Offshore leave

Offshore leave

The idea of a typical 21st Century American manufacturer these days is becoming something of an anachronism, thanks to the increasing reliance on outsourcing noncore competencies to companies overseas — a practice commonly referred to as offshoring.

The two most attractive countries to U.S. manufacturers looking to relocate some of their activities offshore are China and India, for reasons that go beyond drastically lower labor costs. On a wage-per-hour basis, India will generally be more expensive than China, says John McKenzie, partner in the international law firm Baker & McKenzie (www.bakerinfo.com). Why then would a company choose India over China?

Skill sets are important, says McKenzie. Many firms are moving R&D, software programming and service activities (e.g., call centers) to India in part because you are likely dealing with people who speak English. If it is not their first language, they speak English at least as well as their first language, McKenzie notes.

There are other countries with lower labor costs than China, says Rick Moradian, president of international logistics for APL Logistics (www.apllogistics.com), but they tend to have less developed systems, including logistics infrastructure. China has been the beneficiary of a lot of foreign direct investment which has been used to develop infrastructure and for industrial development, Moradian adds. He sees China achieving low cost, high production and high quality.

Generally, India has a lower per capita income, but it also has a lower literacy rate because a high degree of the labor is agricultural, says Moradian. It also has poor infrastructure and a large fiscal deficit which contributes to high interest rates. Labor laws also make it hard for a company operating in India to restructure. India needs time, he continues. China is moving much faster to develop.

China is still a resource and less an end market for many manufactured goods. There are also restrictions on foreign manufacturers distributing in China, according to McKenzie.

While both China and India will continue to grow, Turkey is waiting in the wings to become more of an economic factor. Straddling the line between Europe and Asia, Turkey offers speed to market, says Moradian. In addition, carrying costs are low and the manufacturing base has been building. Turkey is a bit of a surprise for U.S. companies, but not for European companies. With the eastward expansion of the European Union and Turkey’s own call to become part of the EU, it could become the next major alternative for sourcing, and that will bring a new set of logistics challenges. LT

Click here to read related article- How to stay on target when offshoring

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April, 2004

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