Posted: July 30, 2011 |  AUTHOR: KEN FOX | CONTACT ME

 

Years ago most major North American multinational companies were outsourcing manufacturing. Most outsourcing went to Asia, usually China, while some went to Mexico to benefit from NAFTA.  Outsourcing for services (e.g., IT, call centers, etc) often went to India where English was more common and wages were also low. The attraction was to significantly lower manufacturing or operating costs. For manufacturing overseas, U.S. companies often had initial quality issues that became costly, with reworks and returns necessary. This often necessitated some companies to hire a local representative or employee to supervise quality aspects of materials used, work performed, assembly and the finishing of products before being shipped back to the U.S.  Higher wages in China along with increased marine shipping costs have impacted total costs beyond expectations.  Therefore, North American companies are rethinking their offshore strategies.

China is generating a larger middle class. Salaries in China have increased 69% between 2005 and 2010. According to the May 14, 2011 issue of The Economist magazine: “a growing number of multinationals, especially from rich countries, are starting to see the benefits of keeping more of their operations close to home.” Various consultants I interviewed confirm trends of U.S. companies keeping their outsourcing options open. This includes returning production to the U.S., keeping a plant operating here longer than anticipated, or opening a manufacturing plant outside the U.S. but closer to home. The Economist cites the following as examples of U.S. companies moving production back home:
-Caterpillar-is shifting some hydraulic excavator production from abroad to Texas
-Sauder, a furniture manufacturer, is moving production from Southeast Asia back home to North Carolina
-NCR has returned to making cash machines (ATMs) in Columbus, Georgia (USA)
-Wham-O has returned half of its production of Frisbees and Hula Hoops from China and Mexico to the U.S.

Part of this trend is called Nearshoring, which is the practice of outsourcing work or services to companies or staffs in neighboring countries rather than in one’s home country. Better geographic proximity means travel and communication are easier and less expensive. There may also be commonalties between cultures, and people are more likely to speak the same language. I’m especially noticing this Nearshoring trend for two countries closer to the U.S., Panama and Costa Rica.

Panama, as most of you know, is expanding the Panama Canal. This is so it can accept passage of post Panamax ships, which currently cannot fit in the canal. The widened canal is expected to open in 2014, which will help this country economically. Panama, to date, has attracted more outsourcing in “services” than manufacturing. Dell has had a data center in Panama City since 2003. It recently increased this facility by 500 employees, and transitioned it into a call center for countries from Canada to Argentina. Paul Bell, the President for the Public and Large Enterprise business at Dell says: “This project represents a milestone for our operation in Panama and shows Dell’s commitment to being closer to its customers.” The pending implementation of the U.S.-Panama Free Trade Agreement, expected in 2011, should also help increase Nearshoring and trade with Panama.

Foreign Direct Investment (FSI) in Costa Rica was $1.4 million and further supports the Nearshoring trend. Costa Rica, with a relatively stable, democratic government, high literacy rate of 96% and unemployment rate of 6.7% (est. 2010) has attracted a number of U.S. companies. Besides Proctor & Gamble, Intel and AT&T, Amazon opened a Costa Rica “contact center” in 2008. IBM announced June 30, 2011 it will spend $300 million over the next ten years to open a new information technology center that is expected to create 1,000 jobs.

St. Jude Medical (based in St. Paul, Minnesota) opened a heart valve manufacturing plant in September 2010. The plant will eventually employ 2,000 people over the next five years. They also open a training center in Costa Rica, as part of a global plan to open other training centers in China (Beijing), the U.S. and Japan. The training centers will provide education and training to physicians from across the continent on St. Jude’s medical equipment in the areas of cardiology, cardiac surgery and arrhythmia management. Other U.S. medical companies starting manufacturing facilities in Costa Rica include:

Boston Scientific closed its manufacturing plants in Miami, Florida and relocated production to Costa Rica. It now has two plants in Costa Rica, the first one opening in 2004, and the second in 2009, with a total of 1,700 employees
Atek Medical (based in Grand Rapids, Michigan) is a medical device contract manufacturer. It opened a 33,000 square foot plant in 2009 to manufacture disposable Class II devices used in cardiovascular applications.
GW Plastics (based in Bethel, Vermont) is a medical contract manufacturer that is building a new blow molding facility with a Class 8 clean room assembly area, in a Free Trade Zone just outside the San Jose capitol. Their CEO, Brenan Riehl says: “This location will allow us to more effectively support our customers in Latin America.”
BeamOne (based in San Diego, CA) a subsidiary of Synergy Health, PLC is an electron beam contract sterilization service provider. It opened its first plant in February 2009 and is planning an expansion to be completed in 2012.

 

The Central America Free Trade Agreement provides tax advantages for U.S. manufacturing in Latin America, thus creating duty free trade zones.
Another factor driving companies to keep production closer to home is reducing inventory costs. Maintaining shipments from Southeast Asia for 100 days or more is costly. I think the Nearshoring trend will continue even as some manufacturers are shifting production to lower cost locations (vis a vis China) such as Viet Nam.

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©2017, The Global Galaxy blog is produced by The Soundings Group, LLC, Charleston, South Carolina, USA, www.thesoundingsgroup.com. The company is an international business consulting firm, specializing in new market assessments, market entry strategies and marketing guidance. The scope of Global Galaxy is to cover timely international trends, issues and business building ideas. Its purpose is to educate, inform and stimulate thinking for business opportunity analyses.

 

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