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Monday, 28 october 2019 | Redacción CEU
Nations have never been alone in the world, but now they are more linked to each other than ever. The limitations that borders represent are becoming increasingly irrelevant. We can meet a person who is in the other part of the planet instantaneously and without moving anywhere. We have the possibility of buying a product at our neighborhood supermarket, which has been cultivated or made in a foreign country. We can witness from our living rooms what happens in a faraway market while this impacts our country’s economy. All this is summed up in one word: globalization. This is a phenomenon that causes many effects. Among them, offshoring is one of the most important aspects.
According to the dictionary of the Royal Spanish Academy, "offshoring" means "moving an industrial production from one region to another or from one country to another, usually looking for lower business costs". In other words, finding a place is key to accessing better competitive conditions and obtaining higher profit margins. The goal of relocation is usually linked to achieving lower costs, but it can also be linked to other factors such as looking for highly qualified professionals or having better means of production. Indeed, this practice does not have to be limited to the production process. Other services like technical support or areas like research and development can be relocated.
It is also important to point out that this strategy is largely caused by the growing interdependence of the different economies. In this global context in which companies can access a greater number of markets seeking to expand their profits and move away part of their business to achieve better conditions, the firms that do not copy these practices come across more obstacles when competing. Therefore, this is a phenomenon that feeds on itself.
The two sides of offshoring
Offshoring is controversial. Its advocates argue that it helps generate employment and, therefore, stimulate consumption in the target countries. They also believe that employees’ salaries are higher than those that they normally earn, as well as the fact that workers can have access to more and better opportunities. Likewise, they defend that the origin country benefits from price savings.
On the other hand, offshoring’s detractors point out that this strategy brings about a negative impact on the home country’s economy, since it increases its unemployment rate. They also claim that, many times, the employment which is created does not meet the standards of the origin country. On top of that, the quality of the product and production may be affected by the conditions of the host country.
As in any other strategy, offshoring also means that there are both advantages and disadvantages for companies. Among its positive aspects, we find cost reduction, increased competitiveness, access to new markets (that of the destination country), dynamism in the organization of tasks, etc. Among its negative aspects, we can mention greater exposure to exchange rate fluctuations and tariffs policies, cultural shock, operational difficulties in controlling and monitoring the work, internal conflicts due to a possible reduction in workforce when transferring the activity, etc.
Offshoring, outsourcing and their whys
It is important to distinguish offshoring from outsourcing. When referring to these two concepts, sometimes, people get confused. However, these concepts refer to different practices:
- Offshoring: with this modality, part of the business activity moves to another geographical location, that is, companies that bet on relocation do not resort to a third party.
- Outsourcing: this modality involves subcontracting a third party to carry out certain services, tasks or operations that companies need in order to save costs or meet certain specific needs.
Both are business strategies that seek greater competitiveness, profitability and performance. They have gained popularity over time thanks to this global context. Although they are different, they can also be complementary. For example, a company can move part of its production to Taiwan and hire a local company to handle a specific part of this process. When choosing one or the other option, companies can consider aspects such as the capacity to control over the activity, the flexibility of subcontracting a service, the cost of both alternatives, the level of specialization of a third party, etc.
New trends in a global world
Regarding offshoring, it is important to note that this phenomenon has been following a fixed course for many years: from western countries to developing or emerging countries. This has mainly happened in manufacturing production. However, this trend is changing. Countries that have gathered greater economic power, due in large part to the fact that they have hosted this production, are betting on the same strategy, by moving their production to other countries as well. The most significant case is that of China.
In turn, other factors such as the commercial war between the United States and China, technology advances, automation or the increase in labor costs are leading some companies to reconsidering offshoring strategies and returning to their origin countries.
The CEU IAM Business School offers an International MBA which is fully adapted to the needs of today's business world. It is a program aimed at developing competencies and offering the knowledge that new leaders need. These professionals must deal with the challenges which are imposed by a global and changing scenario. If you are one of them, do not hesitate to contact our business school.