"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

11

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

11

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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About us

Experience Our Team

Established 2000 65+ in-house talented specialists

Real Savings

£62.6 million saved for clients in 2012

Delivering

Business wide cost transformation

25

What we do

• Detailed assessment of realistic savings

• Savings delivery roadmap and opportunity matrix

• Benchmark database

• Spend analysis

• Team assessment

• Sustainable, long-term benefits

• Talented functional experts

• Expert support functions

• Bespoke tools

• Tracking and monitoring tools

• Locked in savings

• Managed services

Opportunity Identification

Benefits Delivery

On-going Cost Management

What can I achieve?

Demonstrating success and knowledge transfer

Performance management

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Client delivery

ClientTarget

Savings£m

Actual Savings

£mROI

Oil & Gas 25.0 32.0 27.0

FMCG 1.6 2.8 12.0

Financial Services 1.4 2.3 4.0

Financial Services 1.0 1.1 1.0

FMCG 2.2 2.6 2.0

Leisure 1.5 2.3 8.0

Retail 8.7 9.6 23.0

Financial Services 8.0 10.0 4.0

TOTAL 49.4 62.6 8.3

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