Offshoring is Gaining Speed and Intensity

by Pete Julius

The United States has experienced a dramatic drop in the number of new and expanded facility announcements over the past few years. This is nothing new, but unfortunately it is a reality. One of the main reasons for this destructive trend is the pressure companies are under to streamline costs to improve profitability. In response to this pressure, companies have opted to locate facilities to lower-cost countries such as China and India . Some are even outsourcing work to lower-cost countries. However, several surveys and articles indicate that cost is not the only factor. The 9th Annual Price-Waterhouse Cooper’s Global CEO survey and A.T. Kearney’s 2005 FDI (Foreign Direct Investment) Confidence Index indicate that there are in fact more reasons for establishing facilities in low-cost countries than just cost-reduction measures. Their work indicates that the following causes are motivators for companies investing overseas.

• Penetration of new markets

• Serving existing customers better

• Increased capacity

• Access to a higher skilled labor force

• New large markets

• Access to export markets

• Government incentives

• Favorable cost structure

• Infrastructure or macroeconomic climate improvement

• Educated labor force

• Management talent

• Rule of law

• Cultural affinity

• Regulatory environment

Though there are lots of reasons for locating overseas, cost still seems to be the main driver. Research and working knowledge of corporate real estate executives, site selectors, brokers, economic development professionals and other consultants have proven this point. However, economic development professionals need to become more knowledgeable and have a greater understanding of these motivators as they try to position their communities for expansions and new facility projects. Globalization is making retention and attraction projects exceedingly difficult, and they will only become more difficult. We are still at the early stages of these trends. China and India have seen most of the recent activities, but they are only the tip of the iceberg.

Most of us know and understand that the real size of an iceberg is beneath the water’s surface. Imagine China and India at the tip of the iceberg and the rest of the developing world underneath. Brazil and, believe it or not, Russia (eastern) are becoming popular locations for foreign direct investment. The numbers are staggering. According to the PWC annual global CEO survey, 54% of the respondents indicated that they were going to establish facilities in China . The next three preferred locations are Russia (48%), India (44%), and Brazil (35%). Russia is the big surprise with a greater expectancy for projects even over India . This is just one indicator of this disturbing yet opportunity-rich trend. To further exemplify this trend, nearly 80% of global investors, according to A.T. Kearney, plan to offshore their operations, whether with an actual facility or outsourcing of operations, over the next three years. By now, we all know that this trend will still be a part of our future. The next thing that needs to be understood is what work and which industries are going overseas.

How does virtually anything and potentially everything sound? This globalization trend started with companies moving commodity-based manufacturing overseas in search of a low-cost location in hopes of becoming more profitable. This was followed by service jobs that are routine-based, which usually consist of operational and back-office jobs going overseas. Now value-added manufacturing and service-based jobs and research and development positions are going overseas. Most of the R&D activity will occur in Asia and Eastern Europe . North America and Western Europe , which used to be the core of R&D, are fading fast in their life cycles. A.T. Kearney’s research also shows that just about every industry will be offshored. The list includes information technology, call centers, business processing, distribution, knowledge management, R&D and manufacturing. A little worrisome, but there are certainly plenty of opportunities.

Communities can do a number of things to combat this trend. For starters, economic development professionals and others involved in retention and recruitment projects need to understand not just why this trend is occurring, but some of the obstacles that companies face in making the decision to locate or outsource work overseas. The 2005 World Investment Report, compiled by the United Nations Conference on Trade and Development, identifies the following barriers to offshoring:

• Price volatility of petroleum and other raw materials

• Protectionism

• Exchange rate volatility

• Global terrorism threat

• Slow growth in industrialized countries

• Political instability and civil war

• Financial instability of major economies

Positioning will be pivotal. We cannot stop this bleeding trend, because it is only gaining speed, strength, and momentum. The question is not how to stop this trend, but rather how you adjust to this trend to make your community more prosperous. The key is in positioning. The first step is to understand what’s going overseas and what’s staying here. Next, what are the trends behind this activity, why is it going overseas, and what are the challenges of offshoring. From here, communities will begin to learn the competitive advantages that need to be leveraged in making their retention and recruitment strategies more successful in the future. Additionally, partnerships and learning how to co-operatively work and exist with these offshore locations will be very, very important. Our local communities are beginning to learn about the importance of working together on a regional level. Now communities must learn to adjust and expand that boundary to the national and international levels. It is far easier to cooperate and collaborate than it is to compete. Everyone has something to learn from someone else. In addition, by working together and leveraging each others’ strengths, everyone and every place will eventually be successful in finding their respective missions.

Sources:

PWC Annual Corporate Survey:

Download the 9th Annual Global CEO Survey

China vs. India , a visual essay:

http://psdblog.worldbank.org/psdblog/foreign_direct_investment/index.html

FDI Confidence Index 2005:

http://www.atkearney.com/main.taf?p=1,5,1,169

World Investment Report 2005:

http://www.unctad.org/Templates/webflyer.asp?docid=6087&intItemID=3489&lang=1&mode=downloads

World Economic Forum: http://www.weforum.org/site/knowledgenavigator.nsf/Content/_S15084

Foreign Direct Investment on the Upswing:

http://www.atkearney.com/main.taf?p=5,1,1,114,10