Monday, September 08, 2008

Offshoring becoming more expensive

An interesting analysis in McKinsey quarterly about the increasing costs of off-shore manufacturing - Time to rethink offshoring. As is so often the case this piece is US centric, and it is about manufacturing not services, still, some of the data and analysis are worth looking at:

• Wage rises in China mean manufacturing workers now earn $4,140 a year up from $1,704 in 2003
• Weaker dollar also erodes the advantage (and since the pound is low at the moment the same is true in the UK)
• Higher oil prices mean getting raw materials to China, and finished products from there is also more expensive

They also hint at the delays in supply when you ship from China - because you have to order so far in advance and get stuff shipped.

In short, manufacturing high-tech products in China isn’t clearly cheaper any more.

And to proove the point, yesterday’s FT reports: “The latest cheap manufacturing site for European companies is not in Asia or eastern Europe but the US”. (Its a little more complicated than that but have a read for yourself.)

So what of the software industry? Lets apply this thinking, and extend it to India and elsewhere.

• Wages have been rising here too, I don’t know how much by but is manufacturing staff have more than doubled their pay IT workers can’t be far behind
• Weaker dollar has erodes the advantage (ditto the pound sterling)
• Higher oil prices mean flying staff between your offshore development centre and your actual location is more expensive

And of course you have the supply chain delays too. McKinsey doesn’t go into this angle greatly but there is a good analysis in Womack and Jones Lean Solutions: did you know stores have to order their Nike’s a year in advance? Bottom line: you can have lean manufacturing on the other side of the world but you face challenges if you want a lean company spread over that distance.

Regular readers will know I’m all in favour of developing software in India, Malaysia or wherever. However I think the benefits are exaggerated. Or rather, the downsides aren’t appreciated. Somewhere there is a balance.

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