Although offshoring, which describes the relocation of business processes from one country to another, often raises fears on the job market in the “Old World“, it is responding to companies’ new strategies for development and adaptation to competition and market conditions.

A brief overview of the current situation with Robert de Marchi, Director of Key Export Development for GSE.

- You refer to changing strategy, how would you define offshoring as it is now understood in Europe?

RDM: Today there are two directions for access to foreign countries. One has to differentiate between offshoring for “production” reasons and offshoring for “market capture” reasons.

Offshoring of production is strictly related to the search for lower cost of goods and services - raw materials, labour, local taxes, corporate taxes. More recently, this has involved other stakes related to administrative constraints, and in particular environmental regulations.

Generally speaking, this production offshoring involves fairly low-complexity manufacturing which requires highly structured process organisation and therefore a lower set of manpower skills.

“Market capture” offshoring is the result of Western firms’ desire to be present on the developing markets in order to obtain a significant share of the market. This offshoring is based on economic considerations which differ from those we apply in our own countries. Here the cost issue is not the sole development factor. The objective is to be present early on and before competition gets a hold on the new markets.

Though production offshoring can have a negative effect on employment in European countries, market capture offshoring is both necessary and beneficial to the sound health of European firms. Indeed, presence on foreign markets generates additional profit from these new markets to which access would otherwise be difficult, if now downright impossible, from manufacturing facilities built in Europe. These additional earnings will directly benefit these firms’ capacity for innovation. This increased profit strengthens R&D capacities in Europe, and particularly in France, where R&D remains the best opportunity for leadership in industrial activity.

It should also be pointed out that these “market capture” offshore operations were made possible by the first, production-related offshore activities.

- Based on these two major trends, can we draw a map of offshore development ? In other words, what countries are European firms turning to ? And based on what objectives ? 

RDM: From a geographical standpoint, and in the countries that GSE is familiar with, the following trends are worth noting:

• For high mass, low value-added manufacturing, China is currently beating all the records. Due, among other reasons, to an immense labour force working at very low wage rates, and increasingly to the fact that China represents a colossal market where the standard of living is growing quickly. Despite these conditions, China remains a challenge for management. And China also remains a concern due to the fact that the political leaders could apply strict protectionist laws from one day to the next, seriously jeopardising foreign investment, for the sole objective of nationalising all the economic activity in China once the technological collaboration is completed.
• India has attracted a great deal of business due to the quality of the workforce and the spirit of innovation conducive to growth. “We turn to India for the low cost workers, we remain for the quality we find there, and we invest due to its capacity for innovation.”  This is also true to a slightly less degree for other south-east Asian countries such as Malaysia…
• Central Europe, led by Poland, is currently undergoing a second wave of economic growth, boosted in part by the new membership in the European Union. Here however, it is clear that the Eastern European countries such as Poland, Hungary, the Czech Republic and others will be at the same levels of production cost and quality as the Western European countries in the very short term. This is also true for the Baltic countries. 
• Russia is another market attracting foreign investment, but a difficult one. Currently, solely stakes in markets where large amounts of money circulate on high value-added products are able to attract investment funds. 
• So we are seeing that offshore investments in Eastern Europe are continually moving further east, to Ukraine and even Kazakhstan, and Turkmenistan… . Yet of course one has to be cautious given that these countries’ cultures differ from our own. The example given by their ex-big brother, Russia, inspires dreams of a quick buck. Instead of boosting their national economies however, these coveted  financial “jackpots” hinder development and investment due to unreasonable set-up costs (for both land and construction) which are way beyond the local economic realities. 
• With respect to Latin America, access appears paradoxically more complex even though country culture may appear closer to our own. Whether due to the influence from the USA, to past national economic crisis, competition from new developing countries … whatever the reason, these countries, which attracted our industries some ten years ago, today are primarily simply target markets.

- Would you say then that you really have to know a market well before starting business there ?

RDM: Offshore strategies for Western firms looking to relocate in Central Europe, Asia and Latin America indeed represent veritable niches for these companies’ margins. However, such relocation must be carefully planned with emphasis on possible or even necessary changes, in order to remain abreast of the lowest costs and the best growth markets. The impacts from the local political contexts and economic environment must of course always be factored in too.

- So, is the future always elsewhere for companies looking to grow ?

RDM: Not necessarily. In the upcoming ten years, it is highly possible that the developing countries where the population is currently the work force are going to become the next consumer countries. This will level the geographic distribution for the consumer markets out more fairly and lead to a balancing of prices due to increased demand. Production which was once relocated will find itself located right in the centre of the new consumer centres. Add to this the skyrocketing costs of transportation, and you will find less interest in these zones where manpower is cheaper, but transport costs are higher. Then, our economic system will have to reorganise to survive during this time interval … Much easier said than done …

- Indeed, in Europe so far offshoring has created upheaval – is there a remedy in sight ?

RDM: In the short term, the competition generated by the low costs in these countries is and continues to inflict damage on our labour force.

In the mid-term, as we have seen, the playing field is going to level out among the different countries, and some manufacturing will either return to our countries, or remain abroad definitively. Regardless, our production systems will have attained levels of productivity and quality that will enable them to withstand the competition.

In the long-term, insofar as the current highly competitive situation imposed by the developing countries drives us to the absolute need to concentrate our efforts on innovation, our countries are going to be more experienced and in the lead in terms of research, development and industrial applications. We should therefore have all the advantages we need to remain on the international playing board in the leader position.

- You seem to be rather optimistic ?

RDM: We have to remain positive and as serene as possible faced with the changes to our current economic models, which themselves catalysed the offshore movement to begin with. We are going to be seeing a return – moderate of course but very real – to the need to retain our production plants in our own countries. And now that we fully understand that the challenge of the future for the Western countries lies in controlling pollution and preserving the environment, we realize that transportation for manufactured goods has to decrease and the resulting CO2 balance has to improve for the goods we consume in our countries.

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