“The United States has long been a net exporter of industrial manufacturing,” Morton says. “In the ’90’s, the hot topic was NAFTA (the North American Free Trade Agreement) and the movement of production to Mexico.

“As we fast forward, the region that has been the benefactor of production export — from all industrialized nations — has been Asia, specifically China. India has also done very well as an importer of jobs, but primarily in service sectors.

“Companies that have placed factories in Mexico are currently reassessing their total cost structures and net movement appears to be outbound,” Morton says. “The newest area of interest is Eastern Europe. Quite a few companies are assessing costs and capabilities within that region and moving business or parts of their business there.

“The key issues for companies interested in moving production capacity,” Morton says, “all centre on the management of the global supply chain and the co-ordination of material/components, scheduling, manufacturing and then shipping of products globally. Companies have gone to a total-cost model and have found that when all costs have been taken into account — material, labor, shipping and cost of storage — production in certain countries, for export back to domestic markets, does not make as much economic sense as once expected. China has recently changed their VAT tax structure, which has caused even more analysis on true total cost.

“These companies are now focusing — and sizing — their offshore production for that offshore marketplace and close surrounding countries,” he says. “They’re decentralizing production — and limiting the associated risk — rather than packing up lock-stock-and barrel for what may or may not be a greener pasture.

“One example of this new region-specific approach to offshoring is that growth-oriented Indian companies are developing and executing strategies to place operations in China and Eastern Europe. They’re thinking globally and acting regionally.

“The biggest change within senior management search for offshoring organizations is that they are moving away from placing expatriates into overseas assignments and moving very quickly to hiring country nationals for their key senior roles in offshore operations,” Morton says. “This trend has been driven both by cost as well as cultural management issues.”

Put simply, Morton says, high-cost expatriates statistically come with a higher failure rate than lower-cost local hires. The local manager likely speaks both English and the language of workers on the production floor and can learn the corporate culture of his or her new employer far more quickly and effectively than an expat can learn to fit into the Czech Republic, Romania or China.

Besides, he notes, leading industrialized nations aren’t really in a strong position to export large numbers of senior people to overseas positions where their chances of success may be doubtful, at best.

“The senior leadership pool is ageing in the Unites States and Western Europe and many executives are close to retirement. After the lean years of the ’80’s and ’90’s, when middle management was drastically reduced, the current depth of senior ranks is very thin.

“Companies are relying on their search consultants as never before to patch holes in their domestic talent pools, as well as to provide very solid links into any number of offshore economies. At IIC Partners, we’ve seen this as a doubling of the pace of our transborder business, frequently when clients in leading industrialized nations ask us to find local managerial talent in countries where they’re setting up new production facilities.”

Morton’s IIC Partners colleagues, owners of executive search firms around the world, confirm his picture of richer nations moving production capacity to emerging nations, while individual companies constantly refine offshoring strategies.

Switzerland, long the recipient of offshore banking, is now a significant exporter of industrial production. More than half of 112 leading Swiss companies responding to a recent survey indicated they already have operations in Easter Europe, Latin America and Asia. 

“We show the same pattern as all or most industrialized countries,” says Urs Wüthrich, the Zurich-based former chairman of IIC Partners. “A lot of manufacturing has been moving eastward. A couple of years ago, this was to Eastern Europe and, over the last two or three years, mainly to China.  

“This survey showed that 70 per cent of Swiss offshore ventures were successful, Wüthrich says. “But success was rarely dependent on reducing wage rates alone. The authors of the survey said, ‘Optimization must encompass the whole value chain and not just wage costs.’ ”

In Vienna, IIC Partners member Gottfried Dissauer says Austria is now an exporter of manufacturing capacity. A European Manufacturing Survey for May 2006 showed that 51 per cent of responding Austrian manufacturing companies have moved some part of their production to other countries, particularly in Eastern Europe.

“Manufacturing in Austria is decreasing because of relatively high loan costs,” Dissauer says. “Multinational companies have been relocating their production facilities from Austria to Eastern European countries or to the Far East. Some still hold their competency centers in Austria, such as Siemens and Lafarge, due to high quality standards for technical education in our country.

“Schindler has recently talked with us and our IIC Partners colleagues in Bratislava about hiring needs around the expansion of their production facilities there,” Dissauer says. “Similar to Siemens and Lafarge, they’re keeping their competency centre in Vienna. Also, as more production moves into Eastern Europe, Vienna is emerging as a hub for this activity, with investments in roads and rail transport and increased flight connections both east and west.”  

Morton notes, however, that the success of receiving countries is tending to have a leveling affect on their economies and particularly their wage rates, rapidly reducing their comparative advantage.

Spain, for instance, is transitioning from importing to exporting production and jobs, according to IIC Partners member Luis de Ugarte.

“I would say the most relevant change in the manufacturing sector in Spain over the last 10 years is the increase of competitiveness,” Ugarte says. “The profitability levels of Spain’s manufacturing enterprises have reached, if not surpassed, the EU average. There has been economic growth, due to a more qualified labour force, availability of capital and gradual specialization in mid- to high-technology products,” he says.

“As Spain picks up the pace of industrialized countries, its focus towards delocalization (offshoring) follows the first-world trend. We are beginning to export production capacity eastward.” 

A recent study of the Spanish economy, by professors Luis Torrens and Jordi Gual, shows the typical pattern of a maturing economy, with rising wages and peaking productivity. The study concludes that Spanish sectors most likely to pursue offshoring strategies include transportation equipment, followed by electronic equipment, plastics and rubber products. 

Receivers of industrial capacity have two things in common — relatively cheap labour and large, underdeveloped markets or proximity to such markets.

In Romania, local IIC Partners member Radu Manolescu, says two additional factors have helped to make his nation a destination for manufacturers on the move.

“We have good technical schools and, thus, plenty of good engineers,” Manolescu says. “And the government offers incentives for industries to locate in areas of high unemployment.”

But he says incentives have been a double-edged sword.

“FDIs (foreign direct investments) are seen as a benefit for the areas they go into — they have a reasonably good environmental record and they often build additional infrastructure or upgrade what is there. But building infrastructure is a cost for businesses and this lack of infrastructure speaks to another issue, which is the expatriate question,” Manolescu says.

“The ex-pat issue is indeed maybe one of the biggest issues,” he says. “Companies sometimes send lots of people and if the area they are located in is poor, you can imagine — they come and go every Monday and Friday. It’s certainly an important benefit to airlines. But it’s a cost for the company.

“The alternative is local talent but the very good Romanians are ‘rara avis.’ They are like diamonds and thus very expensive. Sometimes companies prefer to hire expats from France, Italy and Austria, because in some cases it’s cheaper than some local talents.

“But the real issue behind all this is choosing the right location — or the wrong one,” Manolescu says. “If a company is swayed too much by location incentives, the discrepancy in living standards may make it very difficult even to attract Romanians, and of course the situation is worse for expats. Companies frequently find that after three to six months a manager will leave them, rather than stay in a remote location.” 

Despite these difficulties, auto production in Romania tripled between 2003 and 2006 to reach 500,000 units and total FDI rose from $3.9 billion to $10 billion per year. During the same period gross domestic product nearly doubled to $121.9 billion US.

The current darling of industrial offshoring is, of course, China, with a population of 1.3 billion, an annual gross domestic product of $7.043 trillion US and a break-neck GDP growth rate of 11.4 per cent in 2007.

With those figures driving it, China attracted foreign direct investment of some $75 billion in 2007 alone. And, for the most part, business has been good for newcomers. The U.S.-China Business Council and the European Union Chamber of Commerce say that more than 80 per cent of responding members reported their China operations were profitable in 2006.

“Surveys show that two-thirds of foreign-invested enterprises in China are profitable,” says Paul Lien, Beijing-based partner in PCI Executive Search and a core-team member of the IIC Partners global Industrial Practice Group. “Government statistics indicate that from 1990 to 2004, foreign investors in China remitted a total of  $250 billion (US) in profits.

“China now represents not only a fast-growing source of revenue for many multinational companies, but also a rising source of profit,” Lien says. “China has become the world's biggest market for cellphones, with more than 500 million wireless subscriber and the second-biggest market, after the U.S., for personal computers and cars. It also accounts for a huge share of the global demand for commodities such as iron ore.”

He adds, however, that there is growing awareness of the social cost of such explosive growth and signs that businesses will be expected to shoulder their share of the burden. A revised Company Law of the People’s Republic of China, in effect since January 1, 2006, says that in addition to pursuing profits, companies and their shareholders must also bear social responsibilities.

“The growth in manufacturing has led to serious environmental degradation, worker safety problems and periodic bottlenecks in China’s supply chain of strategic materials, especially oil and industrial metals,” Lien says.

“Issues include poverty, health care, education and even the provision of clean water. Leaders doing business in Asia must now balance the short-term expectations of their global investors against addressing these broader long-term challenges. The issue of corporate social responsibility is now gaining widespread recognition and becoming a necessity for most companies.”

At the same time, a white-hot economy presents predictable business challenges.

“The most common scenario is when foreign investment rushes into the country for any of the emerging market segments,” Lien says. “Scarce local talents become highly spoiled by so many job opportunities coming all at once. This situation increases the demand for expatriates and returnees from abroad (local Chinese with foreign education and work experience), as alternatives to the domestic labour market, especially among companies in the early stages of development, after initial entry into China. Expatriates do not have the language skills that are essential for a significant portion of the management team, while returnees are highly sought after.”

If China has been the latest darling of the offshoring phenomenon, surely India has become the bogeyman. As a legacy of its British colonial past, India has inherited an English language school system — and with it the ability to offer not only cheap manufacturing labour but also higher-value services.

In post-industrial Europe and North America, it has been a shock to see white-collar jobs migrating from Boston to Bangalore to be done for lower wage rates and all-in cost savings variously estimated at 30 to 40 per cent. Nor has this movement of jobs been confined to customer-service call centres. What began with ‘capitve’ call centres for American Express and British Airways nearly two decades ago has transformed first into business process outsourcing (BPO) to third-party Indian companies and most recently into (information technology) IT-enabled outsourcing operations such as payroll processing, data processing and data mining by third-party Indian companies or by joint-ventures with Indian companies.

Software engineering has become a huge sector in India, while several companies have moved certain legal, banking and accounting activities there. But IT skill also raises the level and value of manufacturing that can be done in India.

“The introduction of high technologies into manufacturing makes it necessary to source from a country that can provide high-tech skills and this is where India offers comparative advantage,” says Keyur Thakore, a partner of KTA Associates in Mumbai and a member of IIC Partners. “India’s expertise in skill-intensive manufacturing sectors, such as auto components, pharmaceuticals and textiles gives it an edge over other low-wage producers.”

With a population of more than 1.1 billion people, gross domestic product of $2.9 trillion (US) in 2007 and an estimated economic growth rate of 8.5 per cent for the past two years, India attracted direct foreign investment of $67 billion in 2007. And the World Factbook of the US Central Intelligence Agency reports that in the past decade India has reduced the number of people living in poverty by 10 percentage points.

Thakore says that by some calculations, India’s manufacturing exports alone have the potential to grow by as much as 17 per cent per year and to reach $300 billion by 2015.

“On the downside, there will be resource constraint, stress on logistics and cost escalations are bound to happen. Small operators and family-run businesses will be marginalized and low-tech operators will be forced out of business,” he says. “We’ll have to deal with pollution issues and a widening income gap between rural and urban populations.

“But over all, the proportion of the population living in poverty will continue to decline, there will be a higher general standard of living, more and better schools, better healthcare, sanitation and nutrition. As we move into what is called a globalized world, India will flourish.”

So far, Morton notes, relatively modest eastward movements of production capacity and capital investment have had profound and generally positive affects on living standards in receiving nations, though the environmental record has been mixed, at best.

“Whether you believe increased prosperity in China, India and Eastern Europe will make the West richer or poorer is the big political question,” Morton says. “Historically, I think it’s fairly clear that a rising economic tide lifts all boats to some degree.

“The pressing business question is whether the world has the executive talent to manage a world economy that will be much larger in ten years,” he says. “In light of the rapidly shrinking executive talent pool across all leading industrialized nations, I think we need to start building solutions now. As just one example, an industrial producer with offshoring plans might consider searching out leadership talent in the target country now, hiring those people and bringing them to the home office for training and mentoring before sending them back to lead new operations.”