BrazilEuropean companies increasingly moving to reshore Asia production
More and more European industrial companies are bringing production they previously offshored closer to home. Central and Eastern Europe are particularly emerging as the new favourite for production locations, according to research by Buck Consultants International.
Outsourcing activities to low-wage countries in Asia has been one of the biggest trends in the past three decades. By farming out elements of production to countries like China and Bangladesh or aspects of customer service and software engineering to countries like India, companies reduced costs while revenues boomed.
Leveraging outsourcing, companies have been able realise a competitive advantage over competitors who retained work in more expensive labour markets.
It is not a policy without some controversy, though. Offshoring to take advantage of low-wages often saw companies take advantage of labour in countries which suppressed organised labour, and where human rights legislation was rarely applied – if it existed at all.
Decades of criticism from ethical consumers has come to a head in recent years – with more than one-third of customers in the UK alone now willing to spend more to ensure their products are environmentally and socially responsible.
At the same time, the coronavirus crisis has exposed the brittle aspects of many international business ecosystems. With many companies having endured a tough 2021, and seen their pandemic recovery slowed by scarcity of resources due to issues in their supply chain, as ethical criticism continues to mount, executives have started to look differently at the design of their supply chains.
Reshoring
While reshoring has been on the agenda since the outbreak of the crisis, Buck Consultants International has found in a new study that the strategy is gaining momentum. The Global Reshoring & Footprint Strategy report shows that more than 60% of supply chain executives expect to return some of their Asian production to Europe and the US.
One-in-five respondents said they expect to relocate most of their production back from China and Asia in the coming years. Meanwhile, the rest expect to re-locate limited volumes of work – mainly critical components and or products which a long-reaching supply chain may jeopardise the future distribution of.
Patrick Haex, Managing Partner of Global Supply Chain Solutions at Buck Consultants International, commented, “The survey results clearly show that reshoring is high on the management agenda of international companies. The many disruptions in supply and logistics chains over the past two years – ranging from the impact of corona, lack of components to skyrocketing costs for ocean freight – are causing companies to thoroughly overhaul their network of factories and distribution centers.”
Companies from Europe are mainly looking at Central and Eastern Europe as possible production destinations. These nearshore destinations currently have higher labour costs, but in the shadow of the pandemic, Haex believes manoeuvrability and flexibility have become more important than low labour costs.
This is exemplified by the countries now being discussed for reshoring. While people might think of “the Czech Republic, Poland and Hungary,” Haex explained that onshore production of key components and final assembly in places like the Netherlands are “also being considered as a serious option.”
Easier said than done
The Buck Consultants International survey was conducted among industrial companies. These include parties in mechanical engineering, the automotive industry, consumer products and pharmaceutical production. However, it is important for these companies not to get ahead of themselves.
On top of geo-political tensions causing problems across Eastern Europe, dismantling all production in any country is not an easy thing to do. Companies often have to deal with long-term contracts for housing, production assets, the supply of materials and personnel, among other things – which will make a swift exit impossible. In addition, there are several barriers that need to be overcome if they are to re-integrate themselves into the business ecosystem of Europe.
René Buck, Director at Buck Consultants International, remarked, “High operational costs in Europe and the US due to limited scale and the absence of large and broad supplier networks are the main barriers. We see this every day in our consultancy practice. A decision to reshoring is really drastic for a company and requires careful consideration.”
