STOCK MARKET WATCH -- Thursday, 12 January 2012

[Demeter]

16. When offshoring backfires / Xiaole Wu Fuqiang Zhang

http://www.voxeu.org/index.php?q=node/7226

As the global economic downturn grinds on, more companies are acknowledging that labour costs aren’t always the most important factor when deciding where to build their next factory. This column argues that, in times of recession, some companies find that bringing their business home can give them a competitive edge...

By 2002–03, about a quarter to half of the manufacturing companies in Western Europe were involved in offshore production (Dachs et al 2006). And by 2008, more than 50% of US companies had a corporate offshoring strategy (Minter 2009).

Recently, though, many of the perceived offshoring advantages have been called into question. First, the sourcing costs from emerging economies have been rising rapidly. For example, as of mid-2010, many Chinese firms were facing labour shortages and were forced to boost wages to attract qualified workers (Plunkett Research 2010). Second, the global commodity price index has risen significantly (Archstone Consulting 2009). This has led to more expensive transportation costs, particularly as a result of higher oil prices, as well as higher production costs. Third, the economic recession that started at the end of 2007 has had a severe impact on the market. Consumers are more cautious in spending, and firms are seeking new strategies to retain customers (Dodes 2011).

So it should not come as a surprise that more US manufacturers are ‘reshoring’, ’onshoring’ and ‘backshoring’. General Electric announced last year that it is moving some of its appliance manufacturing from China to Louisville, Kentucky. NCR Corp. is pulling all of its ATM machine production from China, India, and Hungary back to a facility in Columbus, Georgia, in order to customise products and get them to clients faster. In their announcements, these firms emphasised that by being closer to the market, they can better understand the market and are able to respond quickly to market changes...As these industry examples illustrate, the tradeoff between cost and flexibility can be quite involved and difficult to evaluate. It now appears that the labour-cost benefits gained from offshoring might not be sufficient to cover the lost flexibility under many circumstances. So before making any sourcing decisions, firms at the crossroads need to understand the business environment as well as the competitor’s sourcing strategy...

AND THAT'S NOT EVEN COUNTING THE POLLUTION BY THE BIG SHIPS (SEE YESTERDAY'S THREAD)