The relocation of production abroad

After production relocation abroad “boomed” at the beginning of the millennium, the trend has reversed several times since then. The crises in the financial sector and the corresponding crumbling of sales led to a new thinking in the years around 2009. After that, the topics of back-reshoring or near-reshoring dominated the scene for a time. However, the shift back to a German location or at least to a location in the nearer (Eastern) European country was not only a reflection of purely economic reasons.

Often enough, companies had to draw the consequences of inadequate risk management – as well as pay a considerable lesson for unsolvable problems on site. Pure process thinking is simply not enough to overcome the many challenges of intercultural understanding and the great differences in work ethics and management culture.

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The relocation of production abroad

The global trend toward relocating production is still alive

In the last 10 years, however, the direction of the number of production relocations has again been pointing steeply upward. In the metal and electrical industries in particular, the relocation of production to a site abroad has increased by around 80% since then, at least among large companies with several thousand employees. It is expected that the share of production abroad will soon be up to 40%. The pandemic, like political developments, however, is revealing new limits.

The temporary closure of major ports in China, the growing in-house demand for semiconductors, the Brexit – these are massive changes in processes in a very short time. They are causing global supply chains to stall for many companies and in some places causing production in Germany to collapse. The delays and the cost increases are also affecting suppliers in other Asian countries, who can no longer meet their obligations without restrictions.

What are the pros and cons of relocating production?

Accordingly, fears are being voiced loudly that the ongoing relocation of production by companies away from Germany should be stopped in order to reduce the dependency of industry. But even these reports are actually more like headlines for the business magazines. The relocation of production, with some “dents” in its development, remains an essential and important project for larger companies. This is shown by practically every serious survey conducted in the recent past. However, one aspect of it deserves far more attention than before.

The complexity of production relocations is much greater and more extensive than the easily calculated figures of many management consultants would suggest. The analysis of the respective starting position of the companies, the detailed consideration of all possible risks, the economic and cultural situation in the target country and literally thousands of other factors want to be thoroughly looked at.

Thorough analysis is the main ingredient of successful consulting

This is where the expertise of Faircom Industries comes into play. Unlike some consulting firms, the experts at Faircom and its international network are experienced practitioners for whom national and international production relocation means much more than playing with big numbers. Certainly, in an initial analysis, we can provide an assessment of the possibilities, risks and opportunities, on the basis of which the company management can decide whether more money should be spent at all on planning a production relocation.

Such a preliminary assessment by an independent party can weigh more heavily than many a favorable forecast by up-and-coming careerists in one’s own company. At Faircom Industries, we clearly prefer to close a project that seems too risky at this point than to put your production relocation and our reputation at risk in the long run. But if the green light can be given after the initial assessment, we’ll make sure that every single phase is worthwhile for you as the client

General conditions of the production relocation

Before signing a contract, we would prefer that the client has already intensively dealt with the market and product development for its offer when awarding the contract to us. Technological progress, possible changes in consumer behavior and also the behavior and strategies of competitors – all these factors should already have given the green light for the conditions of a production relocation.

The mere reduction in costs due to currently still lower wages in the target country is rarely sufficient as a justification and drive for such an undertaking today. But we assume that you have included even more weighty reasons in your planning.

Approach and procedure

It is true that the risk analysis and the cost-benefit analysis of a production relocation must interact and be considered together in the further course of decision-making. However, we have made the experience that they should initially be carried out separately, also in terms of personnel. Otherwise, the temptation to create dependencies in this or that direction and to network without sufficient data proves too great.

The very first question, however, is that of corporate strategy. Is it even possible to integrate a production relocation into the corporate strategy in such a way that all the decisive factors of both the one and the other package support each other? Only in a few companies is a decisive committee sufficient to identify and resolve possible contradictions in just one meeting.

Decisive questions in the company

How much time has been set aside to adequately prepare for the relocation of production? One of the essential prerequisites for the success of a production relocation is that production sales for existing orders do not come to a standstill, nor does the development of a new customer base at the destination. To achieve this, many factors must be considered simultaneously. The smooth start of the supply chain can be affected as much by unexpected bankruptcies as by difficulties in negotiations or with the authorities.

The phase of preparing all the conditions at the new location should not overlap with the stress of the actual relocation, especially with regard to the contracts to be concluded. This scheduling requires much more attention and should definitely be carried out in consultation with experts on site, so that bottlenecks at inopportune times do not increase the stress level excessively.

Questions about the condition of the immediate environment

What is the scope of the relocation? This includes not only the machines and other means of production. It is also about the required manpower and expertise, the associated supply chain and any transport processes. In many cases, these are subject to completely new conditions, the preliminary clarification of which is crucial. Although the relocation should result in as little downtime as possible, this needs to be precisely planned and prepared in consultation with customers and suppliers.

The local suppliers, their capabilities and the quality of their products should already be known at this stage of planning. This data should be included in the preparations by trial order and at least in letters of intent. What does future supply to local and existing customers look like? Export and import processes, all logistical issues and acceptance formalities must be taken into account, as must the integration of the new quality management system.

Issues requiring clarification in the target country

While many of the sub-steps of the analysis and feasibility study mentioned so far can be carried out in the country of origin, the analysis of the conditions for the new location can actually only be done there in a reasonably reliable manner. An intimate knowledge of the local conditions of the country, its legislation and its ways of dealing with such projects as well as of all regional customs is necessary. “Independent reporting” is also essential. Local agents on the ground are often guided by other interests in their assessment of the situation.

However, if planning security is to be achieved over a period of several years, a truly neutral assessment is needed of both wage and market developments, the actual possibilities for recruiting personnel, and the cultural characteristics of the region itself. And even rumors about the history and quality management of the selected supplier companies are much easier to find out locally and can provide important information.

Company foundation and construction projects

In China, Vietnam and corresponding countries, it has often proven advantageous to establish a subsidiary company, even when relocating production. The authorities are more open to a company founded in the country, both when it comes to leasing or purchasing a suitable site or production halls. This also applies to personnel recruitment. Well-trained specialists are usually already in their positions and are more likely to be recruited by a “real” local company. From many reports on production relocations, as well as from our experience, it can be seen that in many cases only a new building can reasonably reliably avoid later imponderables. This certainly depends as much on the size and scope of the planned production relocation as on many other factors such as the estimated time schedule.

But especially when it comes to modern machines and production lines, “flanging on” to an existing spatial and electrical infrastructure turns out to be a colossal hassle. And even if the devil is painted on the wall of relocation even at this early planning stage, this approach proves to be cost-reducing in the long run. It may be that some readers are surprised that we have dealt with this multitude of factors under the heading “general conditions”. But it is precisely these conditions that determine the weal and woe of the entire relocation of production. We see their clarification as a prerequisite so that the actual and already cost-intensive project planning can begin. After that, there is still time for fine-sounding buzzwords such as knowledge transfer, production qualification and sampling according to various certification specifications.