Leading the way: Next-shoring

In early 2012, Global Trailer published an article on US company AXN, which had decided to follow a not-so-common business model called offshore insourcing. Although offshore insourcing was not a new term at the time – it had been around in the IT industry for about a decade – it was not until the advent of AXN that a company in the trailing equipment industry would pick it up as an alternative to outsourcing. 

Offshore insourcing is the practice of setting up a captive process centre overseas, taking advantage of the low-cost environment while maintaining control of the back-office work and business processes. More to the point, it is shorthand for trying to arbitrage labour cost by using lower-wage workers in a developing nation, sometimes referred to as do-it-yourself offshoring. 

Back then, globalised manufacturing was still in its infancy and the transport equipment industry was giving many an organisational concept a whirl – be it classic ‘outsourcing’ or offshore insourcing, a strategy first deployed by the East India company in the 19th century and revived by AXN.

Fast-forward to today, and McKinsey has published an article on a phenomenon called next shoring, effectively taking the old offshoring concept to the next level. The thought process behind it is as fascinating as plausible. Katy George, a director in McKinsey’s New Jersey office, Sree Ramaswamy, a fellow of the McKinsey Global Institute, and Lou Rassey, a principal in the company’s Chicago office, argue that the offshoring movement and adaptations such as offshore insourcing have helped ‘upgrade’ the developing world – leading to a decisive change in globalisation.

By disseminating know-how, first-world businesses opting for offshore manufacturing effectively helped educate emerging-market suppliers and the local workforce. In combination with a wave of liberalisation in countries such as China and India, a growing ability to transfer proven management processes to new locales, and increasingly favourable transportation and communications economics, the movement shaped the post-GFC reality we are currently trying to settle into – a reality where the dynamics of supply and demand are changing.

“As wages and purchasing power rise in emerging markets, their relative importance as centres of demand, not just supply, is growing,” George, Ramaswamy and Rassey conclude. They say rather than focusing on offshoring or even ‘reshoring’ – a term used to describe the return of manufacturing to developed markets as wages rise in emerging ones – today’s manufacturing strategies need to concentrate on what’s coming next.

According to the McKinsey team, a next-shoring perspective emphasises proximity to demand and proximity to innovation. They describe a new world where evolving demand from new markets places a premium on the ability to adapt products to different regions, and where emerging technologies that could disrupt costs and processes are making new supply ecosystems a differentiator.

“Next-shoring isn’t about the shift of manufacturing from one place to another but about adapting to, and preparing for, the changing nature of manufacturing everywhere,” they say.

Due to a lack of standardisation and a complicated regulatory framework, the trailing equipment industry could take a leading role in the ‘new world’ McKinsey is proclaiming – especially the German trailer building community around Schmitz Cargobull, Krone and Kögel.

According to McKinsey, being close to demand is particularly important at a time when consumption in emerging markets is growing rapidly, “boosting with it the diversity of the regional preferences that manufacturers must contend with.”

Both Kögel and Schmitz Cargobull have set up shop in China, for instance – not necessarily to save on labour cost, but to be close to a new solvent client base in Asia. Krone, meanwhile, has built a plant in Turkey to service the booming Middle East – intending to produce and sell product where demand is occurring – and Chinese contestant, CIMC, is attempting to do the same in Germany.

Naturally, the degree of global interlacing can vary from brand to brand. For example, CIMC Silvergreen is still closely linked to the group’s global manufacturing hub in Shenzhen, while Schmitz Cargobull’s Shanghai office may be more interested in the local periphery – including booming economies like Thailand and Indonesia.

That varying degree of local commitment is a natural side effect, according to McKinsey, as creating an efficient global manufacturing footprint that is able to embrace a wide range of local tastes is a delicate balancing act. After all, economies of scale still matter in many an industry – especially in vehicle manufacturing.

George, Ramaswamy and Rassey refer to German automotive giant Volkswagen, which has coped by moving from vehicle platforms to more modular architectures that provide greater flexibility for manufacturing several product variants or derivatives – a concept low loader specialist Faymonville recently implemented in Belgium. According to Faymonville, the move to a more modular production system has been a strategic decision that will bring a “nearly revolutionary expansion” to the business by reducing manufacturing complexity without compromising on customisability.

Naturally, the next shoring movement has only just begun, as many emerging economies are only just reaching for the next stage of sophistication. According to the McKinsey research team, however, it is already foreseeable that it will place a premium on manufacturing talent and create a need for new management muscle.

“As it gets harder to hide behind labour-cost arbitrage, regional manufacturing executives and midlevel managers will need to become both better at running a tight operational ship and more versatile,” they announce.

In the new world they see coming, the question won’t be whether to produce in one market for another, but how to tailor product strategies for each and how to match local needs with the latest veins of manufacturing know-how and digital expertise.

Part of the transport equipment industry, driven by the need to adjust to ever-changing local legislation and a lacklustre recovery that is forcing it to be more inquisitive, has already made the first step – grasping the productivity potential of the old world while fostering ground-level knowledge within the target market to create joint competencies and reduce risk exposure.

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