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Back-Shoring vs. Off-Shoring vs. Near-Shoring. China For China. Let’s Call The Whole Thing Off.

Posted in China Business

Michael Zakkour, who constantly deals with global supply chains as part of his job as a China/Asia market strategist at Tompkins International,made a great comment on exactly that at our Linkedin China Law Blog Group today.  Michael’s comment was in response to a Bill Dodson post entitled, “Backshoring to the Future.”  In just a few paragraphs, Zakkour nicely lays out exactly what I see happening out there and gives lie to the idea that there is any one country for anything:

I think a lot of pundits, analysts and otherwise sober business thinkers, including my friend Jim Fallows are

  1. Blowing this “trend” out of proportion
  2. Seeing it as a Black/White (or Red/Red-White and Blue) issue

The real issue is not a simplistic Off-shoring vs. On-Shoring debate. It is much bigger than that. We are in the middle of “re-globalization” – whereby companies have to consider “right-shoring.”

In other words a number of factors including:

  • Where your biggest customers are (what are your top three markets by region)
  • Cost of shipping, fuel and logistics
  • Cost of labor
  • Protecting IP
  • Profitable partnerships
  • What each country region does best
  • Infrastructure

These factors and many others will inform companies on what mix of “re-shoring” “near-shoring”, “off-shoring” is right for manufacturing as well as R&D, marketing and sales.

A company may well want to keep component manufacturing in SE Asia, 60% of final assembly in China and specialty, high-value add manufacturing in the US. Many are misinterpreting this trend to mean massive, assembly-line focused, dirty and low value add manufacturing is coming home in droves.

The fact is a smart company will consider a new mix of manufacturing, sales, marketing and logistics in a re-balanced and re-globalized world.

In that world China still has a huge role to play. As an example just consider “China for China” manufacturing. If you are an apparel company, and your biggest market for the next 10 years will be China, why on Earth would you move all your manufacturing back to the US?

Good points all, don’t you agree?

Or as we lawyers are always so found of saying, it depends on the specific situation.

 

  • Mark

    Yes, everything in life “depends on the specific situation” but I think Zakkour has laid out the scenarios and is right on the money in his examples. Labor intensive manufacturing has no home in the U.S. (if not China, then Thailand, Malaysia, etc.) in my opinion.

  • http://www.procurasia.com/ Etienne C.

    It is a set of great points indeed. Industrial/Manufacturing strategy is certainly not something simplistic. Consultants (as lawyers) will approve on that.

    The one thing that is probably happening with this reshoring-onshoring-backshoring trend is more for the people (including managers) who do not want to or do not know how to go through the full analysis. While outsourcing to China used to be a no brainer for many (i.e. it was easy to explain the rationale in terms of cost), the no brainer may become soon not to outsource to China (i.e. it may become easy to discard the idea of outsourcing to China because “cost are no longer competitive”).

    In the meantime, the smart ones will do the home work and find the right spot for the manufacturing and build competitive advantages, including some Chinese companies setting up or buying factories in the US and Europe.

    Wait and see

  • Galina Vishnevskaya

    You wouldn’t move your China apparel manufacturing to the US. But you might move it to Bangladesh, Vietnam or anywhere else in ASEAN or even India, simply because it is cheaper to do so, China has textiles tariffs quotas and new ASEAN free trade agreements will ensure it is so. Wake up people, the China supply chain is not what it used to be and it is on the move.

  • http://www.qualityinspection.org/ Renaud Anjoran

    I totally agree.
    The media are looking for nice stories about re-shoring, like the increase of jobs in GE Appliance Park. They are selecting the stories they run in a biased manner, so who knows if off-shoring isn’t still the dominant trend?

  • http://twitter.com/michaelzakkour michael zakkour

    Hello all. Thanks for the great feedback. A few follow-up notes.

    Renaud – It does play out as a nice headline but reality is another thing right? Apple will indeed move 250 jobs to CA but that leaves about 50,000-80,000 back at FOXCONN in China. Lenovo wil move 200 jobs to NC but that leaves tens of thousands back in China.

    Gallina – You might indeed move it to Bangladesh or Vietnam, as some Western as well as Chinese companies are doing. That said, Bangladesh does not have the experience, personnel, infrastructure or scale to take on a significant portion of China’s textile manufacturing. Add to that they are not a “China for China” market for most retailers and brands and the equation looks very different. It’s true the China manufacturing and SC scene isn’t what it used to be, but it has not been rendered moot or irrelevant either.

    Etienne, good points all. As I said, I don not think this is a black/white or China/US issue. This is about figuring our what mix of market, manufacturing and logistics each country/region will play for your company. To that end, for at least the next 4-7 years the CCP will subsidize low/mid/high level manufacturing in China until more GDP shifts to consumer and services.

    Put another way: 10 years ago the “no brainer” was for Germany to sell a Chinese factory a machine that helped a majority human labor force make shirts. The new no-brainer may be China making that machine in Shenzhen, selling it to Vietnam and moving production of low end garments to rural Sichuan province.

    Mark, precisely.

  • David

    All good points. What’s missing is resilience. Maintaining operations and supply chains in the face of shocks. Change affecting climate, energy and environment factors either directly risk shocks for supply chains and operations or indirectly through cascade effects on society. Shoring dimensions discussed so far are spatially constructed with reference to headquarters. For resilience it is necessary to think conceptually in terms of risk mitigation and adaptation and perhaps operationalise Taleb’s anti-fragility. Resilience leads to “safe shoring”.

    To take an example. In 2011 floods interrupted production at facilities in international supply chains in Thailand. Avoidable? With hindsight bias of course. But consider the context. Facilities built on a flood plain in a context of poor spatial planning and land management. Had hydrological modelling of flood risks kept up with the development and effects on water flow of infrastructure development? Probably not. Had developers considered the effects and taken sufficient steps? Evidently not either out of ignorance, neglect or cost cutting? Did firms occupying those facilities independently audit flood and associated environmental risks and mitigation?

    All this is of course speculation. Nevertheless as a thought experiment it illuminates some of the challenges to developing resilience. Given that the climate is becoming more extreme then it is necessary to engage in more comprehensive assessment and planning to reduce vulnerability and enhance resilience of supply chains and operations. Safe shoring may lead to a greater local or regional focus such that operations may continue autonomously and inhibit transmission of shocks through global supply chains.