To offshore or not to offshore? The future of the Swiss manufacturing industry

Manufacturing is increasingly being offshored

• Offshoring is taking off
• The reasons are attractive new sales markets and also the continued cost pressure from low-cost countries
• Target regions are mainly Eastern Europe and the Far East
• Offshoring success depends on five factors

"To offshore or not to offshore?" Almost all Swiss manufacturers are asking themselves this question nowadays. Roland Berger Strategy Consultants, the University of St. Gallen (HSG) and the Swiss Engineering Association presented the study "To offshore or not to offshore? The future of the Swiss manufacturing industry". The publication is based on a survey among 112 leading medium-sized and large companies, with the following results:

• Swiss manufacturers already have an international focus: just 37% of the companies surveyed manufactured goods in Switzerland only. Well over half manufacture in Eastern European, Latin American and Asian countries
• Offshoring is continuing to pick up speed: the reasons for this are market consolidation, attractive growth markets in Eastern Europe and Asia, cost pressure and the decreasing appeal of Switzerland as a production location
• Offshoring activities are being extended: up to now, the focus has been on manufacturing and assembly, but now more and more upstream and downstream areas (engineering, production, service) are being offshored. R&D and administration are affected to a lesser extent
• The offshoring pioneers are new industries such as electronics and microelectronics. Traditional industries such as plant construction and specialty engineering, are following suit
• Large companies are now being followed by SMEs: the proportion of medium-sized firms with international operations will rise from 60% to 75%, and for small firms from 40% to over 60%.
• Once offshored, always offshored: over 70% of offshoring projects proved successful – and were not reversed

The success of offshoring manufacturing depends mainly on five factors:

• A clear strategy is essential for successful offshoring
• Optimization must encompass the whole value chain and not just wage costs
• Every offshoring project must be tailored to the specific company – there are no one-size-fits-all solutions
• Possible scenarios must be evaluated qualitatively and quantitatively and in terms of opportunities and threats
• The implementation process must be managed efficiently

Quotes:

Joost Geginat:
"Many of our projects showed that merely reducing wage costs often did not justify offshoring. What is more important is firstly to be close to the markets where the goods are sold and secondly to reduce overall costs of value creation."

"The most common reason offshoring projects fail is the lack of a clear strategy."

Elgar Fleisch:
"The offshoring trend is continuing, and is affecting even small and medium-sized companies. In addition, not only manufacturing and assembly are offshored, but also R&D and service activities. This is due not only to costs, as is often claimed, but rather to the fact that many firms want to be present in booming markets such as those in Asia. Companies remain in Switzerland and diversify abroad. We all benefit from this."