucial factor in firms opting for Re-shoring is innovation. American and European firms have prided themselves in producing quality innovative products to the customers. This entails the need for carefully studying the target market. Innovation also requires a workforce, which is skilled to think beyond the ordinary and come up with something new. Outsourcing hasn’t contributed much in the innovation department. Re-shoring allows firms to have their R and D departments closer to the manufacturing bases helping in innovation. Customer demands play an important role here. The marketing department surveys the target customer base and takes note of the changing demands of the market. This is relayed to the R and D department who translate the demands into reality by creating innovative solutions. Re-shoring provides a major advantage here. The firms will have their bases closer to their customers, which will help them in delivering the solutions on time.
A major advantage to the US has been the number of jobs that have been brought back due to the recent Re-shoring activities by the companies. Harry Moser, who founded the Re-shoring Initiative, an Illinois-based nonprofit that works to bring manufacturing jobs back to the U.S, found out through tracking various companies that about 120,000 jobs have been Re-shored back to the US since 2010. During the early 2000s around 150,000 jobs were offshored. However, by 2013 about 30,000 to 50,000 jobs were lost to offshoring, whereas 30,000 to 40,000 jobs were brought back to the U.S. The balance between the numbers of jobs offshored to those created has been restored. As a result the Gross Domestic Product of the country has been gradually increasing. From 11 percent of the GDP in 2009, it rebounded to 11.5 percent in 2011 and further 11.9 percent in 2012.
The Top 20 reasons for Re-shoring.
A big boost to Re-shoring initiatives could be the psyche of the American consumers who feel more comfortable buying products, which have a “Made in the USA” tag. Such a tag implies better quality and trust especially when it comes to sensitive goods like medicines and baby food. This skepticism amongst the consumers is based on their experience with foreign produced goods. Ranbaxy, for example, violated FDA norms while manufacturing generic drugs consumed in the US market. This created a huge public backlash. Even Ranbaxy’s former executive came out strongly against the company and said he wouldn’t use any of Ranbaxy’s drugs himself.
At the end of the day, Re-shoring depends on the firm’s outlook. For lot of firms the cost of outsourcing is still relatively cheaper. The number of jobs being outsourced is still a fraction higher. In such a situation, it would be unwise to opt for Re-shoring without proper planning. A lot of firms are unwilling to Re-shore because of losing out on the consumer base of the countries to which they have outsourced their operations to.
Before planning to Re-shore, companies should take into consideration various factors that can affect their decision. The two major factors that should be taken into consideration are: macroeconomic environment and the industry environment. The macroeconomic factors are the external forces influencing the firm’s decision and are beyond the control of the company. They mainly include Economy, Population, Geopolitical factors, Technology and Resources. Industrial factors playing a major role in the Re-shoring decision are the Customer base, the Supply Chain, Competitors and Employees. For example, a faulty Supply Chain can plague the Company’s operations to Re-shore. Technological advancements also play a crucial role. The recent trend towards Robots could nullify the advantage of low cost labour. Robots are cheap and are more efficient.
The last decade witnessed an increase in the number of jobs in developing economies like India due to Outsourcing. This led to improved wages and standard of living. Ironically, this has forced companies to look at Re-shoring as a viable option. Over the next decade, it will be interesting to see the impact that Re-shoring will have on the Western as well as the developing markets. The push by global giants like Walmart and GE shows us that Re-shoring is here to stay.
This article has been authored by Aakriti and Narayanan from XIMB