Posted by: Lee Elliott
Jones Lang LaSalle EMEA Research
One of the most amusing stories to emerge during my time in the States has been that of the US based worker who outsourced his own job to a worker based offshore in China. The individual – ingenious and disingenuous in equal measure – delivered all his tasks through a third party at a fifth of his salary (let me tell you that guy ain’t dumb), freeing up his own time to focus on web-clicking and the like (maybe getting a blister on his thumb). Of course the story didn’t end well for the individual as he quickly received his pink slip (he’s now watching MTV).
While the story was highly amusing, it is increasingly at odds with the nature and rationale for corporate shoring activities. This dynamic was covered in the reprise of our 2008 paper ‘Onshore, Offshore, Nearshore: Unsure?’ and has also been the focus of a special supplement this week in The Economist. The theme is relevant right now. As such it has never been far from any of the conversations I have had with occupiers here.
In summarizing these discussions, 6 points are worth highlighting:
- The cost arbitrage that enabled the above worker to do what he did and has similarly fuelled multiple decades of off-shoring activity is rapidly eroding. Wage inflation in the core off-shoring markets of China and India has been running at 15-20% per annum for the last decade. Furthermore, as the middle classes in these markets expand, social and political aspirations are driving movement towards a service and consumer-based economy. Labour cost arbitrage is no longer the clinching factor of a shoring decision for the majority.
- The ability of alternative off-shore markets – such as Vietnam, Indonesia and the Philippines – to fill the void is being called into question as they are more limited in terms of scale, efficiency or supply chains and, indeed, as the tasks being considered for off-shoring become more complex.
- Many corporates, having pursued aggressive shoring strategies, are now realizing that they went too far, too quickly and are being impacted by what The Economist neatly termed the ‘disadvantage of distance’. This is particularly true given: strong rises in shipping costs; the risks to supply chains posed by war and natural disasters; and the disconnect between on-shore R&D and off-shore production.
- The above is leading to a redistribution of corporate activity with ‘re-shoring’ on the rise – particularly, though not exclusively, with a manufacturing focus. Google, GE, Caterpillar and Ford have all brought production back stateside or are choosing to increase capacity here ahead of overseas markets. Equally, in the service sector many traditionally perceived non-core functions are taking on a new strategic importance (e.g. data management) and are less likely to be pushed huge distances away from base.
- The rationale supporting new activity flowing into traditional or emerging shoring markets is now market penetration rather than cost advantage. Corporates will increasingly align their operational models to the geography of market opportunity. It is all about taking root in new marketplaces. This will also allow increased customization of products and services to meet with local market expectations – extending the longevity and profitability of sales.
- The shoring phenomenon is not a developed to developing dynamic – there is growing evidence that corporates from the BRICs and beyond are now placing activity within developed economies (e.g. Tata Group are now making Range Rover’s outside of Liverpool).
It is clear from my discussions over the last few days that the changing dynamics of shoring are as germane to the West Coast and the TMT sector as they are elsewhere. Consideration of the most efficient, cost-effective and productive operational model is an essential task given the low growth economic environment and the need to seek out any possible competitive advantage. For a company to do so is a good and necessary practice. For a worker to do so would, however, appear to remain a step too far for those in the boardroom.
* with apologies to Dire Straits