OutSourcing? A thing of the past

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For the past quarter century, outsourcing and offshoring have been a focus of businesses and globalization. Companies in developed markets moved jobs away from their home country to company owned facilities abroad (offshoring) or to third parties (outsourcing) in developing countries. The reason was very clear, cheap labor would lead to cheaper manufacturing cost, and this would lead to more profit. Two prominent examples of offshoring include China, which is the “global product- manufacturing center” and India, “the global service provider.” However, due to the rapidly changing nature of the global economy, “offshoring” and “outsourcing” is becoming not as important as it was decades ago.

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Today, cheap labor is no longer the leading factor for global companies in choosing where to locate their businesses across the world. Nowadays, the emerging markets are growing too fast internally, and due to increased demand for labor, new labor laws are being created and the voices of the worker are being heard. The wage rate is rising in those countries. In contrast, wages in developed markets are starting to decline because of the depressed economic conditions for workers. New advanced technology is another crucial factor: the high efficiency and productivity of technology dramatically lowered the price and demand for cheap labor. Since labor cost is getting less important, other costs such as raw material, currency and tariffs are having a higher impact on the businesses’ choice of location.

Just as Zara’s vertical integration strategy (owning several layers in its value chain), which helped them to be 18 times more efficient than competitors. The old “de-verticalizing” idea is being partially revered with “re-verticalizing”. Companies now tend to make important parts of their product rather than buying them from third parties. This is because the close connection between R&D, design and marketing, manufacturing and assembly helps companies to respond much more quickly to market shifts and innovation. (in Zara’s case, the Fresh Fashion). In contract, the old practice of designing at home and manufacturing through offshoring slows the process of innovation, which is a critical factor in this rapid growing economy.

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As a result of the faster economic growth in developing markets than in developed markets, the advantage of offshoring and outsourcing are becoming smaller. Instead of “offshoring,” now many global companies are practicing two new strategies, “on-shoring” and “ re-shoring”.

On-shoring is  “creating new, additive economic efforts in emerging markets.” Companies are now trying to have a powerful new local presence, creating new R&A and other centers directly in the emerging markets. This is very different from “offshoring” where the companies export cheap products from cheap markets to expensive markets. For example, GM is the leading car-marker in China. They now sell about 20 percent worth of cars in the market, 11 assembly plants and 4 power train plants in China. This demonstrates the need to serve overseas markets.

Re-Shoring is taking overseas work back to domestic countries. Companies such as Apple, Google, Caterpillar, Ford, GE and Intel are adding plants and jobs in the U.S. The decisions are driven by the desire to integrate corporate functions for innovation since those companies are deeply rooted in their home countries. Also, “re-shoring” helps the domestic economy, creating more job opportunities for local people. 

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