Lessons Learned from Nearshoring, Offshoring, and Reshoring production
Producing companies have followed many trends in recent years. After a big wave of far-shoring, the firms have started to review the risks and benefits of outsourcing manufacturing and the right location for the operations. With the impacts of the Coronavirus pandemic, 37% of the participants of a Reuters Events supply chain study plan to change manufacturing locations (Two Thirds Have Shifted Sourcing Locations in Response to Global Disruption | Reuters Events | Supply Chain & Logistics Business Intelligence, n.d.), while two thirds will change sourcing locations. Changing production and supplier locations will have a significant impact on the global footprint of the supply chain. These high percentages demonstrate that the companies are unhappy with the existing setup.
Since there are many options for relocating production, the focus will be on offshoring, nearshoring and reshoring projects. There are a lot of lessons learned from successful projects. Reviewing many case studies one can find good examples for many different options. Nevertheless, in recent years many companies have changed their original approach. While outsourcing operations leads to major labor cost savings, they are not always offset by other cost increases.
Background on Labor Cost
Figure 1: Labor costs in selected countries (Source Statista)
One of the key decision criteria is low labor cost. Three countries are contained in fig.1: China and Vietnam as offshore countries and Mexico as a nearshore country. China is not the cheapest labor country anymore. Since roughly 2010, the labor cost in China has risen dramatically and has overtaken the cost of the nearshore country Mexico. Besides Vietnam, Philipines, Thailand and Malaysia plus India are typically low cost countries with wages around 2-3 USD/h.
Successful Offshoring Examples
Apple is a great example of offshoring manufacturing to China. Designed by Apple in California, and assembled in China, can be found on many Apple products. While supposedly Steve Jobs moved the manufacturing to China (China: Key to Apple’s History, but a Potential Threat to Its Future - 9to5Mac, n.d.), actually Tim Cook, the former COO and now CEO of Apple, moved production from the US to China between 2001 and 2004 (Duhigg & Bradsher, 2012).
The actual reason was not to lower labor costs, as the labor cost is roughly 1 % of the total cost to make a smartphone or tablet and slightly higher for a laptop. The main decision criteria were cost for material, robust supply chains and production flexibility. In China, the manufacturing service providers for Apple can ramp up and down production by thousands of workers within few days. The sheer amount of workforce in China is mind-boggling. Apple is estimated to employ 700,000 people in outsourced manufacturing with 70,000 employees working at the company directly. In the biggest factory, 200,000 employees produce iPhones.
With most electronic components produced in Taiwan, China, Korea and Japan, the material cost for the phones and laptops was majorly reduced after the move to China. At the same time, production could be scaled to demand: a lot of workers are employed when demand is high, and few workers need to be paid when demand is low, so the cost of labor is mostly proportional to the output.
When Apple relocated its production to China, some US-based suppliers moved their production to China or Asia as well. The firm spends a lot of effort to qualify suppliers and parts to ensure that only the highest quality reaches their plants. The company has also committed many engineers to support production process design and implementing new processes and equipment on-site at production. There used to be a constant exchange of Apple engineers and supply chain experts from California to China.
During the last few years, Apple has invested heavily in production process automation to reduce labor contents further. As a lot of the automated equipment has been sourced locally in China, Apple has not only developed part suppliers but capable automation partners near its manufacturing. The Pearl River Delta in China has seen a lot of economic boost from Apple’s outsourcing partners.
The increasing tensions between China and US, the closures due to the pandemic, the tight rules about Coronavirus isolation have led to a review of the production footprint. China is seen as a problem, especially after the shutdown of factories led to massive production problems. Lower sales of the iPhone 14 resulted directly from problems in China.
Apple has started to implement several side shoring projects: moving production out of China to Vietnam and India. They have started to develop plants with their existing outsourcing partners in India. India is set up to deliver the phone demand for the US market, China will remain the production site for local phone demand.
The move to India highlighted a lot of problems, that other companies face when offshoring. The suppliers in India are not producing to the same quality standard as the existing suppliers. Apple will need to provide a lot of support in developing capable suppliers for parts and automation in their new locations until production will run smoothly again. Other companies are not as willing to go to India, as the support for international production relocation seems to be less than in other countries.
Another example for far-shoring production is the British company Dyson, a maker of vacuum cleaners and other household devices. The company offshored first the production of motors to Singapore and later final assembly to Malaysia and Singapore in 2002 (“Dyson,” 2014). Lower labor costs, availability of workers and the availability of qualified suppliers leading to lower material costs were key reasons for Dyson to move to Asia. During the last twenty years, outsourced production has worked well for the company. The company maintains production in Asia and concentrated engineering in the UK. Dyson announced a year ago to move its global headquarter to Singapore.
In summary, small, easy to transport products with a low number of variants and high electronic and labor content are typical parts that are produced offshore. Highly automated equipment can ensure high product quality. While labor was cheap several years ago, the labor costs have increased significantly in the past years.
Successful Nearshoring Examples
Other companies have outsourced the production to a nearshore location. For US companies, Mexico or Puerto Rico or other Latin American countries are a typical choice, while European companies move to Eastern Europe or Portugal, sometimes to the northern part of Africa, like Tunisia. In most cases, nearshoring happens in the same trade zone to avoid taxes on outsourced production.
Many companies have moved the production of products or components to a nearshore partner. The textile industry has always looked for the lowest labor cost. Nearshoring garment production to Mexico has been implemented for US companies for many decades.
But other production also moved nearshore. Whirlpool started in the 1990s to nearshore the production of their appliances, such as refrigerators and washing machines, from the US to Mexico. Due to the big size of the product, transport costs were too high, if the product were to be produced far-shore. Low labor costs in Mexico and production plants directly near the border have provided only a modest increase in transport costs.
Although the company has produced nearshore for a long time, during the last years, Whirlpool has started to bring some production back to the US.
Some electronic manufacturing service companies have moved to Mexico as well. Driven by lower labor costs, many US-based EMS companies have set up production sites in this country. According to American industries (American Industries – Electronic Manufacturing Mexico, 2017) there are more than 700 electronic producing companies in Mexico and nine out of ten international manufacturing service companies have a production location there.
Low labor costs combined with short transport times and low transport costs have been the killer decision factors for nearshoring. Despite all the advantages, many companies review, if an automated production can be moved to the home location.
Successful Reshoring Examples
Moving far-shore production either to a nearshore or local site has been called reshoring. Many companies have implemented projects to reshore their production. This applies both to outsourcing and in-house production but is done more often for outsourced production, as the exit costs are higher, if a company decided to move the production back and close the plant in the offshore location completely.
Wisconsin-based Master Lock Co. has brought back production from nearshoring in Mexico and far-shoring from China (“Reshoring Jobs,” n.d.). Higher labor costs, unfavorable exchange rates and logistics cost increases were issues that led to a rethinking of production locations. The company changed the production system and automated equipment, requiring now more qualified workers. The overall result of the reshoring was higher customer satisfaction, as the customer was served faster.
The company said its decision was motivated by rising labor and logistics costs in Asia, labor shortages in China, and a stronger Chinese currency. Meanwhile, overall costs at Master Lock’s Milwaukee plant have not risen as much as they have in China, thanks in part to union concessions. Bringing the work home also gives the company greater control over its manufacturing, improving service to its customers. A threat to the bringing back is the availability of skilled labor, which may be partly overcome by automating further.
The European low-cost fashion retail company C&A recently moved the production of jeans from Asia to Germany. Digitalization and automation have changed the production of jeans from a manual process to a highly automated process. Using advanced robotics, the company can produce jeans with short order fulfillment lead times and much less transport costs. While the company is using European denim to focus on sustainable production, the production of the jeans is more expensive than in Asia.
The German chainsaw manufacturer STIHL decided to reshore manufacturing operations from Brazil. As the exchange rates were increasing, the assembly got expensive. Also, high administrative burdens, such as taxes and customs, were quoted as reasons for relocating. Toy manufacturer Steiff from Germany went to China to fulfill the extra high demand for an iconic polar bear. As internal capacities were limited, the product was outsourced to China. Low quality, high rework and long transport times led to the internal discussion to bring the production back, since despite a lot of training, the production could not fulfill the requirements. Since migrant workers tend to change jobs regularly, there was no organizational learning (Reshoring – Zurück in Die Zukunft | Made in Germany GmbH, n.d.). Some German manufacturers were not able to collect a premium price in Asia for products manufactured in China and some were afraid of copies.
Mecano, a French company, reshored production from China to France again. Half of the production is now produced locally, with a limited increase in cost due to higher productivity. But the main advantage is flexibility. Production in France can produce smaller lots and can react to changes in demand more quickly. Long transport times from Asia have been eliminated, making the operation much more agile.
Kyocera, the Japanese electronics manufacturer, is reviewing its operations in China (Kyocera-Chef: Chinesische Fabriken Lohnen Sich Nicht Mehr | Heise Online, n.d.) since labor costs are relatively high. Furthermore, new laws in the USA, that prohibit certain chip technologies to be produced in China and some import limits, have convinced the company to produce somewhere else.
Successful Regional Production Examples
Cisco produces routers with its manufacturing partners around the world. Instead of concentrating the production in one location, the company produces products around the globe. They have manufacturing partners in the US, Mexico, Brazil, Asia and Europe. While some products are produced in many sites, some products are built in specific plants. All manufacturing is outsourced. Nevertheless, Gartner has awarded top places to Cisco for supply chain performance.
Figure 2: Lenovo manufacturing operations (Source data Lenovo)
Lenovo, the Chinese manufacturer of computers, laptops, mobile phones and other consumer electronics products, employs nearly three quarters of its employees in China and 16%-18% in the Americas. While the company produces a lot of products in-house, it has double the amount of external manufacturing employees than internal. As the products are small, they can be sent easily from China to the world, the production does not need to be as regional as for bigger products.
Figure 3: BMW global production breakdown (Source data BMW)
BMW produces cars around the world, as these products are much bigger than consumer electronics. While nearly 50% of all cars are produced in Europe, China is responsible for more than a quarter and the US for a fifth of the total volume. The biggest production site is Spartanburg in the US. The SUVs produced in this location are exported to all countries in the world. BMW is the biggest car exporter in the US. Typically, many suppliers are supporting the production with a local site near the final assembly site.
In recent months, Volkswagen has struggled to decide where to produce cars. The company is looking for new production sites for electric vehicles in the new Scout model line. The original plan was revised, instead of outsourcing the US production to a manufacturing service provider, Volkswagen now plans to own its production plant. Better access to the American market and higher flexibility were seen as the main reasons.
Identify Key Success Factors
The key to right shoring is a good understanding of the strategic impact of production. If a company wants to achieve cost leadership as a strategic differentiator, moving production with high labor contents from a high wage county to a low-cost country makes absolute sense. But if the company wants to compete on time, providing the shortest reaction times, a nearshore location is a much better option.
Interestingly, the financial performance of companies improves when they reshore their production (Risher, n.d.). Many companies equate labor cost savings with total cost savings, but the indirect costs increase considerably when moving to a far-shore location and less with a nearshore location.
While total cost savings are one of the top decision criteria for far-shoring, many international companies combine offshore production with other tax optimizations.
If there is good logic to far-shore such as supply is well established, labor is available and adaptable to volume changes and low transportation costs due to small product sizes, companies can easily move production far away. If you need a lower cost than internal production but cannot automate, moving to a nearshore location is a good choice.
The key to understanding the right shoring discussion: The decision requires a strategic background and a long-term perspective. The cost of building a plant and selecting a new outsourcing partner is very high.
Read also the articles on decision-making on the right shore and outsourcing.
Bibliography
American Industries – Electronic manufacturing Mexico. (2017, October 10). https://www.americanindustriesgroup.com/electronics/
China: Key to Apple’s history, but a potential threat to its future—9to5Mac. (n.d.). Retrieved February 16, 2023, from https://9to5mac.com/guides/china/
Duhigg, C., & Bradsher, K. (2012, January 21). Apple, America and a Squeezed Middle Class. The New York Times. https://ghostarchive.org/archive/N4vig
Dyson: “Keep engineers in Britain.” (2014, November 21). BBC News. https://www.bbc.com/news/business-30139181
Kyocera-Chef: Chinesische Fabriken lohnen sich nicht mehr | heise online. (n.d.). Retrieved February 23, 2023, from https://www.heise.de/news/Kyocera-Chef-Chinesische-Fabriken-lohnen-sich-nicht-mehr-7523787.html
Reshoring – Zurück in die Zukunft | Made in Germany GmbH. (n.d.). Retrieved February 23, 2023, from https://webcache.googleusercontent.com/search?q=cache:Z7XMsZoBPmMJ:https://www.madeingermany.online/magazin/wirtschaft/reshoring-zuruck-in-die-zukunft&cd=1&hl=de&ct=clnk&gl=de&client=safari
Reshoring jobs. (n.d.). Compass Magazine. Retrieved February 16, 2023, from https://compassmag.3ds.com/special-reports/manufacturing-in-the-age-of-experience/reshoring-jobs/
Risher, J. J. (n.d.). From Offshoring to Reshoring: A Conceptual Framework for Manufacturing Location Decisions in a Slow-Steam World.
Two thirds have shifted sourcing locations in response to global disruption | Reuters Events | Supply Chain & Logistics Business Intelligence. (n.d.). Retrieved February 16, 2023, from https://www.reutersevents.com/supplychain/supply-chain/two-thirds-have-shifted-sourcing-locations-response-global-disruption