No Need to Go Far... Outsourcing and Offshoring Coming to an End

Logistics Costs Rise Due to Supply Chain Crisis... Increased Local Production and Direct Employment
Italian Multinational Fashion Company Benetton Shifts Production Base from Asia to the Mediterranean

[Photo by Reuters]

[Asia Economy Reporter Park Byung-hee] Among the products of the Italian fashion company Benetton, 58% are produced in Asia, including Laos, Cambodia, China, and Thailand. Benetton plans to reduce the production share in Asia by half over the next 12 to 16 months. Instead, it intends to increase production in Mediterranean regions such as Serbia, Croatia, Turkey, Tunisia, and Egypt. This is because the effect of low labor costs in Asia has disappeared due to rising logistics costs caused by supply chain bottlenecks.

As the global supply chain crisis paralyzes the world economy, outsourcing and offshoring?where product manufacturing is entrusted to other domestic or foreign companies?are disappearing, the Wall Street Journal reported on the 1st (local time). Outsourcing refers to entrusting the production process to other domestic companies, while offshoring means entrusting it to foreign companies.

Over the past few months, U.S. airline Delta Air Lines has directly hired thousands of aircraft cleaning staff. Before the COVID-19 pandemic, cleaning tasks were outsourced to service providers, but after the pandemic, these providers failed to secure cleaning personnel in time.

Delta Air Lines CEO Ed Bastian said in August, "We can no longer wait for service providers," and moved to direct hiring. CEO Bastian stated, "We pay entry-level wages to employees responsible for aircraft cleaning," adding that labor costs have increased compared to when using service providers.

Benetton also expects production costs to rise if it reduces the use of cheap labor in Asia. However, Massimo Renon, Benetton's CEO, said the company can repay this with better quality. Since production bases are closer, they can more thoroughly inspect local production processes to ensure quality. Benetton stated that transportation time will be reduced from several weeks to one week, which will also reduce transportation costs accordingly.

Multinational companies that have reduced production costs through offshoring are also forced to revise their strategies. The WSJ explained that multinational companies suffered significant damage due to border closures and lockdowns during the early stages of the COVID-19 pandemic, and some companies are seeking permanent solutions to supply chain problems.

Accordingly, U.S. automotive, medical, and consumer goods companies are aiming to expand bases within the United States instead of Asia and Europe. Ellen Kullman, CEO of 3D printing company Carbon and an outside director of Goldman Sachs and Dell Technologies, said, "Ultimately, it is a matter of control," adding, "In an uncertain world, companies want more control."

The agreement on the introduction of a digital tax, ratified at the G20 summit held in Rome, Italy, on the 30th and 31st of last month, is also expected to cause strategic changes for multinational companies. With the introduction of the digital tax, the taxation rights on annual consolidated revenues of 20 billion euros (approximately 27 trillion won) and profit margins above 10% will be allocated to the market jurisdiction, and companies will have to pay at least 15% corporate tax. As a result, multinational companies that expanded overseas markets centered on countries with low corporate tax rates are inevitably facing strategic setbacks.

This content was produced with the assistance of AI translation services.