Is Global Offshoring the Right Move for Your Manufacturing?

In GE’s case, it was under the leadership of CEO Jack Welch. A pioneer of global offshoring, Welch had a reputation for cutting jobs and transferring them overseas to increase productivity and profitability.

In 1989, Welch flew to India for a sales call in the hopes of selling GE products to the Indian government. Here he met Sam Pitroda, chief technology advisor to Indian prime minister Rajiv Gandhi. “We want to sell you software,” Pitroda pitched a surprised Welch over breakfast. The GE CEO replied, “if I kiss your cheek, what do I get in return?” 

In the years that followed, GE offshored big business processes to India, including data maintenance, call centers and even created a specialist department called General Electric Capital International Service. This division handled finance, business analytics and e-learning. Overall, the move helped GE save millions of dollars and drive the profitability that Welch hoped for over two decades. 

This story indicates the power of offshoring, though it isn’t necessarily the right fit for every North American manufacturer. In this article, we’ll explore some of the reasons offshoring happens so you can make an informed decision. 

Cutting operational costs is one of the biggest attractions of offshoring. After all, the cost of living and average salaries are lower in Asia, Latin America and India compared to the US. This means you can save money on the cost of labor and raw materials.

For example, we used a cost of living tool to determine the difference between the US and China and found that overall it’s 37% cheaper to live in China based on factors like eating out, buying food, paying for housing, etc. When doing the same comparison to India, we found it was 68% cheaper and 50% cheaper in Mexico. 

We also used Statista to compare the minimum wages of these countries to the average US minimum wage of $7.25 an hour as of January 2023.  In China, the average is 25 yuan ($3.64) per hour, while it’s 178 rupees ($2.15) per day in India and 173 Pesos ($9.24) per day in Mexico.

But just because costs are lower doesn’t mean the quality of talent is lower. Offshore locations like Hong Kong and Singapore are known for having highly competent and technically capable workers. So, you don’t have to worry about sacrificing the quality of labor in exchange for reduced operational costs. It’s a win-win.

Even better, some Asian governments (like China and South Korea) offer tax incentives and subsidies for bringing manufacturing to their countries. An example of this kind of cost-saving exercise came when Ford Motor Company offshored car production plans to China in 2018, saving $1 billion in investment costs. 

One of the biggest challenges US manufacturers are battling is a massive labor shortage. Data never lies, so let’s look at the facts. Deloitte has predicted a shortage of more than two million American manufacturing workers by 2030, representing an opportunity cost of $1 trillion per year. 

There are still some 40 million Baby Boomers in the workforce—that accounts for about 25% of the total workforce, many of whom are in “old school” manufacturing roles. As Boomers retire, younger workers are avoiding manufacturing jobs in favor of technology, healthcare and other industries where working conditions and compensation are more attractive.

What this has done is create a crisis where either there aren’t enough skilled workers to do the jobs or there aren’t enough unskilled workers willing to learn those skills. While both situations are putting manufacturers in a bind, this is where global offshoring can prove valuable in addressing the problem. 

Countries like India, China, Brazil and Argentina have a strong reputation for providing advanced software development and IT services. So, hiring talented workers from these countries could give you a competitive advantage.

Microsoft is a great case study for showing the benefits of accessing a global talent pool. The company has been offshoring to India as far back as 2004, increasing productivity across multiple departments. The technology giant also signed a deal with Indian organization Infosys Technologies in 2010 to manage a major part of its worldwide IT system. They’ve also recently deepened their collaboration to accelerate enterprise cloud transformation on a global scale. 

Another reason to offshore is tapping into the expertise of specialist suppliers who you might not be able to find domestically. Asia is a great place to look, due to the population size and sheer volume of manufacturing facilities. Not to mention, suppliers should also give you a better rate.

As the world’s largest producer of manufactured goods, China offers plenty of opportunities to source and create niche products. The same goes for Vietnam, which has established itself as a key player in manufacturing with lower-cost options than China, easy supply chain integration and strong free trade access. 

What China and Vietnam have in common are suppliers with the right equipment, experience and workforce to produce high-quality products at lower costs. 

We can see why some brands choose to work with a select group of suppliers. It’s likely these suppliers offer a good price and have a good reputation for delivering high-quality products in a timely manner. So, it’s not surprising that brands would favor certain suppliers who they trust.  

But this can backfire in some cases. Apple is a good example of this, as it was heavily reliant on its Foxconn factory in China. Because of COVID-19 fears, factory workers left the factory campus in Zhengzhou, the capital of the central province of Henan. 

To lure workers back, the factory offered bonuses. But then they reneged on those promises, which resulted in mass worker protests and mayhem. That meant production at the Foxconn factory was shut down – causing major issues for Apple, not to mention negative publicity.

That’s why it’s better to spread out the work to a larger group of suppliers than limiting it to a small group. Just make sure you’re doing the necessary due diligence on any supplier you use by checking their international business credit report.

By doing this, you can make sure they’re a legitimate company and understand how strong or weak their finances are. If they don’t have a strong cash flow and have a high Days Beyond Terms (DBT) and high % of past due dollars owed, that could indicate they might struggle to get the materials needed to complete your work orders.

It could also indicate that they may be close to shutting down due to financial issues. That’s something you’ll want to know before you decide to give them big work orders. If they do shut down and you don’t have enough suppliers to fill that production gap, you could have a serious problem on your hands. 

Working with a supplier overseas lets you transfer capital risk during the most critical phase of business – scaling up. Risks you can avoid include the purchase of sophisticated and expensive equipment, labor costs (including workers’ compensation) and overhead costs. 

But it’s extremely important to create a set of guidelines for auditing and qualifying each supplier. The same goes for grading the supplier against these criteria in person before launching production. You don’t want to trade one risk for another and end up with quality issues.

Before working with any foreign supplier, it’s vital that you vet them. Some things you can do include:

• Run thorough credit checks and create credit risk profiles for every international supplier that you talk to. Look at their credit score, credit limit, DBT score, amount of past due payments, the amount and cost of legal filings as well as verifying their corporate structure. Doing your due diligence will build a picture of their financial strengths and confirm if you can trust them to issue large workers for your goods.
• Do a deep dive into their website. Look at the registered address for the company, the contact details, the language the website is written in and the terms and conditions. You’ll also want to look for customer references and/or testimonials to see if their quality of work can be vouched for.
• Check databases like WHOIS to discover domain name registration and protect yourself against fraud. 
• Cross reference supplier data through the US Securities and Exchange Commission (SEC) and government bodies in the supplier’s country of origin to see if there are any discrepancies.

We also recommend running online compliance checks to make sure suppliers aren’t listed on any global sanction lists or have been convicted of financial crimes like money laundering, bribery, corruption or slave labor.

When running these searches, you should check multiple databases, including:

• Law enforcement
• Current sanctions
• Previous sanctions
• Bankruptcies
• Corporate registries
• Adverse media
• Politically Exposed Persons (PEP)
• Office of Foreign Asset Control (OFAC)

Remember this simple rule of thumb - credit risk data should be your best friend when managing any kind of supplier risk with offshoring. Dig into their facts and figures before you decide to work with any international suppliers.