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Global Footprint - Relocation of production
According to a recent survey by the DIHK (The Association of German Chambers of Commerce and Industry), around 15 percent of companies are now considering relocating production facilities back to Europe again. The following article explains the drivers and success factors for this development, which locations offer competitive advantages and for which industries relocation of production is particularly worthwhile.
Uncertain supply chains make locations abroad less attractive
Supply chain problems pose major challenges for many companies, especially since the Corona pandemic. This is because the no-covid strategy, with temporary closures of entire production facilities in China and delays in clearance at ports and airports, is also causing production stops for German vehicle manufacturers. Due to lack of important components no new cars can roll off the production line. In a survey conducted by the DIHK in the fall of 2021, 54 percent of respondents said they were directly feeling the effects of supply chain problems.
What are other drivers for production relocation?
But there are a number of additional reasons for production relocations from Asia back to Europe:
- In China, for example, there are a number of regulations that place enormous restrictions on entrepreneurial activity. For many years, for example, foreign companies were only allowed to set up in China together with a Chinese partner. This is still common practice. In addition, production is supposed to serve the Chinese economy first. This leads to considerably less flexibility for companies, which cannot do what makes the most economic sense, but must first comply with regulations.
- In the past, companies accepted this inconvenience because there were other advantages, such as low labor and production costs. But in the meantime, these advantages have become relative and the lack of flexibility and production stops are now costing companies dearly.
- In addition, China in particular is often associated with the unauthorized copying of technology - which, in view of the high development costs for such technologies, damages the competitiveness of companies in the long term.
- The lack of flexibility as well as language barriers and bureaucratic hurdles also stand the digitalization in the way. This is because these new technological possibilities require change management and upheavals that are often not so easy to implement in faraway countries.
- In addition, compliance with environmental standards at distant locations is difficult. This is because local regulations often do not correspond to the standards desired in this country, including by customers. Ethical reasons can also be decisive for companies today, because customers are now much more sensitive to the effects of production on people and the environment.
- Sustainability and fair working conditions will be an increasingly important competitive advantage in the future. As well as more flexible supply chains and lower transportation costs.
- Still, labor costs abroad are an argument for offshoring in many industries. But the economic development of the countries where many production sites are currently located will lead to higher labor costs in the long term. If these continue to rise and are compounded by high transport costs and expensive production downtime, distant production sites are simply no longer profitable.
- In addition, consumer quality expectations are rising and quality controls are often more difficult at these locations. Quality problems therefore pose a serious problem for many companies, especially since long waiting times for products, low quality and non-transparent labor and environmental standards can develop into a competitive disadvantage in the long term.
For which industries is relocation worthwhile?
Above all, manufacturing industries that produce technical equipment for end consumers are increasingly benefiting from relocating back. This also includes companies from the automotive sector.
In this case, a relocation back is worthwhile for supplier companies as well as the manufacturing itself. This is because the sector is particularly affected by disrupted supply chains, since hundreds of thousands cars less could be produced during the pandemic due to missing components. This has enormous consequences for the domestic economy. Therefore it makes sense to relocate the production of important components to sites that can deliver reliably and flexibly.
The switch is also worthwhile for industries that benefit particularly from robotics and Industry 4.0. This is because state-of-the-art automated production facilities reduce long-term labor costs. Digitization can be used in many areas of the company and thus additionally contribute to better resource utilization. This reduces costs as well.
Which locations have a competitive advantage?
- Production sites that are closer to key customers have an enormous advantage because delivery can be made so quickly and flexibly.
- In many industries, customers now place value on quality. Easily accessible locations allow easier quality checks. Locations within the EU also have higher standards and prescribe certain controls. This automatically ensures higher-quality products. After all, inferior quality resulting from processes that are difficult to control at distant locations is no longer attractive to customers today, despite the lower price.
- Transparency is also important. Locations within Europe guarantee minimum standards in the field of occupational safety and are easily accessible for regular inspections.
- Locations that favor entrepreneurial flexibility also provide a competitive advantage. These can be promotions of digitalization or lower bureaucratic hurdles in the respective country.
- In order to stabilize supply chains in the long term and make them more profitable, locations with good connections are in demand - ideally by land so that, in the best case, transport by rail is also possible. Proximity to key customers is also a decisive advantage in terms of transport costs. This lowers transport costs and reduces emissions.
- After all, the issues of climate and sustainability are also increasingly becoming a competitive advantage. This is because both are easier to implement and communicate to customers in Europe.
- In most cases, the main reason for offshoring, especially to Asia, was the desire to reduce labor costs. Therefore, locations for labor-intensive production with low labor costs have a clear advantage. These can be countries in Eastern Europe, for example.
- The more automated and digital the respective production facility can operate, the more worthwhile it is to locate it in Central Europe or Germany. Because even if they are less personnel-intensive, skilled workers are also needed in automated production facilities - especially highly qualified and well-trained experts. That's why it makes sense to locate production facilities where, for example, universities that train IT specialists are located.
Success factors for the successful relocation of a production facility
If you are considering a production relocation for your company, you should analyse in advance all consequences in detail. This is because reshoring in particular requires sensible planning. Ideally, you should think through in advance any problems that may arise and find possible solutions. After all, in many cases a production relocation can be more like a start-up than a simple move. This mainly affects companies that have produced abroad for many years. They have to be prepared for drastic changes. This is because there is simply a lack of experience with production in Europe - this can affect regulations as well as bureaucracy.
The initial phase in particular sometimes requires changes to established processes, which can also lead to financial losses. These costs should therefore always be included in the cost calculation of a production relocation.
You should also consider higher personnel costs, changes in tax expenses and investments in the new location and take a close look at them.
In many industries, sharply increased personnel costs can be offset by the increased use of robotics, so that the relocation of production is still financially worthwhile. However, this may require high investment costs, which you should consider.
Taxes are also usually higher in Europe than at the foreign location. This information should also be included in the cost calculation.
Also the purchase of a property locally should not only be roughly estimated. Rather, concrete figures are also important here. Only when you carefully analyse all the costs that may be incurred, the relocation of production can become a worthwhile investment on balance.
Taxes, personnel and co. - you should also pay attention to these issues
Before you start with the actual relocation, all administrative questions should also be clarified. This includes planning the individual departments and recruiting suitable staff for the new location. It is also important to consider a new legal form and to compile all the documents necessary for registering the company in the new country.
Furthermore, before a concrete change is made, all administrative processes that are necessary for this should first be initiated and completed. This creates a basis for a transition that is as smooth as possible. Ideally, you should already create the first logistical structures before the relocation so that production can start quickly again and you can supply the first customers from the new location.
If you have been producing abroad for a long time, professional advice can be useful to help you get started in the new country. When actually relocating, it is also important to keep the downtime of the machines as low as possible. For this, too, you can call in experts to help you relocate sensitive technology smoothly.
For a successful start, you should definitely communicate the positive effects of the production relocation in your marketing. Because this will bring you tangible advantages. Customers benefit from shorter delivery times and more flexibility. In addition, the new production location guarantees more environmental protection and sustainability - through higher standards, more resource-friendly technology and shorter transport routes.
By relocating back, you also strengthen the labour market and the economy at the new location - this is a tangible advantage for many customers, which you should also address in advertising and marketing. However, this should be done carefully and only correspond to the actual circumstances. Because exaggerated promises can quickly have the opposite effect and scare off customers.
Production relocation - an investment in the future
A relocation is initially associated with effort and costs. But if companies simultaneously use the opportunity to drive digitisation processes, focus on resource conservation and choose locations that offer short transport routes to key customers, the relocation back to Europe is a long-term competitive advantage.
If you would like to know more about the possibilities of relocating production, please feel free to contact us.