Tag Archives: Government debt

Is Offshoring threatened by a return to Onshoring?

CHICAGO - JUNE 16:  A demonstrator protests ag...
Image by Getty Images via Daylife

One of the potential side-effects of the global economic slowdown that could have far-reaching financial and political consequences is the question of whether offshore jobs should be brought back onshore.

After all, since the Offshoring model really started to take off in the 90s, a number of economies have become dependent on the revenues generated by their ability to provide such facilities for the historically more costly Western countries. For example, India’s business and technology services companies are estimated to have had revenues of some $58 Billion in 2008, up from just $4 Billion ten years earlier, with that sector’s export earnings (largely Offshoring) reaching an estimated $46 Billion in 2008 – offsetting some three quarters of the country’s oil imports.

The rationale for Offshoring was simple:

  • Consumers were ever-more price conscious, and companies were equally ever more cost conscious.
  • Developing economies had much lower labour rates and so could provide manufacturing and many services at significant lower cost, to the benefit of the consumer and the company.

The effects on local labour were not a serious consideration as it was widely believed that they would find alternate employment – perhaps even at a higher skills level which would earn them more money.

Of course, Offshoring was not without its challenges – issues over the quality/consistency of goods and services supplied, of cultural/language differences (especially in the services sector), of corporate governance (data and information leaks, etc.) and of differing expectations of both parties raised their heads. But these could be overcome while economies remained strong and consumers kept buying.

However, the persistence of the economic slowdown, coupled with the likelihood that unemployment in the Western democracies will remain high for the foreseeable future and the growing public debt are forcing a re-evaluation of the Offshoring model:

  • What impact will weaker Western currencies have on the production cost?
  • Will a move to new models of outsourcing – using a managed-services model with guarantees of performance/quality, as opposed to the classic “staff augmentation” model – enable total delivered cost to be lower Onshore?
  • For manufacturing, to what extent will lower transport costs of finished goods offset the higher manufacture cost of Onshore products?
  • What is the premium that can be attached to national pride (e.g. goods/services from that Onshore country)?

And then there are political considerations for the Onshore country: politicians that are seen to encourage job growth are more likely to be re-elected. What’s more, perhaps this could be done in a way that benefits that country’s fiscus, while being seen to be friendly to business and to the workforce as a whole. To what extent would tax breaks for companies bringing jobs back Onshore be offset by the additional income taxes it would gain from the newly employed, the decrease in unemployment benefits and the additional sales tax/VAT it would gain from the spending of these people?

Although a return to Onshoring may not be suitable for everything – large scale manufacturing of small, relatively low-cost items, for example – it seems to me that the benefits to a country, and to that country’s employers, of adopting a greater Onshoring model could be significant. And, if this trend took hold, the impact on Emerging markets that had come to rely on providing Offshoring could be even more significant. What do you think?

Update:
Great blog article by Derek Singleton: “5 Strategies for Growing as a Domestic Manufacturer

Advertisements