How to Counter Offshore Manufacturing Competition

Over the last 30 years, various factors have helped usher in the globalization era. The rise of wages in the US, the increasing industrialization of poorer countries, the desire to reap the benefits of lower wages abroad and huge technological increases have all fueled this new era.

Consequently, offshore manufacturing has become a common practice. This has led to fluctuating costs and greater competition, which has increased pressure on US corporations. Companies must confront both the positive and negative impacts.

What is offshoring?

Offshoring is when a business moves part of its operations—such as research and development, assembly or customer service—to a country with cheaper costs. It's especially popular in IT, manufacturing and customer service.

Offshoring allows companies to reduce costs and prices while increasing productivity and profits. But it's also controversial. You should consider both the pros and cons before deciding what's right for your company.

Advantages

In capital-intensive industries like manufacturing, offshoring provides a distinct financing advantage. By outsourcing manufacturing to companies in China, Mexico or elsewhere, a company can keep millions of dollars of machinery and other equipment off its balance sheets. This lowers the business's debt-to-equity ratio, making the company less risky for bank financing.

Another often-cited advantage of offshoring is lower labor costs, especially in unionized industries. Wages can be significantly lower in developing countries, which have a lower standard of living than the US. Lower production costs drive higher gross margins and greater profits.

But the pros of offshoring extend beyond the cost savings. There are many strategic advantages that can help your company compete.

• Access to global talent pool: Offshoring opens the door to specialized skills and expertise that may not be readily available in your company's domestic market. This diversity can help you problem solve and innovate, contributing to the competitiveness of your business.
• Focus on core competencies: By offshoring non-core functions, your business can focus on its main competencies and objectives. This creates agility, efficiency and the ability to quickly respond to market changes.
• 24/7 operations: You'll be able to complete projects quicker and offer round-the-clock customer support when you have employees working in time zones across the globe. This can be a particular advantage with projects where being first to market is important.
• Flexibility and scalability: You can more easily respond to customer expectations and a changing market when you can scale your operations based on demand. The flexibility of an offshore operation makes it easier to deploy additional resources during periods of high workload and scale it back during slow periods.
• Reduced tax burden: By using offshore entities, companies can expense their manufacturing costs instead of depreciating those asset purchases over long machine and building life spans. This provides another major financial advantage, particularly for mid-sized and larger companies. The ability to load these overseas operations with costs ultimately reduces the firm's corporate tax burden.
• Risk mitigation: Having operations across the globe means your company isn't reliant on one market. It also provides a buffer against regional instabilities and allows you to more easily navigate geopolitical or economic uncertainties.
• Global market expansion: Offshoring can help your business expand into global markets. Having a presence in different regions can help you understand the local market, regulations and consumer preferences.

Drawbacks

Offshoring also introduces major challenges. It's crucial to address and mitigate these issues to ensure success.

• Communication challenges: Project coordination and collaboration can suffer as a result of people who work in different time zones, speak different languages and come from different cultural backgrounds.
• Quality concerns: Offshore partners may not adhere to the same quality standards as their parent company. Maintaining quality across multiple countries and teams that have different work standards and ethics can require robust communication and oversight mechanisms.
• Data security risks: Companies that participate in offshoring risk transferring their proprietary and technical knowledge of processes, methodologies and other intellectual property to companies that can steal this information and exit the supply chain.
• Dependency on external providers: The US has been engaged in a prolonged trade battle with China—a critical manufacturing hub for many American companies—and is making overtures to other countries. Supply chains have become increasingly complex. Those driven purely by relationships and not by ownership require rigorous vetting and continual nurturing. Usually, the more complex the product, the more components there are—and the more points that exist in the supply chain. All of this increases the number of businesses, the number of people and the risk of a breakdown, as well as the intensity of the potential fallout.
• Loss of control: For your company to offshore, you must be willing to relinquish some of your control over day-to-day operations. It will be more difficult to monitor and manage tasks, which can hinder decision-making and responsiveness.

Offshore competition

US-based businesses must contend with this offshore manufacturing competition and their inherent advantages. To compete smartly and effectively, US businesses must successfully address one or more of the aspects that make offshoring attractive. Since offshoring generally drives down prices, competing on price will typically lead to losses.

Instead, companies with US manufacturing operations must focus on driving efficiencies to lower costs. By measuring all components of the manufacturing process, they can identify areas for improvement, whether through productivity increases, new technology or other means. Another way to compete is to focus on customized or highly complex items made in smaller batches that need quicker delivery times. Overseas competitors would be at a disadvantage due to the complexity of the supply chain and the shipping times.

Companies can also differentiate themselves from offshore competitors in quality. This includes product-inherent quality, warranty and service quality, as well as delivery times and overall customer service. To drive service quality, companies can build out a customer service organization that offshore competitors can't match because they lack the necessary market or customer familiarity.

Sound financial management

A strategic approach to your company's finances is a key tool that can help your business adapt to a complex market environment. By building a relationship with a business banker, you can tap into resources, analysis and feedback that you may be overlooking. Making the fullest use of financial tools and options can help you effectively address the effects of offshore manufacturing, so they work in your company's favor.