INTERNATIONAL. In the wake of China’s recent devaluation of the yuan, companies need to be more strategic than ever in their manufacturing-sourcing decision-making, focusing on clear-headed, case-by-case analysis and tight project management.
That is according to a new study, including a survey of almost 250 senior-level executives in Western Europe and North America from manufacturing and distribution companies in 20 industries, released today by AlixPartners, the global business-advisory firm.
On the one hand, the AlixPartners study finds a continued appetite for “nearshoring” – i.e., moving production closer to, or to, its ultimate end-market. A total of 32% of executives in Western Europe and North America say their companies have recently nearshored manufacturing production or are in the process of doing so, with 49% of Western European businesses expected to nearshore some or all of their operations within the next three years.
For those identifying nearshoring as an opportunity, 85% of Western European firms say it is very or somewhat important, with 27% admitting that nearshoring decisions are more important today than they were a year ago – though 71% say such decisions are “about the same”.
Among Western European respondents, 38% cite Eastern Europe as the most attractive nearshoring destination, followed by Western Europe at 16% and Turkey at 15%. Emergent regions, such as North Africa and the Middle East, were also cited as attractive nearshoring destinations, but only by 7% and 6% of respondents, respectively. 17% of respondents cited regions outside of the aforementioned areas.
Meanwhile 55% of North American respondents confirm that the U.S. remains the most attractive nearshoring destination, followed by Mexico in second, at 31%, up a hair from last year’s survey (28%) but down dramatically from 49% in the AlixPartners survey of just three years ago.
Even with sustained Western European and North American interest in nearshoring, levels of enthusiasm are somewhat tempered by the expected challenges of nearshoring operations. Availability of skilled labour is cited as the biggest challenge for 48% of both European and North American firms.
Maintaining product and service quality and consistency is also a factor of concern for 41% of Western European companies, more so than for North American firms (33%). Other challenges near the top of the list are: working through local government regulations (32% overall, 37% of Western Europeans), labour costs (29% overall, 24% of Western Europeans) and personnel-management and labour-law issues (26% overall, 28% of Western Europeans).
Concerns about stability and security in both established nearshoring locations and emergent regions, such as North Africa and the Middle East, also remain a key consideration for businesses in their decision-making. 41% and 45% of global respondents said they expected the security situation in Middle East and North Africa, respectively, to worsen somewhat over time; however they recognise that assessments of these two regions are less certain than for other regions.
In contrast, 61% of business leaders in the survey say they expect an improvement in the security outlook in Eastern Europe, their top preferred nearshoring destination, which may in turn hasten Eastern Europe’s power to command higher labour rates, and possibly risk the region’s popularity.
Despite some of these concerns, there are numerous benefits to nearshoring cited by respondents. Lower freight costs, improved speed-to-market and customer service improvements are seen as the biggest benefits of nearshoring across both Western European and North American firms. AlixPartners study also suggests that the benefits of properly addressing and working through nearshoring issues can be significant.
According to the survey, the average estimated savings from nearshoring cited by all respondents was 8.5% globally, up from 6.3% in 2014. The majority of respondents globally forecast savings of 0 to 5%; however 63% of Western European firms estimate total landed-cost savings of 6 to 15%.
Andrew Bergbaum, Managing Director at AlixPartners, concludes: “Recent moves by China to devalue the yuan make already-complex manufacturing-sourcing decisions all the more complicated. These recent actions prove, as does our recent survey, that the world of manufacturing and supply chains is world of constant flux, and that in such a world there’s no substitute for deep, strategic, case-by-case analysis and tight project management.”
About the Study
The AlixPartners Strategic Manufacturing-Sourcing Outlook analysed manufacturing sourcing costs, patterns and expectations related to meeting local-market demand. The study included an online survey, conducted in June, of 248 senior-level executives from manufacturing and distribution businesses worldwide, across 20 broad industry groups.
Among the companies represented in the survey 92% had annual revenues of $100 million or more, with 69% having revenues of $1 billion or more and 32% having revenues of $10 billion or more. All of the respondents said they sourced production across multiple continents, averaging about 10 production locations per company to supply their domestic end-customers.
AlixPartners is a leading global business-advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business life cycle.
The firm thrives on its ability to make a difference in high-impact situations and to deliver sustainable, bottom-line results. Its expertise covers a wide range of businesses and industries, whether they are healthy, challenged or distressed.
Since 1981, AlixPartners has taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks, and investors to respond to crucial business issues.
For more information, visit www.alixpartners.com.
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