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.Today in Spain there is surplus capacity in nearly all industrial sectors. Many SMEs have used exports to fill the gap, at considerable cost. Exportation is expensive: it requires investment, restructuring, contracts, and a change of internal culture that not all companies are able to assume. This new wave of relations should produce a new supply and demand market in which local companies can offer their surplus capacity to companies that took their production abroad but are now thinking of returning. It is foreseeable that production costs will be higher, but both logistics costs and uncertainty would be significantly reduced, and quality and the speed of response would increase. Moreover, working with a partner that is closer in terms of distance, with a more similar culture, and who speaks the same language, has undeniable advantages not only in terms of cost but also in terms of establishing a long-term relationship. What has to happen on a corporate level to make this a reality? First, entrepreneurs who have delocated their production processes have to carry out a detailed evaluation of their current costs and the cost of returning to Spain. Then, their possible suppliers have to be able to produce at a cost which, offset by the drop in logistics costs, the disappearance of expatriation costs, uncertainty, and even banking costs, is interesting for the client.
I believe that a dual-pronged approach is needed here. Not only is it necessary to develop mechanisms that enable supply and demand to connect up, it is also necessary to help manufacturers become truly competitive through funding and training. One example of this is the Yo Soy Empleo (www.yosoyempleo.es) initiative, led by BBVA and in which IE Business School is involved. The project offers financial aid to SMEs to help with contracting, and also provides training and help in building local networks from which new business opportunities can emerge. It may not provide all the answers to relocation needs, but it’s a good start.