Offshoring

Offshoring, can be defined as relocation of business processes (including production/manufacturing) to a lower cost location.

Offshoring can be seen in the context of either production offshoring or services offshoring. China has emerged as the preferred destination for production offshoring while India has emerged as the dominant player in the services offshoring domain.

Frequently used terms

Offshoring can be contrasted with outsourcing and offshore outsourcing which implies that a third party service provider takes over the business process and runs them based on service level agreements.

Other related terms are are nearshoring which also implies relocation of business processes to (typically) lower cost locations, but in close geographical proximity (e.g. shifting US bases business processes to Canada/Mexico); inshoring, which means picking services within the US; and bestshoring, picking the "best shore" based on various criteria. Business Process Outsourcing (BPO) refers to outsourcing arrangements when entire business functions (such as IT, Customer Service, etc) are outsourced.

Production offshoring

Production offshoring involved relocation of physical manufacturing processes to a lower cost destination. Examples of production offshoring included manufacture of electronic components in Taiwan, production of apparels, toys, consumer goods in China, etc.

Production Offshoring got its big push when NAFTA made it easier for manufacturers to shift production facilities out of USA. The trend later shifted to China which offered cheap prices through very low wage rates and economics of scale.

Services offshoring

The growth of Services Offshoring is linked to availability of large amounts of reliable and affordable communication infrastructure following the telecom bust of late 90s. Coupled with digitisation of many services, it was possible to shift the actual delivery location of services to low cost locations in a manner transparent to end-users.

India benefited from the trend as it has a large pool of English speaking and technically qualified manpower. India's offshoring industry took root in IT functions in 90s, and has since moved to back-office processes such as Call Centers, Transaction Processing etc as well as high end jobs such as Research & Development, Equity Analysis, etc.

Other offshoring destinations are Phillipines, Ireland and Eastern European countries.

Offshoring: Debate

Offshoring has been a controversial issue with heated debates. On one hand it is seen as benefiting both the origin and destination country through free trade. On the other hand, job losses in developed countries has sparked opposition to offshoring.

Offshoring: History

In the United States, moving jobs out of the country began in the 1970's and continued throughout the eighties. It was characterized primarily by the closing of factories, frequently with the corporations opening new factories in Mexico. Many of these new factories were called Maquiladoras.

In 1994 NAFTA, the first of the major free trade agreements went into effect.

The World Trade Organization Ministerial meeting in Seattle in 1999 saw a protest by approximately 50,000 activists. There were more than 600 arrests.

Currently efforts are underway to expand free trade to many new nations. A recent Free Trade Area of the Americas meeting in Miami drew massive protests and a heavy police response.