In the past few months the terminology called as "Re-Shoring" has been catching up in the American corporate circles. There have been several discussions in the American Universities, think tanks and corporates alike on how to bring back the work that has been "Outsourced" to Emerging markets like India and China back to the United States. Re-Shoring in simple terms is all about getting back work that has been Off-Shored to foreign destinations by the US back to the US. This is primarily aimed at the Manufacturing industry and also applies to some of the Services sectors like the IT industry.
In the lines that follow I will attempt to talk about 'Re-Shoring' and what its implications are to the United States as well as for emerging markets like India and China.
1. Re-Shoring vs. Right-Shoring: Like apparel vendors like Zara have shown us it is always good to do manufacturing close to the markets where the demand is so that the changing market trends and the customer pulse can be quickly incorporated in the innovation cycles. For American MNCs that have operations all over the world, it is a good strategy to have manufacturing close to the markets. This means that the manufacturing hubs for the US markets must be in US and similarly manufacturing hubs for emerging markets like India and China must be in that geography. So it is all about right shoring than just re-shoring as that will drive the responsiveness to the changing market dynamics
2. Access to the Global Talent Vs. Labor Arbitrage: The gap in the wages between the emerging markets and US is on the wane and more so for niche technological and management positions. Keeping this in view the targets of the US MNCs must be re-calibrated to aim at penetration of the global pool of talented resources and the access to the best in class talent globally for high value adding and high skill activities rather than looking at the emerging markets only from a "labor arbitrage" perspective. With the talent pools in emerging markets matching with the best in class talent available in US, it will only do good for the MNCs to be able to exploit this broadened talent pool. If a BioTech company wants to set up a research center in China or an IT product company wants to set up an R&D center in India the target should be only to broaden their access to the best in class talent pool available.
3. Emergence of shale reserves as a means to reduce costs: The emergence of technology to profitably extract the gas trapped in the shale gas reserves in US will go a long way in making the US economy more energy independent and also will go a long way in terms of reducing the input fuel costs for the energy hungry manufacturing industry. The resulting economics will support the re-shoring initiatives in a big way by making it more viable and cost effective to manufacture goods in the United States. However reliance on a natural resource as a source of competitive advantage is not a good strategy and US firms need to establish differentiation and nicheness in their manufacturing processes that will help them sustain the competitive advantage even beyond just the economic advantage shale gas provides.
4. Remaining Independent of the Supply Chain: Today Apple depends to a large extent on FoxConn for the manufacturing of its high end devices like iPhones and iPads. FoxConn is the key to the success of Apple and thereby would have a significant bargaining power. The complex supply chain that brings together hundreds of parts and circuits that go into the making of an iPhone is mainly governed by FoxConn with its strong and powerful networks with the other firms in China and Taiwan. For Apple an "effective and smooth supply chain without disruptions and with desired agility and flexibility" is definitely the competitive advantage. In case of Apple both the 'Supply Chains' as well as the 'Excellence in the Manufacturing Process' which are its competitive advantages have been outsourced. American companies in future might take care not to fall into this 'dependency mode' and might want to maintain their complete independence as well as retain control on their supply chains.
5. Leveraging Robotics as a competitive advantage: A small company called Kiva has made waves in the retailing industry by deploying thousands of robots in the warehouses of leading American Retailers like Staples, Gap, Walgreens, Toys R Us etc and ensuring that these robots carry out all the manual tasks like walking among the shelves and picking the products. About 70% of a typical worker's day was spent only on this job in the past which has now been automated by these bots. While Retailing is one industry which is immune to outsourcing due to obvious reasons there are a number of lessons that manufacturers can learn from this industry and the measures they have taken to stay profitable despite the usual challenges in the economy
6. Adapting to the changing dynamics of the demand for manufactured goods: The consumer demand for types of goods and the categories of goods changes depending on the economic cycles and the fiscal and monetary measures that are in place at any point in time. For example the Quantitative easing unleashed by the FED after the 2008 crisis changed the demand profile for the goods and hence certain goods which were in demand before the crisis were no longer in demand now and vice-versa. What is key is to cross skill and cross train workers to move from a low demand industry to a high demand industry so that we have twin benefits of solving the unemployment problem as well as increasing the supply of goods in demand which in turn will solve the "supply side" issues associated with growth
7. Building an eco-system that will enhance Competitiveness: A country is called as competitive as long as its firms are able to compete effectively in the international markets while at the same continuously increasing the standard of living for its citizens. From a macro-economic perspective the government needs to strengthen the policy environment, political institutions, health care and education systems etc. From a micro economic perspective what is needed are investments for re-skilling work force, R&D in Advanced Manufacturing/Service capabilities, building the component supplier eco system locally around the Manufacturing/Services hubs, building innovation value chains that starts at the universities and goes on to incubations and then to the corporates. This is not only true for America but also for emerging markets like India and China.
8. Harnessing the Game Changing Process improvements: Most of the large American corporates have outsourced a substantial part of the Manufacturing and Production value chain to other countries due to labor arbitrage. What has happened as a result is that while the design and the other high value adding activities still remain with the US the feedback loop between the design and the manufacturing/production processes has broken down which in turn has made the American firms lose their insights and visibility into the actual production process. The weakening of feedback loop between design and production make the game changing process improvements in the manufacturing process very difficult. Thus it is becomes imperative that American corporates bring back some of the vital elements of the manufacturing process to the US so that the critical parts of the value chain are fully visible and game changing improvements in the various parts of the production life cycle which can eventually become a competitive advantage are possible. However the remaining non-strategic parts of the production life cycle can still remain outsourced as they are not a part of the 'Competitive Advantage'.
In Summary re-shoring and re-calibration of the outsourcing strategies by the American firms need not be a matter of concern for the firms in emerging markets. There is enough opportunity for firms in the emerging markets by virtue of being closer to the large domestic markets and customers who are spending more. Also there is enough work that can be safely outsourced without the risk of losing the competitive advantage. Eventually there will be a good balance between the work and activities done in America and that done overseas and the sheer size of the pie ensures that it is a win-win for all the parties involved.