Business Corner

The new "offshoring" could be the new "backshoring"

By Phil Phillips | October 30, 2008

When will outsourced services and manufacturing flow back to U.S. shores?

There has been and will continue to be consternation within our industry regarding services and manufacturing being transferred to other countries, a trend driven by less expensive labor and other supply chain advantages versus the U.S.

Some studies are now saying that this offshore out-flow phase may have turned the corner and end soon and return to our shores. The term "Backshoring," which describes this phenomenon, has been adopted by these sources. However, much of the talk thus far is more chatter than reality. Large U.S. computer and service companies have reduced their offshore service operations due to the backlash from irate customers with no tolerance for problem-solvers located thousands of miles away whom do not resolve their problems.

Some Asian service companies have even relocated their operations from the Far East to the U.S. as a result. Is this a major trend that we will see in other services and manufacturing sectors?

Many circumstances need to be tossed up for examination in an effort to answer this question. For example, when considering China's manufacturing history over the past 15 years, it has been taking an increasing amount of manufacturing from the U.S., making the goods and returning the finished product to the U.S. for sale.

Here's one example of many. Let's take a look at wrought iron patio furniture to illustrate the paradigm. The situation is that China has increasingly taken market share from:

the iron producer;
the wrought iron furniture manufacturer;
the cleaning chemical manufacturer; and lastly
the powder coating formulator

Needless to say, the four aforementioned manufacturers are losing their business to China in this scenario. Contributing to the rationale that has supported this "offshoring" trend has been:

the non-floating Chinese currency;
the non-floating Yuan;
cheap labor costs which run at an average range of between four and ten percent of labor costs in the U.S.; and lastly

a then strong U.S. dollar in combination with favorable government supported shipping rates.
These favorable combinations of advantages make a compelling case for a wrought iron powder-coated furniture set to be sold in the U.S. at a 40-55% cost advantage over similar products made and sold in the U.S. We've all heard the story before.

It is also fair to say that provided these offshore tactics start to reverse themselves it will not be an overnight occurrence and it will not be logical to assume that these applications will return to the country of origin. To this latter point, the U.S. may have "offshored" the wrought iron furniture example to China originally, but in the "backshoring" process, it may be sourced to Brazil, Germany or any other geographical location for that matter. The point is, whether its offshore, onshore or nearshore, the best place to perform a given piece of work from a business perspective may or may not be the good ole USA.

"As the concept of offshoring matures and settles, companies and vendors can expect a natural rebalancing as they determine what work can best be performed where," according to Vinay Couto, Ashok Divakaran and Mahadeva Mani in a recent Strategy + Business article.

Globalization will force our economic decisions to the world geographies where the lowest all-in product/systems costs exist. Of course we know that offshoring is alive and well. However, we also have to consider the near collapse of the U.S. economy and how it has effected global markets to realize the extent to which the U.S. has increased its sourcing.

Some economists are saying, with only modest evidence thus far, that the U.S. is in the midst of witnessing a significant change in the path and dynamics of outsourcing. Chemark would like to report that we are agreement with this contention, but we cannot. Yes the strengthening of the U.S. dollar will help but it cannot by itself shift the direction dramatically.

Other influences that will continue to support offshoring-not backshoring-are:

More companies are planning on offshoring versus not offshoring;
U.S. labor costs cannot fall enough to offset the gap that exists between it and China and India;

Skilled labor available in the U.S. to do the work that is offshored now will not be enough going forward; and lastly,

Fuel price increases affect developed countries more than undeveloped growing economies; as a result transportation costs favor offshoring.

Based upon these factors, the logical conclusion is that offshoring will continue to be a viable alternative for both manufactured goods as well as services.

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