Hedge Your Offshoring Bets

Spreading foreign operations and outsourcing relationships over a broad, well-balanced mix of regions and countries reduces risk and increases potential reward.

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When a European or North American manufacturer thinks about offshoring a factory or function today, it often looks first to China and India. Both countries offer an attractive combination of low costs, well-developed capabilities, business-friendly regulatory environments and large domestic markets — all reinforced by their governments’ robust public relations efforts. China and India offer such desirable characteristics, in fact, that they’re rapidly becoming the default choices for low-cost offshore operations.

But for those considering offshoring, there are dangers in taking too narrow a geographical view. Every country presents a different mix of strengths and weaknesses. One country may, for instance, have very low labor costs but a high degree of political instability and a small domestic market. Another might offer a wealth of engineering talent but quickly rising labor rates. A third may have robust local markets but intrusive regulatory regimes and a weak transport infrastructure. Moreover, the cost-benefit profiles of individual countries, particularly in the developing world, can shift rapidly and unpredictably. Currency fluctuations may unexpectedly swell the costs of sourcing from one country, for instance, or a natural disaster may wreak havoc on a critical source of supplies. If a company restricts its offshore arrangements to a small number of countries, it may unwittingly be assuming far more risk than it should.

Whenever an investment program involves choices with widely divergent cost and benefit characteristics, it usually makes sense to create a portfolio that brings potential gains and risks into balance, over both the short run and the longer term. Offshoring is no different. By spreading its foreign operations and outsourcing relationships over a broader, well-balanced mix of regions and countries, a manufacturer can, quite literally, get the best of all possible worlds.

Casting a Wide Net

Our recent research into industrial offshoring confirms the wisdom of a portfolio approach. We canvassed 138 manufacturing executives in sectors ranging from automotive and chemicals to consumer products and technology. More than 80% of them said that shifting activities to low-cost countries is a high priority in their industry, and nearly two-thirds said their own companies have launched significant offshoring initiatives. But when we categorized the companies according to their respective cost positions in their industries, we found that the cost leaders — companies with the lowest cost position given comparable quality and for comparable products — tended to approach outsourcing in a way very different from the cost laggards.


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