Off-shoring of production in European countries with a focus on Slovenia.

Palcic, Iztok ; Buchmeister, Borut ; Leber, Marjan 等

Abstract: This paper deals with analysis of several European countries in respect to off-shoring of production by their manufacturing companies. The analysis has been conducted in the scope of international project, coordinated by the famous German Fraunhofer institute, where an extensive European Manufacturing Survey (EMS) was sent to thousands of manufacturing companies across Europe with the purpose of investigating manufacturing and innovation activities. This paper indicates results focused on the frequency of production off-shoring in European countries, target regions of off-shoring activities and main motives for off-shoring activities.

Key words: production, off-shoring, back-sourcing, manufacturing company, Slovenia

1. INTRODUCTION

During the last few years globalisation of economy has come into the focus of economic policy discussions. Whereas in the past predominantly large multinationals have established production facilities abroad (Buckley & Cason, 1976), today more and more small and medium sized enterprises (SMEs) open up new markets abroad thereby utilising the advantages of a more intensive international labour division (Bell et al., 2003; Fillis, 2001) by off-shoring parts of their production either to affiliated companies abroad or to other companies in foreign locations. As a result of the ten new member countries joining the European Union this development has gained momentum (Kinkel und Lay 2004).

In the following paper, the EMS constitutes the basis for an analysis of the extent and motives of production off-shoring in different European countries, followed by an identification of the decisive factors and the specificities of off-shoring companies. We will try to answer the following questions:

* How many companies do offshore parts of their production?

* What are the motives for companies to offshore production facilities?

* How have off-shoring activities changed in Slovenia from 2003 until 2006?

2. EUROPEAN MANUFACTURING SURVEY

The European Manufacturing Survey (EMS) was conducted in 2003/2004 as a pilot survey in nine European countries. The survey covers Austria, Croatia, France, Germany, Great Britain, Italy, Slovenia, Switzerland and Turkey. In total 2249 firms answered questions concerning manufacturing strategies, the application of innovative organisational and technological concepts in production and questions of personnel deployment and qualification. In addition, data on performance indicators such as productivity, flexibility, quality and returns was collected. The responding companies present a cross-section of the main manufacturing industries. Producers of rubber and plastics are represented by 11 percent, producers of metal works by 27 percent, mechanical engineering by 31 percent and electrical engineering by 10 percent.

In the year 2006 a new survey was conducted in even more European countries, where Greece, Netherlands and Spain joined the project. The survey is still going on in some countries, while Slovenia has already finished it and the results for the off-shoring of the Slovenian manufacturing companies will be presented here. The authors of this paper were conducting a survey and analysis for Slovenia.

3. FREQUENCY OF PRODUCTION OFF-SHORING

As the results clearly show production off-shoring has become an extremely important strategy for production improvement in Europe. Off-shoring means moving the production facilities to other newly built or existing manufacturing sites of the own company in foreign countries or to foreign suppliers. As expected, the highest percentage of companies that off-shore their production comes from Western European countries. For example, every second Austrian company has off-shored their facilities abroad. Austria, France, UK, Switzerland and Germany are countries that have quite a high degree of direct foreign investments abroad, production off-shoring on the other hand presents a promising alternative to foreign plant extension investment to further improve the vicinity to customers and markets in emerging key markets (Dachs et al., 2006).

Figure 1 also present data for back-sourcing parts of production abroad. It ranges from one back-sourcer compared to six off-shoring companies in the case of Italy to one back-sourcer compared to two off-shoring companies in the UK; i.e. a span from about 16 percent to 50 percent. The following pattern shows: countries ranking top as regards off-shoring quotas (30 percent and more) do also take top ranks in back-sourcing quotas (12 percent and more as survey shows). Countries with an off-shoring quota of less than 30 percent do also have a markedly lower back-sourcing ratio of 5 percent and less (Dachs et al. 2006).

4. MOTIVES FOR PRODUCTION OFF-SHORING

The surveyed companies mention lower costs for production factors in the target countries as the main factor triggering off off-shoring activities. Despite the paramount importance of cost savings as motive for production off-shoring we have to keep in mind that deciding for production off-shoring is often not triggered off by a singular factor but by a whole bundle of motives (Figure 2).

In most countries, active opening up of new markets takes second rank as motive for off-shoring production. Across the surveyed countries the importance of this motive varies slightly more than the cost argument. Varying with the surveyed country, vicinity to key customers or improvement of flexibility and ability to supply locally can be of paramount importance for up to 40 percent of the companies. Varying with the surveyed country, vicinity to key customers or improvement of flexibility and ability to supply locally can be of paramount importance for up to 40 percent of the companies (Dachs et al., 2006).

5. PRODUCTION OFF-SHORING IN SLOVENIA

Slovenia is a new EU member since 2004. It has always been assumed that Slovenia is a country where Western European countries off-shore their production to. Because of quite high labour costs and non friendly tax incentives for foreign direct investments many potential investors were averted to start their business in Slovenia. This is why a more interesting question comes to mind: do Slovenian manufacturing companies off-shore their activities, where and why? As shown in figure 1 in 2003 18 % of Slovenian companies off-shored their production abroad. Their primary targets were other ten countries that joined EU in 2004 and mostly other European countries, especially countries from the former Yugoslavia. The main reasons for that are, of course, still good connections to these markets, geographical proximity, social ties, language etc. Economical reasons for moving the production abroad were similar to Western European countries. The main reasons were production costs and conquering new markets. Other important reasons were availability of (semi)qualified and reasonably cheap workforce, vicinity to key customers and flexibility. The percentage of Slovenian companies that back-sourced their production is very low (5 %, figure 1). The main reasons for back-sourcing are production costs, taxes, lack of infrastructure and quality.

In 2006 the number of Slovenia countries that off-shore their production has risen up to 28 %. Primary destinations are still the same. As we can see the trend of Slovenian countries moving their production abroad is positive. The economy in Slovenia is at the moment in a very good condition. Slovenian companies are deciding to invest abroad to become more competitive. The main reason for companies today to move the production is still production and workforce costs. But another interesting reason appeared--bottlenecks. This can be explained as the lack of skilled workforce in Slovenia and overloaded existing production facilities. Other two important reasons are vicinity to customers and possibility to open new markets. The target countries are still former Yugoslavian republics, new EU member countries, Russia and also Asian countries as the new attractive location for production off-shoring. In 2006 only 6,7 % of companies back-sourced their production. The main reasons were the lack of quality and flexibility.

6. CONCLUSION

Off-shoring is a very complex topic, since off-shoring activities are neither characterised solely by attempts to reduce the costs of production factors--even if this is still the dominating single motive--nor are they an over proportionally frequent phenomenon in countries with the highest labour costs. The surveyed companies increasingly base their off-shoring decisions on a whole bundle of different motives including factors such as market opening, vicinity to key customers or securing the ability to supply locally. This analysis has also shown that production off-shoring does not necessarily mean an irreversible one-way process. Varying from country to country, every second to sixth off-shoring company is countered by a back-sourcing company.

Slovenia is becoming one of the European countries with quite high rate of manufacturing companies that off-shore part of their production.

7. REFERENCES

Bell, J., McNaughton, R., Young, S. & Crick, D. (2003). Towards an integrative model of small firm internationalisation. Journal of International Entrepreneurship, Vol. 1, pp.339-362

Buckley, P. J. & Casson, M. (1976). The Future of the Multinational Enterprise, London

Dachs, B., Ebersberger, B., Kinkel, S. & Waser, B. R. (2006). Offshoring of production--a European perspective: Frequency, target regions and motives, European Manufacturing Survey, Fraunhofer Institute

Fillis, I. (2001). Small firm internationalisation: an investigative survey and future research directions. Management Decision, Vol. 39, No. 9, pp.767-783

Kinkel, S. & Lay, G. (2004). Produktionsverlagerungen unter der Lupe, Mitteilungen aus der Produktionsinnovationserhebung Nr. 34, Fraunhofer-Institut fur System und Innovationsforschung, Karlsruhe

Fig. 1. Share of companies having off-shored parts of
production abroad

 Off-shoring quota 2003 Backsourcing quota 2003

Austria 51% 16%
France 46% 15%
UK 39% 20%
Switzerland 31% 12%
Germany 29% 5%
Italy 26% 4%
Slovenia 18% 5%
Croatia 15% 0%
Turkey 5% 2%

Note: Table made from bar graph.

Fig. 2. Motives for production off-shoring

 Germany Switzerland Austria France UK

Flexibility, 36% 28% 40% 22% 19%
ability to supply

Vicinity to key 26% 21% 25% 41% 34%
customers

Market opening 47% 39% 35% 56% 38%

Costs of 87% 78% 83% 82% 88%
production
factors

Note: Table made from bar graph.