Tuesday, 22 January 2013

On The Economist's Special Report on Reshoring

The Special Report in the January 19, 2013 issue of the Economist, focuses on the increasing trend of "reshoring," bringing back manufacturing and some services jobs that were once "offshored" to foreign countries.  There are several reasons for this. 

Wages in China and India have been rising 10-20% a year for decades, and, while still much cheaper than developed world rates, are doubling as quickly as every five years.  When the cost of overseas shipping is included, the difference between developed and developing world costs narrows further.  Though rarely noted in the media, more jobs are lost due to automation than from offshoring, and labor's component of overall costs has continued to fall.  Manpower urges companies not to offshore at all if labor consists of 15% or less of a product's overall cost.

Shipping often takes weeks, and global supply chains expose companies to political, currency, climate, intellectual property and many other risks.  Boeing, for example, suffered badly by outsourcing too much of its supply chain, and Samsung used the knowledge it gained manufacturing for clients and became a competitor, and a triumphant one.

Much of the motivation is simply to be close to end markets, where it's easier to respond quickly to the tastes and demands of local customers.  In addition, offshoring enrages many citizens who are also potential customers, and reshoring can make for good public relations. 

Interestingly, one justification for bringing production "home" is to increase innovation by having manufacturing and research and development (and, though the Economist failed to emphasize it, design, data analytics, marketing and customer service) housed in the same location, a move towards the "end-to-end" production that Steve Jobs advocated.  (Ironically, Apple has outsourced much of its manufacturing to Foxconn, with a number of high-profile consequences).  It's more difficult, on second thought, to draw a distinction between "core" functions, and superfluous ones.

Herd Behavior
And, to the Economist's credit, it points out that some of the frenzy for offshoring was caused by "herd" behavior in the first place. Very simply: some companies did it merely because other companies were doing it.  One quality that Warren Buffett looks for in managers is independence, to avoid lemming-like behavior.

In the end, reshoring likely won't happen in revolutionary numbers, but gains in manufacturing may offset most of the losses in services, and a significant drag on developed-world workers will be lifted.

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