Making the move to low cost countries
By Till Vestring, Ted Rouse, Uwe Reinert and Suvir Varma
Till Vestring (email@example.com), based in Singapore, directs Bain & Company’s Asia-Pacific Industrial Practice. Ted Rouse (firstname.lastname@example.org), based in Chicago, directs Bain’s Global Industrial practice. Uwe Reinert(email@example.com), based in Dusseldorf, directs the firm’s European Industrial practice. Bain partner Suvir Varma (firstname.lastname@example.org) is based in Singapore.
Copyright © 2005 Bain & Company Inc., 131 Dartmouth Street, Boston, Massachusetts 02116 United States of America. All rights reserved. Editor: Katie Smith Milway Managing editor: Susan Donovan Layout: Global design
The move tolow cost countries
Lessons from leaders in cost migration
Migrating costs to low-cost countries (LCCs) has moved from being an “interesting idea” to an imperative for most industrial companies, but it’s a “must do” that too often is managed with ambivalence. On the one hand, companies see it as a critical piece of their cost strategy; on the other, too many firms seem to attempt it onlyhalf-heartedly. They aren’t sure which costs to shift elsewhere, where to shift them or how to go about the organizational changes that such “cost migration” implies. The concept seems straightforward: Companies need to decide which suppliers and work sites to migrate from high-cost countries, such as Germany or the United States, to low-cost countries like Hungary, Mexico or Malaysia. But identifying theright opportunities in your supply chain—which encompasses everything from materials supply to research to engineering to manufacturing labor—can be tricky, given the need to balance lowering cost with accelerating time to market and mitigating risk. Indeed, a recent Bain & Company survey of 138 manufacturing executives, in sectors ranging from automotive and chemicals to consumer products andtechnology, found that more than 80% of respondents believed that moving costs to low-cost countries was a high priority. However, less than two-thirds had made it a significant company initiative, and only 15% saw the benefits of offshoring value-added activities like R&D. Such incomplete efforts can shortchange the benefits that firms seek by moving costs abroad. To attack the problem from allsides, companies must get beyond “whether” to act and face the fact that cost migration is a competitive necessity. Forrester Research predicts that up to 3.4 million service jobs will move offshore by 2015. German executives say 10,000 jobs
are moving out of their country weekly. Our research finds that such moves are netting manufacturers in Europe and North America cost savings of 20% to 60%.When your competitors are realizing that kind of gain, whether to act is less a choice and more a matter of economic survival. The key to success lies in answering three other critical questions: what, where and how to migrate. In our study, we found that on such decisions there was a clear divide between respondents who rated their companies as cost leaders and those who acknowledged theircompanies to be cost laggards. Sixty-eight percent of leaders say they already fulfill 20% or more of their global manufacturing needs in low-cost countries, versus only 13% of laggards, for instance. The differences between leaders and laggards are even greater when it comes to decisions about how to shift costs. But by taking a close look at the practices of the leaders, such as Emerson Electric,Honeywell International and GE, other companies can plot their course and close that gap.
Getting beyond “whether”
Despite the evidence pointing to the inevitability of shifting costs to low-cost countries, a surprising number of companies still chew on the question of whether to do it. In our study, 22% of laggards still struggled with this elementary decision. This is no simple issue for...