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Friendshoring: A Realistic Trade Practice?

July 10, 2023
International corporations have incentives to reduce their operational risks and diversify their production but relying on nations perceived as "friendly" to U.S. interests will bring a new set of problems to counterbalance the many that it solves.

Outsourcing has been the way of the world for the last two generations – whether it was automotive manufacturing moving to Asia within NAFTA, clothing predominantly being produced in “The Global South” or the rise of SE Asia and China for all types of technology and other advanced manufacturing, moving manufacturing offshore was the de facto cost-saving move for most multinationals in the preceding several decades.

Moving offshore facilities to countries less authoritarian and better aligned with democratic and humanistic values is both a morally laudable and eminently pragmatic desire. International corporations have incentive to both reduce their operational risks and diversify their production base but relying on nations perceived as “friendly” to U.S. interests will bring with it a new set of problems to counterbalance the many that it solves.

The Hidden Risks of Friendshoring

In much the same principle as there always being a bottleneck (you just move it around within the process), friendshoring – a growing trade practice where supply chain networks focus on countries regarded as political and economic allies – replaces certain types of political and operational risks with others. Let us examine a few.

It is well documented that autocratic regimes tend to outlast their democratic counterparts, especially when they superficially incorporate select elements of freer countries, such as elections, parliaments, and the like. Corporations looking for stability in the long-term policies of a nation will naturally see such tenures as reducing the risks associated with changes in subsidies and similar incentives.

Furthermore, the increasing polarization and echo chambers driving political rhetoric apart is also affecting policies. This means that a democracy not only has to contend with more frequent changes of power, but businesses also have to weather the increasingly extreme policy shifts that accompany each new administration.

Secondly, it is important to remember the reasons why places selected for outsourcing were chosen. While labor costs are a huge factor, of course, moving to another country that has similar demographics, income inequalities, etc. is not going to “fix” outsourcing issues. The poorer and more disenfranchised segments of societies across very diverse locales have more in common with one another than they might with the ruling regimes.

People who are desperate for work, or local politicians looking to alleviate poverty in their communities, are largely motivated by the same broad drivers. As with Maslow’s hierarchy of needs, the cultural differences only really come to the fore after people have enough to eat and feel secure in their employment to enjoy and develop their local cultural traditions.

Finally, there is no guarantee that countries aligned with “Western” values at a high level politically (the macro view) will percolate down locally and facilitate business transactions at the local level (the micro view). One need only look at countries strikingly diverse in languages and cultures like India to understand how there can be many more nuances to operating successfully within a community than are apparent or reflected in national political circles. Much like the adage that “all politics is local,” all business surely is, as well.

Understanding Local Communities

Notwithstanding the potential for “out of touch” national politicians to inaccurately reflect the will of the local community, businesses will also have to spend additional resources to accurately understand those more diverse communities in which they operate. “Our man in Beijing” may be enough of a proxy to get business done almost anywhere, due to the nature of the Communist party’s structure in China, but it may not hold as much water in other countries. That local knowledge will take time and effort to uncover.

Consider the contrasting cases of California and Texas. If you look at their high-level demographic, wealth, and cultural markers, you would not easily understand why so many people and businesses have shifted from one state to the other in the last several years. If that level of nuance is needed within two U.S. states with more similarities than differences, imagine trying to assess an accurate list of pros/cons or SWOT analysis for locating a production facility in Rajasthan versus Uttar Pradesh in India. The two Indian states may share a border, but their differences run far deeper than those of any U.S. states.

Even assuming two countries are broadly aligned at the macro and micro level in their democratic policies and other pertinent aspects of their culture, this fact alone will not mean that a friendshoring project will go off without a hitch.

The reasons should come as no surprise to those who are familiar with organizational psychology and sociology. Many studies have demonstrated that tendencies such as “in-group bias” and “false consensus” can often drive more vitriolic debates between members of the same group who are perceived to be “on the same side” than the debates they’ll have with people who stand in more direct opposition.

The Bottom Line

Businesses looking to outsource with countries broadly aligned with Western values should remain vigilant when performing their due diligence and not allow shared values to cloud their judgment – no matter how closely those values may appear to align on the surface.

About the Author

Lukas Pankau | co-CEO | Industrial Next

Lukas Pankau is co-CEO of Industrial Next, a company creating autonomous manufacturing for car manufacturers and other producers.

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