Time to rethink
For decades now, global manufacturing companies have been moving to the Far East, with China absorbing most of these activities. And the results are clear: approximately 100 million people are employed in manufacturing in China (in the US, the number is around 12 million), and the sector accounts for almost 36 percent of China’s gross domestic product. China accounted for just 3 percent of the world’s manufacturing output in 1990. In April 2016, China produced almost a quarter of the world’s manufacturing output, including 80 percent of all air conditioners, 71 percent of all mobile phones, and 63 percent of the world’s shoes (1).
Where do we stand today with respect to offshore production strategy? According to his recently-published book, ‘From Global to Local’, Finbarr Livesey(2) claims there are clear signs that this globalisation trend is being reconsidered, driven by issues such as increasing protectionism, natural resources dependency and consequently a forced push to develop a circular economy. Not only has production moved to the East, but perhaps more worrying is that certain R&D capacities also seem to have been relocated wholesale to the East, which raises serious concerns. This has triggered certain countries and their politicians to rethink their manufacturing positioning for the future (for example, Germany’s Industrie 4.0 programme, aimed at the development of so-called smart factories)(3).
NB: according to Harvard Business School professors Shih and Pisano, currently 90% of global R&D spend is split between the US (29%), Europe (22%) and Asia (40%)(4).
Global operating companies have probably figured out their offshore production strategies and will keep refining and adapting them, where possible incorporating the latest developments and insights. Bold Capital Management’s client base includes many medium-sized manufacturing companies. These types of companies have less sophisticated offshoring production expertise and/or managerial bandwidth to deal successfully with running offshore production sites or supply chain management. Driven by the obvious cost arbitrage and sometimes without seriously considering all the execution risks, many of these midsized companies went to China or other Far East countries. And quite frankly with little or no real success.
What should trigger a serious reconsideration of your offshore strategy? Besides the issues identified by Finbarr Livesey(2), such as increasing protectionism, natural resources dependency and consequently a forced push to a circular economy, at least two new phenomena jump out which seem to offset the cost arbitrage advantages and are worthwhile investigating further; these are robotics and 3D printing.
In the past few years, robotics has experienced enormous growth especially, but not exclusively, in manufacturing. The automotive industry has led the way and notably this seems to be particularly true in the West. This has resulted in plants being ‘refurbished’, leading to very high productivity despite the limited labour force required (for example, the Mini production plant in Oxford, 2013 on Youtube). In other words, where cost arbitrage in respect of labour costs was the reason to move to the East in the ‘old’ days, with the use of robotics, this is no longer a key factor in the decision-making process. Furthermore, the fact that companies can enjoy a high level of productivity and a competitive cost base while producing very close to the customer base seems to be a major advantage in terms of quality, delivery times and customer satisfaction. But in the West, we still have a long way to go compared to South Korea and Japan: in South Korea, there are 478 robots per 10,000 workers; in Japan, the figure is 315; in Germany, 292; and in the US, 164. In China, not surprisingly, the figure is only 36, according to Will Knight in MIT Technology Review (1)
What was once considered to be a high-tech R&D feature only available to techies and global companies now seems to be accessible even to the hobbyist at home, let alone the mid-sized companies which can benefit from this amazing invention. Enabled by the major advances in Internet-of-Things technology, 3D printing means goods can be produced in the home market and close to the customer base with all the obvious advantages of that. It also brings a totally different perspective to the design and manufacture of goods, as well as to the supply chain regarding the natural resources needed. In other words, the recreation of the design-to-delivery process (to be clear, not ‘production’ but literarily making goods to the customer specifications and, if necessary, even printing them at the customer premises) offers all kinds of possibilities to seriously reduce the time-to-market and increase customer satisfaction, consequently creating a new business model.
Albeit it wasn’t in the manufacturing industry, but I well remember back in my days at Getronics, we were competing in the managed services industry against the likes of IBM and HP, and we couldn’t figure out the strategic benefit for our company of going so far East. Although the cost arbitrage was clear, the Indian workforce was only to be able to speak English. To stay close to our customers, and enable us to serve them in their local languages, we opted to create three service hubs around the globe, while trying to benefit as much as possible from the cost arbitrage available. We ended up in Mexico, Hungary and Malaysia, speaking to our customers in over 20 languages, using the latest technology to connect the centres and to trace and track global customer calls anywhere and at any time. In other words, we were servicing our customers in their local language but, if something urgent came up, we could act immediately, outside office hours, using one of the other centres. This approach meant that Getronics differentiated itself by being global, but with a strong local customer focus, compared to IBM, HP and the like, who went to India and China for most of this type of customer service. To cut a long story short, our approach was highly successful. Getronics customers recognised and appreciated our innovative customer service concept and shortly thereafter we were able to build an order book of over EUR 1 billion (the highest ever in the history of Getronics), climbing the global managed services providers ladder to a number three position in under two years.
We at Bold Capital Management can corroborate Finbarr Livesey’s observations, analyses and conclusions, and wholeheartedly recommend his book(2). There’s no doubt that the world today is flatter than ever, but new technologies like robotics and 3D printing, in combination with the Internet-of-Things, are enabling mid-sized manufacturing companies in the West to seriously rethink their offshoring production strategies, allowing them once again, instead of the cost arbitrage advantages, to put the customer at the centre of their strategy.
I would be delighted to discuss this and any other topics with interested clients or candidates. Please don’t hesitate to get in touch with me at www.boldcm.eu and, on behalf of all the Bold Capital Management partners, I wish you well.
Klaas Wagenaar, 23 August 2017
- Knight, W., China is building a robot army of model workers, Technology Review, 26 April 2016: www.technologyreview.com/s/601215/
- Finbar Livesey, From Global to Local, 2017, published by Profile Books
- Forschungsunion, Recommendation for implementing the strategic initiative INDUSTRIE 4.0, April 2013, www.forschungsunion.de/pdf/industrie_4_0_final_report.pdf
- Shih, W. and Pisano G., Restoring American Competitiveness, Harvard Business Review, July-August 2009
- Email: email@example.com
- August 24 2017