Tuesday, February 12, 2013

Time To Shift Focus: From Outsourcing to Marketing

For years, the concept of off-shoring, or moving production to a foreign country, has been the goal of any company looking to cut costs. Owing to price demands of customers and the cost advantages obtained, manufacturers in US have treated off-shoring as a necessity and not just an option. The procurement cost from suppliers in low cost countries like China, Vietnam, Indonesia have traditionally been 25 to 40 percent lower than manufacturing it locally. These reduced prices were made possible due to low labor costs, cheap raw materials, and favorable exchange rates. However currently the same factors that offered off-shoring as a win win strategy for maximizing profits by reducing costs have changed dramatically, making on-shore and near-shore production more viable and lucrative in the long run.

Over last few years , the costs of off-shoring have increased across a broad range of indices:
• Ocean freight costs have increased 135 percent.
• The Chinese Yuan has gained 18 percent in value compared to the U.S. dollar.
• Chinese manufacturing wages have risen by 44 percent. [1]


These economic factors have neutralized the previous cost disadvantages of taking US produced
goods to global market. At the same time other factors, which were overlooked earlier, have improved the ability of U.S. manufacturers to compete overseas. For example :
• U.S. products are of higher quality standards and are more tightly regulated.
• Manufacturing on-shore shortens supply chain,improves visibility and enables just in time efficiency and thus contributes in accelerating decision making.
• U.S. protection of intellectual property is as high as any country in the world, a key consideration for foreign companies looking to source components. [1]

All this clearly indicates that its time, companies  start shifting their manufacturing bases back. But ad-mist all this we are overlooking one very important point, the rise and emergence of the middle class in the so called developing regions. According to a recent survey, the projected population of China in 2020 will be about 1.4 billion people, so the middle class will be about 500 million. Comparing that in context of United States, its total population  in 2020 is projected to be about 305 million. And the total population of the EU in 2020 will be about 460 million.[2] The rising economy of China will lift millions of households out of poverty and increase their purchasing power drastically, so much so that by 2025 the Chinese middle class will make up one of the world's largest consumer market spending about  3.2 trillion dollars annually.[3]
Source: National Bureau of Statistics of China, McKinsey Global Institute Analysis
Considering this, the question that we need to ask is, is relocating back and disregarding a market of this size the right strategy, or is this actually where a supply chain needs to be positioned-close to an emerging market? In my opinion, going forward the focus of west should be how much can we sell to China instead of how much can we buy from it. 

References:
[1] http://www.areadevelopment.com/article_pdf/id44472_does-offshoring-still-make-sense.pdf 
[2]
http://blog.kinaxis.com/tag/outsourcing/
[3]
http://www.andrewleunginternationalconsultants.com/files/mckinsey-quarterly---the-value-of-chinas-emerging-middle-class.pdf

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