Fear of ‘globalisation’, and in particular of the loss of employment to low cost countries, has become a potent political force across Europe, as referendums on the proposed European Constitution have shown. At the populist level, imaginary demons have been conjured – the ‘Polish plumber’ nightmare for example: allegedly, hordes of highly skilled, inexpensive labour, prepared to do an honest day’s work, are poised to sweep in from the East bent on doing for the EU what Attila did for Rome.
The reality of low cost country sourcing (LCCS) has now been researched by Prof Dr Christopher Jahns of the Supply Management Institute, European Business School, Wiesbaden with support from Ariba, the spend management specialists. The findings are much more complex and, in their way, scarier.
Jahns quizzed 200 chief procurement officers in large companies in the UK, France, Germany, Italy and Spain, the five biggest industrial markets in Europe. Despite over a decade of the single market, there are some significant differences which may both help explain some of the current political turmoil and also cast doubt on the long-term future of integrationist policies such as the euro currency.
Jahns looked at both direct and indirect spend. In France, in both categories, China is already seen as a significantly more important source than the home country and that gap will widen by 2010. Italy, Poland and Thailand will remain relatively important but sourcing from Germany will decline. Perrhaps the French are right to be worried. In Germany by contrast, the domestic supply base is holding up pretty well and is expected to continue to do so. Though China and India will increase dramatically in importance, it looks as though this will be at the expense of Southern and Central European neighbours rather than the domestic supply base. (Turkey is also an important source for German industry).
For Italian buyers, the dominance of Germany as a source will decline, especially as a source of direct goods. Germany is currently more important than the domestic supply base. China again is expected to be the beneficiary.
Spain shows a different pattern. China again is expected to increase its importance but India will also be significant. With a common language, Mexico is an important source for Spain but could lose out significantly by 2010.
These varying patterns are further confounded by the UK. Industry here already has a more diverse pattern of sourcing. It is, for example, the only one of the five in which the US is a top ten source or Russia is significant. Like Germany, the domestic supply base is expected to maintain its position, though that may simply mean that anything that can be off-shored already has been. China increases in importance: our nearest neighbour, France, declines.
Overall, Jahns expects companies to increase their degree of direct and indirect spend in low cost countries to 30 and 20 per cent of the total respectively by 2010. The UK and Italy already have pretty globalised supply bases so the rates of change there will be lower. France, by contrast, is expected to increase LCCS of direct goods by more than 100 per cent in the next five years. The UK will be the only one of the five where the home base remains the most important source for both direct and indirect spend.
The political implications of all this may be profound. The EU accession countries and the hopefuls such as Bulgaria and Romania may find the benefits of a wider, freer European market snatched from their grasp. And trade between ‘old Europe’ countries may suffer, in particular. The Italian economy is already notably suffering as German orders drop off. Supply may polarise between inputs that have to come from close to home and those that can be sourced at the ends of the Earth. The very ‘common market’ that is supposed to bring Europe together may be falling apart.
And the really scary bit, according to Prof Dr Jahns, is that this change is occurring almost by accident. There is little evidence of a coherent strategy towards LCCS. The rush to source in China, for example, seems too often to be a “me too” reaction. Nor are the many risks, from dodgy intellectual property protection to log-jammed ports, being assessed or managed. Jahns says that only 25 per cent of companies with suppliers in low cost countries have built any sort of close working relationship with those suppliers – many buyers have never even researched the region, let alone the individual supplier! Two-thirds of businesses can’t see their spend patterns on a global basis so how are they making the decisions to offshore strategic supplies to countries which, despite low labour costs, may not even offer the lowest total cost of ownership when other risk and cost factors are taken into account?
The danger is that the blind outsourcing of spend to supposedly low cost areas may create political and social instability in Europe without the compensation of increased competitiveness for European companies.
- Sourcing of both direct and indirect spend (including services) from low cost
countries is already significant and will increase rapidly.
- The big winners look like being China and India. Efficient domestic supply
bases may be relatively unaffected. The big losers will be suppliers in
neighbouring European territories.
- Most companies lack a coherent strategy for determining what inputs are or
are not appropriate to be offshored. By the same token, they make little
assessment of the risks involved.
- As a result, there is a growing danger that European firms will be seriously
damaged by the discovery that supply from a low cost country is by no
means the same thing as a low cost supply.