Out-sourcing to Asia ‘not an unstoppable trend’

by John Manners-Bell on 2012-05-18 01:44:13

A paper ‘Relocating the value chain: off-shoring and agglomeration in the global economy’, authored by Richard Baldwin and Anthony Venables, describes the process of un-bundling and fragmentation of manufacturing which has resulted in the globalization of supply chains.

The authors describe how over the last two decades 'unbundling' of production processes has occurred across markets. This initially occurred in Europe with the accession of Spain and Portugal to the European Union and continued with its expansion into Central and Eastern Europe. In North America, the establishment of maquiladoras just across the US/Mexico border had the same effect. In Asia unbundling has been encouraged by the huge disparity in wage costs compared to physical distances. The authors compare wage costs in China with those in neighbouring Japan.

The facilitation of longer distance supply chains was due to the development of information and communications technology which occurred at the same time as falling transport costs.

In many instances it makes sense to out-source high labour intensive processes to lower wage cost markets, although if the goods are capital intensive and transport costs high, then out-sourcing may not take place. Fluctuating shipping costs can mitigate or enhance the benefits of co-locating various production stages within an end market influencing management decisions and demonstrating the fluidity of the environment in which these decisions are taken. Timeliness, reliability, information sharing, quality and design, along with wider benefits resulting from shared labour skills and knowledge all mitigate against out-sourcing to remote markets.

An interesting part of the analysis shows that in some cases out-sourcing to remote locations will only work if sufficiently large number of production stages are re-located. Otherwise remote companies have the penalty of being distanced from upstream supply partners and the end market. In addition to this, many companies are unwilling to re-locate production if other companies are unwilling to follow. This will slow development of manufacturing clusters in developing markets as the necessary production eco-systems do not exist. Japanese manufacturers have been able to overcome this problem in one such developing market, Vietnam, by creating their own supplier parks. This is no doubt facilitated by the strength of the relationships which often exist between suppliers and manufacturers in Japanese supply chains.

The authors of the paper do an excellent job in out-lining the dynamics at work in out-sourcing as well as developing models which show the impact of the various factor costs on decision-making. The discussion perhaps demonstrates that out-sourcing to Asia is by no means an unstoppable trend and that decisions on re-locating production are highly sophisticated. One recent report suggested that in one sector of light manufacturing the differential in wage costs between the UK and China had shrunk from 50% to 15%. Other factors therefore come into play, and very rapidly, sourcing strategies can be changed. At the same time as this, Asia is transforming from a production market to consumer. This will add an extra layer of complexity into sourcing and out-sourcing decisions for Western manufacturers.

John Manners-Bell MSc FCILT
Chief Executive
Transport Intelligence Ltd