Today’s Top Stories
- Major tech companies unite to call for new limits on surveillance (Business News, Financial News, Business Headlines & Analysis - The Washington Post)
- New Snowden Leak Reveals The NSA Planted Agents Inside 'World of Warcraft' (Forbes - Business)
- CBO Details Growing U.S. Income Inequality (Forbes - Business)
- Riot spoils Singapore’s harmonious image (UK Homepage)
- EADS to cut up to 6,000 jobs (Europe homepage)
- EADS to cut up to 6,000 jobs (UK Homepage)
- Ex-Deutsche Bank exec guilty of bribery (US homepage)
- Ex-Deutsche Bank exec guilty of bribery (Europe homepage)
- Stocks firm on growth optimism (US homepage)
- Three dead in Bolton house fire (BBC News - Home)
- DJ Campbell held in fixing probe (BBC News - Home)
Other Blog Headlines
- 10 Monday AM Reads (The Big Picture)
- Paul Krugman: The Punishment Cure (Economist's View)
- Sunday Night Futures: Taper Talk and "Small Ball" Budget Agreement (Calculated Risk)
- Twitter Digest: 2013-06-09 (Paul Kedrosky's Infectious Greed)
Category Archives: International Strategy
I periodically revisit the trend of “reshoring” – the process of bringing activities that were off-shored back to the home country. According to a recent article in the Financial Times, the shift from off shore manufacturing to domestic manufacturing has become increasingly pronounced (see US manufacturers ‘reshoring’ from China):
…[A] Boston Consulting Group survey found that 21 per cent of a sample of 200 executives of large manufacturers were either already relocating production to the US, or planning to do so within the next two years. A further 33 per cent said they were considering it, or would consider it in the near future.
Those figures are sharply increased from a similar BCG survey early last year, which found 10 per cent of respondents moving production to the US, and a further 27 per cent considering or close to considering it.
The article attributes the driving factor to wage inflation in traditionally low cost manufacturing countries. However, as I’ve mentioned previously, there are various other factors affecting those decisions as well, including increased automation in manufacturing, changes in long term strategies, and quality differentials (see Offshores Coming Home).
In fact, there is a long standing debate about the perceived benefits of offshoring versus its actual costs. And as I’ve noted (see Small Business in US Reevaluate China Outsourcing Strategy):
I have found that managers typically overestimate the benefits…i.e., the ability to access cheap labor…and underestimate its costs (e.g., those born out of cultural, political, economic, and regulatory differences across countries)…
Although I agree that there are compelling business reasons to consider offshor[ing], it is also important for managers to recognize that the practice is not without strategic consequences.
All things considered, it seems there is something to the reshoring trend. The phenomenon has garnered more and more interest over the years (as depicted in the Google Trend Report below). And given recent technological advances, coupled with political and economic developments in emerging markets, I fully expect the reshoring trend to continue.
More on this topic (What's this?)
Economic Recovery Doubtful as New Survey Shows Downturn in Manufacturing (Jutia Group, 11/21/13)
U.S. Jobs Outsourcing Paradigm (EconMatters, 11/7/13)
Wal-Mart Stores Inc. (NYSE:WMT) – Wal-Mart to announce three U.S. manufacturing projects (Jutia Group, 10/31/13)
A recent issue of The Economist magazine contained a timely special report on offshoring and outsourcing.
In a series of insightful articles, the magazine highlighted the trend of companies rethinking their offshoring strategies and bringing work back home (see Welcome Home).
According to The Economist, the “reshoring” trend is being driven not only by increased automation in manufacturing, but also by rising labor costs.
…The pull of low-wage countries is weakening. In a survey of big American manufacturers by the Boston Consulting Group last spring, nearly two-fifths of firms said they were either planning to move or thinking about moving production facilities from China back home…Consultants at both BCG and Alix Partners reckon that by 2015 it will cost about the same for an American firm to manufacture in America as in China.
It is only natural that as labor becomes increasingly more expensive overseas, and as automation tools become increasingly cost competitive, companies will reconsider their decision to offshore work. But the calculus doesn’t end there.
Western firms are also finding that innovation is easier when manufacturing is in the same place as research…early pioneers of services offshoring are bringing work back home, having discovered that looking after customers and developing new IT tools are in fact a “core” part of business.
It’s not solely about the nominal wage differences, but the hidden costs associated with managing far-flung activities. In many cases, cost differentials don’t compensate for quality differentials or its long-term strategic consequences. As I mentioned in prior blog posts (see Small Business Reevaluate Outsourcing and Revisiting Outsourcing Again):
…managers typically overestimate the benefits of offshore outsourcing (i.e., the ability to access cheap labor) and underestimate its costs (e.g., those born out of cultural, political, economic, and regulatory differences across countries)…[offshore] outsourcing is not without strategic consequences.
Although the economics of outsourcing can seem compelling on its face, the trend toward “reshoring” seems to suggest that managers are finally starting to recognize that the benefits are not quite what they seem.
With all that in mind, I invite you to take a closer look at The Economist special report. You can also watch the accompanying (embedded) video introducing the special report. Enjoy!
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Company Update – Morgan Stanley (NYSE:MS) – Exclusive: U.S. expands China hiring probe to Mor... (Jutia Group, 11/26/13)
China’s Manufacturing Expands at Fastest Pace in 19 Months (Penny Stock DD, 12/30/12)
How Growing Chinese Credit Signals Long-Term Opportunity in Gold (Jutia Group, 11/10/13)
The New York Times’ Dealbook recently highlighted Fiat’s offer of $198 million for 3.3% of Chrysler’s stock. Fiat, which currently owns 58.5% of Chrysler, is looking to consolidate ownership and further integrate its American subsidiary.
The offer implies an enterprise valuation of $6.7 billion for the entire firm. However, many, including the article’s author, believe that Chrysler is worth much more (see Valuing Chrysler Too Cheaply).
Mr. Marchionne’s offer values Chrysler at just four times his own expectation of the company’s 2012 net income. General Motors, meanwhile trades above nine times expected earnings for last year, and Ford Motor’s multiple is just over 10 times.
The Fiat proposal also pegs the enterprise value of Chrysler at $6.7 billion, scarcely more than the company’s $5.5 billion of…Ebidta…Ford’s enterprise value-to-Ebidta multiple is over five times; G.M.’s is just 2.6 times, partly thanks to $20 billion of net cash. That makes Mr. Marchionne look mighty cheap.
Sergio Marchionne, Fiat’s chief executive, admits that the offer might not be in line with Chrysler’s current performance. However, I am more interested in understanding why Fiat would undervalue Chrysler. Given Fiat’s current struggles, I can’t help but wonder if the real issue is that Fiat can’t afford to buy it anymore…
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Chrysler "Imported from Detroit," weed from Mexico and beer from St. Louis! (Video) (The Political and Financial Mark..., 12/12/12)
Ford, Chrysler Canadian sales up in November, GM drops (Penny Stock DD, 12/3/12)
Chrysler IPO (Wealth Daily, 9/17/13)