From time to time, a journalist writes a really insightful article about recent development, and we all take pause and reflect.
Charles Fishman did just this. If you haven’t read The Insourcing Boom on The Atlantic, it is worth 10-15 min of your time.
This excellent article analyzes the nascent trend called “reshoring” (bringing production back from China to the country where the goods are sold):
For years, too many American companies have treated the actual manufacturing of their products as incidental—a generic, interchangeable, relatively low-value part of their business. If you spec’d the item closely enough—if you created a good design, and your drawings had precision; if you hired a cheap factory and inspected for quality—who cared what language the factory workers spoke?
This sounded good in theory. In practice, it was like writing a cookbook without ever cooking.
Many companies, that used to manufacture in their own country or within a 3 hour flight radius, suddenly had to deal with production taking place in China. They decoupled design & engineering from manufacturing.
“What we had wrong was the idea that anybody can screw together a dishwasher,” says Lenzi. “We thought, ‘We’ll do the engineering, we’ll do the marketing, and the manufacturing becomes a black box.’ But there is an inherent understanding that moves out when you move the manufacturing out. And you never get it back.”
It happens slowly. When you first send the toaster or the water heater to an overseas factory, you know how it’s made. You were just making it—yesterday, last month, last quarter. But as products change, as technologies evolve, as years pass, as you change factories to chase lower labor costs, the gap between the people imagining the products and the people making them becomes as wide as the Pacific.
What is only now dawning on the smart American companies, says Lenzi, is that when you outsource the making of the products, “your whole business goes with the outsourcing.” Which raises a troubling but also thrilling prospect: the offshoring rush of the past decade or more—one of the signature economic events of our times—may have been a mistake.
There are many hidden costs in this decoupled model: “the engineers in the U.S. and factory managers in China who can’t talk to each other; the management hours and money flying to Asia to find out why the quality they wanted wasn’t being delivered.”
Actually, the mistake may have been keep the design and engineering teams in the US, while subcontracting production in China.
I am certain there is a future for trading companies that are close to production and that have the capability to propose new designs that are in line with their target market’s desires.
This opinion of mine was confirmed by a seminar held last week by the EU Chamber of Commerce in China. Speakers representing successful companies explained their business model:
- PCH – 5,000 employees, 90% of whom are in China (including design and development).
- Canal Toys – about 30 employees, with engineers working on design and the following production during peak season.
Here are the three takeaways I noted:
- All two have design and engineering done in China… Close to production.
- All two are very hands-on when it comes to managing production, testing product safety, etc.
- And all two are also selling a little of their production to China and to other Asian countries.
I guess they are good models for many entrepreneurs who want to work in the sourcing industry.
PS: a good LinkedIn discussion started on the basis of that Atlantic article. Read more here.