Relocation, another opportunity for SMEs?

IE Focus | By Gamaliel Martinez, Professor at IE Business School

The tide is turning. After twenty years of delocation fever among Spanish firms, some of them are now bringing their manufacturing back to Spain. It is a particularly good option for SMEs. After twenty years of delocation fever it would appear that the trend is now reversing, as some companies start to bring their production plants back home, while many more are considering it.

Labour costs have risen in China. The increase in the price of a barrel of oil has impacted the cost of logistics, and some of the hidden costs, such as expatriation, were not calculated properly. Distance has constrained flexibility. Some companies have lost control over their know-how. Quality is uneven. Although manufacturing in Asia (or other places) seemed like such an interesting option only a few years ago, this often turned out not to be the case. According to Fedecon 15% of delocated textil companies have returned to Spain or to countries nearby, and we already have examples in the toy sector, such as Juguettos and Injusa. These are two sectors in which it was supposed that production costs were everything.

Labor costs are going down in Spain resulting in an improvement in levels of competitiveness in the international market. Bringing production  back to Spain is now a real option which would improve quality, response time, and enable greater control over processes, all this at a very similar cost. Coming back seems to be a simple choice, given that in the majority of cases, and particularly in the case of SMEs, the companies in question did not make enormous investments in production plants, preferring to subcontract production, to the detriment of local plants. Nevertheless it is entirely possible that those businesses that decided to delocate at the time have lost all or part of their know-how and may even have closed down their factories, making it very expensive for them to return to Spain.