Reshoring of Services: Is It Just A Matter of Time?

There is a new addition to the x-shoring lexicography—reshoring. Well, I say new because, at the time of writing this, Wikipedia still does not have an entry for it. Else, the trend has been on the rise in the last couple of years. Today, it has reached a stage where one can easily call it a trend, if not the dominating trend.

Reshoring, put simply, is moving offshored operations of a company, back to the country from where it had moved, typically the home country of the company.

“In the last two years, there has been a lot of discussion and excitement around reshoring, as the trend to move manufacturing back to the U.S. is called. In parallel, a growing number of U.S. executives are repatriating their manufacturing capabilities—moving some production operations back from overseas,” noted a report recently published by the MIT Forum For Supply Chain Innovation. The report, titled U.S. Re-shoring: A Turning Point, was conducted among members of the MIT Forum for Supply Chain Innovation and members of the Supply Chain Digest community. As many as 340 participants completed the survey. Some 33.6% respondents stated that they were “considering” bringing manufacturing back to the U.S, though only 15.3% of said that they are “definitively” planning to re-shore activities to the U.S.

The tendency to reshore is not specific to companies of any particular size. Neither is it to any particular segment within manufacturing. Some of the big names that have taken to this include Apple, Caterpillar, NCR, Ford, Master Lock, and Foxconn, representing all types of manufacturing segments, from capital goods to electronics and from contract manufacturing to automotive. And yes, GE, which once led the offshoring wave, has also started reshoring. This very interesting article, The Insourcing Boom in The Atlantic, gives a nice overview of GE Appliance’s genesis of reshoring efforts.  The articles raises some interesting questions that take on the logic of offshoring head on. But I will return to that. Just to make sure, the reshoring trend is not restricted to the likes of GE, Apple and Caterpilar. Smaller companies have also found value in that. Here is a first person account from a small sports apparel company.

Estimates about the magnitude of reshoring varies. But 40,000 to 65,000 jobs in the last three years is a decent range to go by.

While it is early days yet, the opinion seems to be turning in favor of re-shoring. In a recent Economist debate, Do multinational corporations have a duty to maintain a strong presence in their home countries? as many as 54% voted for the motion. While Harry Moser, Founder, Reshoring Initiative, an initiative that aims at mobilizing opinion in favor of reshoring defended the motion, noted economist and author of the book, In Defense of Globalization, Prof Jagdish Bhagwati argued against it.

The debate about offshoring is not new. It has been there ever since offshoring begun and has never really ceased, though it comes to the forefront only during certain phases such as presidential elections.
But usually, the tone has been political. It has been emotions vs cold logic. It has been “politics” vs economics, as some practitioners of offshoring put it.

But for the first time, it seems, cold logic and economics are being used to challenge the benefits of offshoring. This article in The AtlanticWhy We Can All Stop Worrying About Offshoring and Outsourcing, puts forth some arguments, that applies to logic, something that businesses ultimately go by.

One, it argues that labor costs for many businesses may no longer be the critical or even primary factor in global location decisions. Two, it says that the old practice of designing at home and then manufacturing abroad can slow the pace of innovation and product change. And finally, it argues that companies are questioning some of the “outsourcing”  logic and bringing certain functions in-house. While that can still be done by a company owned offshore centre, many re-shoring enthusiasts still see it as a reversal.

The jury is still out on if reshoring will be an industry-wide phenomenon,  one cannot ignore the trend any more.

Will services be affected?

So far, the trend has been seen in the manufacturing industry. All the arguments and facts are about manufacturing industry. What about services—something that really affects India? So far, I haven’t read much about reshoring in services, except for some passing mention of India in some articles while talking about broader offshoring wave.

Does it mean that services offshoring is irreversible? Or does it mean that it is only a matter of time? After all, didn’t offshoring of manufacturing precede services offshoring by a few decades?

To examine if services could follow the same reshoring trend, we must see if the factors that are driving manufacturing reshoring can impact services as well.

Let us start with the the arguments put forward by The Atlantic, as listed above.

Take the first one: labor costs for many businesses may no longer be the critical or even primary factor. We can safely say that when it comes to services industry per se, it is not going to be the case in foreseeable future. So that logic does not really apply.

The second one is more pertinent. And has different dimensions. The old practice of designing at home and then manufacturing abroad can slow the pace of innovation and product change, it argues. That essentially suggests co-location of R&D, design, and manufacturing, and preferably closer to market. Which essentially means that if the demand in emerging markets go up, there is some cold logic for having manufacturing and design there. If one examines from India’s perspectives, for example, it calls for manufacturing capability in India, assuming that the design and R&D capability are well-developed. So, it brings us back to the old debate: whether China develops services capability faster or India develops manufacturing capability faster.

The third point in the article is about inhouse offshore centres. They are not new to India. Popularly called captives and now being labeled as Global Inhouse Centres (GICs), their importance is being acknowledged. One of the NASSCOM forums that actually is seeing a lot of rising interest is the NASSCOM GIC Conclave.

The MIT study identifies six top reasons for reshoring decisions. Time to market was the top reason cited by the manufacturing companies. That only partially affects services industries. The main reason for time lag is not there as there is no movement of atoms,  as in manufacturing. Movement of bits happen in almost real time. However, not co-locating different functional teams could have some impact. But that is usually addressed in a mature offshore services operations. In fact, sometimes having people in different time zones accelerates services delivery, as many companies have found out. The other reasons cited by the respondents from manufacturing industry is cost reduction (I assume supply chain costs as oil prices keep going up), product quality, more control, and IP protection. IP protection is the only reason out of this which could be as important for services as it is for manufacturing.

Reshoring Initiatives, in its website, lists the following reasons for companies to consider reshoring.

1. Reduces Total Cost of Ownership
2. Improves quality and consistency of inputs
3. Reduces pipeline and surge inventory impact on just-in-time operations
4. Clusters manufacturing near R&D facilities, enhancing innovation
5. Reduces intellectual property and regulatory compliance risk
6. Eliminates the waste and instability caused by offshoring

Except for reason 5, none of these apply too much to services.

So, in effect, it does not seem that services would be a candidate for reshoring anytime soon. The only thing that can trigger companies looking at services reshoring is lack of availability of manpower in pockets of skill areas. But those are tactical and not strategic decisions.
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