In the economist’s edition of this week, you can find a special report on outsourcing and offshoring, including two interesting articles on Manufacturing and Services. Thinking about the earlier posts on the Demise of Manufacturing this is yet another interesting development as mutual reinforcing multipliers (manufacturing attracts services and vice versa) previously discussed can stimulate job growth now in mature markets.
Source: McKinsey Global Institute
Services and Production Move Back to Mature Markets
The oversupply of qualified workers in mature markets in distress has a depressing impact on their salary expectations and governments are moving to make labor more flexible, countries like Portugal and Spain are becoming more attractive. Portugal for example is turning into a service hub for Brazil’s firms (it’s already a services provider, production hub and export portal to the booming markets of Angola and Mozambique). As Chinese and Brazilian laborers demand higher pay, this development could accelerate.
Production: Minimizing Supply Chain Risk and Vicinity to End Markets
However the labor cost arbitrage is becoming a less important driver for outsourcing decisions. Manufacturers want to be close to their end markets and minimize supply chain risks. New less expensive technology will make this increasingly possible.
Think of the decreasing costs of robots and 3D printing, which will further improve the labor costs per product and make local production more feasible. A German car manufacturer went from 75.000 assembly workers in the 90s to 25.000 nowadays, making labor costs per product lower than in Portugal for example, even though salaries are around 25% of German salaries.
On the long run, 3D printing will inevitably lead to even less labor intensive production processes and more local production. So despite business activity moving back to mature markets, political challenges of keeping unemployment low won’t go away.