Download - Onshoring vs. offshoring debate
"The changing balance between risk and reward will see a rise in onshoring over offshoring"
Breakfast debate15th May, The Centre Point
"The Changing Balance Between Risk and Reward Will See a Rise in Onshoring Over Offshoring"
Ed Ainsworth
Onshoring:
The process of moving a business operation from overseas to the local
country
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Companies are thinking more about moving back production to Europe or the US.
Note: Surveyed American Manufacturing companies, with $1 billion or more annual sales figure. Survey covered whether they are planning, or actively considering, shifting production facilities from China to America due to increasing Chinese labour costs. (2012 Survey)
Considering shif
t37%
Production Shift Consid-eration from China to
America
Moved to UK13%
Didn’t move88%
Manufacturers that moved operations in past 2 years
Source: http://news.bbc.co.uk/1/hi/8434458.stm
Not considering shift
63%
Considering shift
37%
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Cost of labour are rising in Asia
Source: OECD Economic Surveys CHINA – March 2013 – Overview as cited in National Bureau of Statistics
Chinese Manufacturing Employee Migrant Wage Growth
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-5%
0%
5%
10%
15%
20%
25%
30%
Growth in the real wages of migrants
2000 2005 Current Forecast 1 Forecast 2$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
Shipping - Mexico Shipping - China Inland Transport
Average U.S. bench-mark crude-oil price
$30 $56 $130 $150 $200
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Transport costs are also rising
The cost of shipping a standard, 40-foot container from Asia to the U.S East Coast
Source: http://online.wsj.com/article/SB121331934552070357.html.html
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But labour and other costs in the UK are actually falling
Source: Office for National Statistics / Work and Pensions
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 10
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12
13
14
15
16
17
18
London (workplace, 2012) London (residence, 2012) UK (2012)
£ p
er
hour
Median Hourly Earnings of all employees in UK and London
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Within the UK
• Production costs are further declining
• Automating manufacturing process
• Less labour intensive• 3D printing and robots
• Availability of grants• Changing employment
regulations to become more flexible
• Spare Capacity
Additional factors that are making onshoring more attractive
Additional benefits
• Increased quality of service• Reduced Co-ordination costs• Risk of supply chain disruption• Retention of IP• Compliance• Labour Standards• Bribery• Ease of increased customisation
and configuration
GlaxoSmithKline
In 2013, announced investment of £500 million in a new bio-pharma manufacturing facility - the first time in 40 years the company has built a factory on British soil.
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New leaders
Powergen
Closed its Indian call centres, and re-opened with UK staff
Santander
Move back to the UK to improve customer satisfaction All calls are now handled with staff based in Glasgow, Leicester and Liverpool and the move had created 500 UK-based jobs.
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The balance of risk and reward has changed
•Increasing salaries in Asia
5x increase since 2000 with an expectation to continue to grow 18% annual for the foreseeable future.
•Decreasing salaries in the UK
Decreased by 2.2% since 2005.
(European salaries have also barely moved over the past decade).
•Increasing costs of transportation
•Need to protect IP
Companies do not want to offshore their intellectual capital.
•Onshoring more attractive in the UK
New western regulations
Better customer service
• Need for incidental compliance, quality of service and customisation and configuration
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Thank you
"The changing balance between risk and reward will not see a rise in onshoring over offshoring"
Rob Lees
“Offshoring and outsourcing today are like sex in the Victorian era: repressed or criticised in public discussion, much practiced in private behaviour.”
Ben W. Heineman Jr. GE's former senior vice-president for law and public affairs.
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Offshoring – It still makes sense
• In 2003, 40% of American and European outsourcing contracts involved offshore workers
• In 2013 the number rose to 67%.
• Number of employers intending to offshore UK jobs in 2013 has grown to 8 per cent, up from 6 per cent in 2012.
• In the USA about 663,000 large-company jobs in IT, HR, finance and purchasing have been offshored since 2002.
• More than a third of the U.S. jobs in those industries in 2002 will have moved offshore by 2016.
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Offshoring – It still makes sense
The Facts:
Figure one: The EconomistCIPD SurveyHackett Group
EU and USA companies’ outsourcing contracts with offshore element
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Offshoring – Cheaper Labour Costs
Manufacturing Labour costs (USD per hour, 2000 – 2008)
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Offshoring – Access to Labour
US Companies in 2011 highlight employee skill shortages per sector
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Offshoring – The Apple Example
Value Creation in the iPhone
Apple (US)Basic and Applied R&D, Product Design, Commercialisation
ARM Holding (UK)Chip Design
NXP Semiconductor (Netherlands)
Chips
Balda (Germany)Touchscreen
FoxConn (Taiwan)Assembly
Value added
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Offshoring – The Apple Example
Full year profit in billions of Taiwan dollars
Apple gross profit pre product in billions
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Offshoring – Making it Work
Many companies see offshoring as a quick solution to existing troubles.This is simply not the case. Offshoring a broken function will not fix it.
Any offshoring activity needs to be undertaken after careful reflection of the below:
Do not just consider cost when selecting a supplier• Consider all relevant factors: location, quality of labour, company culture,
logistics.
Analyse all relevant risks• Political instability, potential data theft, reduced employee motivation, increased
costs as project progresses, potential of natural disasters, reliance on few suppliers, legal and regulatory risks.
Treat supplier as an extension of your own company• Communicate, collaborate, help them reach your standards, innovate together.• Invite them to visit you and vice versa.
• Lower costs• Flexible Resources• Access to skilled labour• Location benefits
Savings from a co-ordinated approach can be poured back into research and development. This is the kind of competitive advantage western governments should be campaigning for, not against.
However, there is a caveat:
Offshoring a function does not provide a solution to an existing problem. Businesses must treat offshore suppliers as an extension of their own brand.
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Offshoring - Conclusion
The benefits of well-managed offshoring are numerous.
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Thank you
"The changing balance between risk and reward will see a rise in onshoring over offshoring"
Breakfast debate15th May, The Centre Point
4C Overview
Breakfast Debate
15th May 2013
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