Re-relocation from Far East – Back to the origin

Rising wages, escalating transport charges and an appreciation of the currency. The production in China gets more and more expensive for western companies. As a consequence more and more companies retrieve their outsourced parts of the production back to the origin.

As an example we can capture the French presidential campaign in 2012. The candidates were touting with arguments like “sell more home-produced products” and “retrieve the production back in our country”. Furthermore there is the claim for warranty certificates, which attest the origin of production in France. However, companies have begun to relocate their production several times before politics took possession of this topic for their purposes. This means that globalisation partly begins to stuck.

One example for this issue is the French toy manufacturer “Meccano”. The owners Michael und Alain Ingberg followed the outsourcing-boom. They relocated their production to China in the previous ten years. The main factory at the French city Calais was already written off. But two years ago the Ingberg brothers have brought 20% of their production back to France. Meanwhile roughly 50% of the outsourced production is back in Calais. “China is changing”, was the comment of Michael Ingberg. Wages are rising, the currency is appreciating and the costs for transportation from China are rising and rising over time. Another point for the re-relocation is the gain in flexibility. The workers in China become scarce and as a consequence the delivery times increase.

Even other companies have decided to come back with their production. Another example from France is “Genevieve Lethu”, a producer for high quality kitchen accessories, table ware and pots. The reason was that China wasn’t able to fulfil the necessary quality claims of the company.

There are many other companies which are following this trend. “Kapsch”, the Austrian producer for radio technology brought the production from the Chinese city Foshan back to the 8,600km dislodged Austria. The radio stations which were produced by 500 Chinese workers are now produced by 50 domestic workers. Despite of the productivity-advantage, the production costs are +5% compared with China, but considering the raising minimum wages of annually 20% in China and the appreciation of the currency, the 5% more are acceptable, a fortiori regarding the additional flexibility. Kapsch can react notably faster on changes or adjustments from their customers what consequently improves the service quality of the company as a supplier. This argument runs like a golden thread through the explanation of the returnees.

Also in Germany we can find such companies. One example is the producer for high quality pans “Berndes” from Arnsberg. Their explanation is that the production of low quantities is more expensive. Further reasons are the same as already mentioned in the examples of Kapsch and Genevieve Lethu.

“Back to the roots” is also a project from Apple, which also produces in China. The Mac- Book production will be returned to the USA.  Tim Cook, the director of Apple said that they want to invest 100 Million US Dollar in this project. It could be a beginning of a revolution; the industrial jobs are coming back to their origin.

This trend isn’t new, but amplifying. The main reasons are the continuous crisis in the world and the reorientation of the companies. Costs aren’t any longer the key factor. Based on the financial crisis, plantare declining. For companies it becomes more and more important to use their own capacities, to have a higher level of utilization, what would lead to lower production costs.

Another important point is the short lifespan of products nowadays. The products cycles are always faster and the availability is a crucial factor for companies.

A little comparison shows, that for three relocations from Germany to Far East, one company comes back. Every seventh company from United Kingdom also returns from Far East after a period of two years. The British chief economist Lee Hopley says also: “The key factors in the global competition are quality, customer service and delivery times.” This led to a revaluation of the production in emergent countries like China, Vietnam or Korea.

It could be an interesting investigation, if countries from Far East like China etc. already observe this trend in their export statistics. But probably it needs more time to see in which direction this progress will turn. But it’s a first shift in the big world of the GLOBALISATION.

written by Matthias Lerch, Nicolas Lauer, Timo Bug