Starting in the 1990s and accelerating in the 2000s, manufacturing industries in western countries have embraced the global economy and undertaken ‘offshoring’ activities. Now, ‘reshoring’ is on the agenda.
Offshoring is the practice of a business relocating some of its activities (usually production) from its home country to another country. Also, offshoring is sometimes called ‘physical restructuring’, where manufacturing plants are set up by the business in low-cost labour countries either as a sole entity or a joint-venture with a local business. Joint-ventures are legislated as a requirement with businesses setting up physical restructuring activities in the People’s Republic of China.
With lower labour costs usually being the main factor behind offshoring decisions, the unethical treatment of workers in third party countries is a major concern for manufacturers. Product quality, production lead times and shipping issues all present problems that manufacturers must face.
These problems are obviously countered by the total landed cost of the goods, which is the main reason for offshoring in the first place.
The American experience has actually found that companies that have offshored are now looking to bring activities back again. This is evident in the service industry, where call centres that had gone overseas had witnessed a backlash. Manufacturing doesn’t experience the same immediate customer impact, but there are secondary issues also at play.
Labour costs in China and India are on the rise, and China is now outsourcing its labour for some tasks as the cost of labour increases. Countries that China is sub-contracting to include many in Africa, with a key focus on Ethiopia. This also makes it difficult for manufacturers to ensure the ethical treatment of workers.
American companies are taking these issues into consideration when looking at the total cost of manufactured goods. Industrial and capital equipment is also a little isolated from offshoring, as the technical nature and quality focus of the end product usually requires the country of origin to have a heavy engineering base.
Reshoring in Australia
The automotive industry was a major part of Australia’s manufacturing base. It’s demise is in the process of dealing a blow to Australian industry. Other industrial and consumer product manufacturers have also embraced globalisation, especially ones that have been traditionally Australian.
Global companies have gone down the low-cost country sourcing route and sought production mobility with lower production costs. They are not going to simply ‘about-face’ and re-enter western countries with a view to manufacture. The real challenge for Australia is to keep manufacturing businesses that start here to remain here as they expand. That is always going to be hard in a high-labour, high-cost market.