Anecdotal evidence has it that the great move of European manufacturers to lower-cost production centers in Asia — first China, then other Asian emerging economies as China became too expensive — is slowly being reversed.
Manufacturers are bringing production back to Europe, we hear, perhaps not all the way home to the original domestic base in western Europe, but to a nearshore destination in the lower-cost but highly skilled markets of central and eastern Europe.
It’s still all about cost, but it’s also about quality, quality control and being near enough to the center of the action to be able to go out and deal with the day-to-day issues that arise. In a niche manufacturing sector that I know quite well, the truth is that production in China became both too expensive, as wage levels increased, and quality fell away, as experienced and skilled workers — enticed by higher pay in other sectors — were replaced by new, untrained workers. Quality control also fell away as western manufacturers balked at the cost of paying yet more for someone to supervise the workforce and assess the output. That’s a false economy, though. Remember — low-cost production only works if someone buys what you produce. And definitely doesn’t work if someone decides not to buy what you produce.
Not so, apparently, on the anecdotal evidence. Put your anecdotes away. Colliers International and CoreNet Global have produced a report, Home vs. Away: The repatriation of manufacturing in Europe, that debunks the theory that manufacturing is coming home or nearer home.
The report concludes that the repatriation of manufacturing to Europe is still the exception for many multinationals. Instead, they are adopting a “best-shoring” approach, a pick-and-choose way of placing operations around the world to price and competition advantage. But Europe may be well placed to benefit from best-shoring, explains Guy Douetil, managing director of EMEA Corporate Solutions at Colliers International.
“Companies’ strategies are far from being one-dimensional,” Douetil says. “The good news for Europe is that it is set to increase its appeal as a ‘best-shoring’ option.”
Douetil agrees that the findings of the report are surprising “as the general perception, based on all the hype around offshoring and re-shoring, was that manufacturing businesses were flocking back to Europe. It was commonly believed that multinationals were returning to Europe, driven by a need for proximity to their client base, supplier chain and escalating labor costs in traditional offshoring locations.”
The survey found that, although nearly 25 percent of manufacturing businesses have moved parts of their production activities back to Europe in the past five years, this was rarely part of an explicit repatriation strategy. Only 11 percent of manufacturing companies plan to return to Europe, or “re-shore,” in the next three years. Interestingly, though, half of the survey respondents said that they intend to ramp up production in eastern Europe, Russia or Turkey in the next three years.
“The sharp rise in labor costs and the consequent erosion of cost advantages in emerging economies is now a key concern for global businesses,” Douetil suggests. “In China, salaries have more than doubled since 2007, and the introduction of mandatory employer social welfare contributions and rising wage expectations from employees is also likely to place total labor costs under further upward pressure.”
Regardless of where manufacturing is undertaken, it still doesn’t augur well for those firms that don’t pay enough attention to quality and quality control. If goods are found to not meet the specifications required by customers, then customers won’t buy those goods. Equally, if goods are damaged in transit due to deficient packaging and handling, then the manufacturer has to bear the cost of rectifying matters or writing off the goods.
You can onshore, offshore, nearshore, best-shore and re-shore all you want to. But the product has to be right.
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Richard Fleming is editor of The Institutional Real Estate Letter – Europe.
