Euro zone companies come home as Asian costs rise

Euro zone companies come home as Asian costs rise
A FIAMM employee prepares batteries in this photo illustration taken at the battery maker's factory in Avezzano, near L'Aquila, November 28, 2014.

MILAN - After years of moving production to Asia, some European companies are following the example of their US counterparts and coming home.

Decisions by the likes of Italian leather goods brand Piquadro SpA and battery maker FIAMM SpA to boost production at home do not mark a reversal of the "off-shoring" phenomenon that has shaped global business for two decades.

But companies are tiptoeing back to their home regions, driven by rising salaries in China that are eating away at the profit margins that once lured them abroad. They are weighing the still lower but climbing manufacturing costs abroad against the difficulty of overseeing production far from home, plus the cost and time taken to get goods to Western markets.

"Reshoring" is being led by clothing, footwear and electronics companies, partly because they are rediscovering the cachet of the "Made in Europe" label. But in Spain, for example, depressed wage levels since the euro zone crisis have also prompted foreign car firms to open production lines there.

A PricewaterhouseCoopers survey of 384 euro zone non-financial companies last month found almost 60 per cent had reshored some operations, mainly production, over the past year, against 55 per cent which had done the opposite. Italy topped the reshoring list with 44 companies, while Ireland, Germany and Spain also featured prominently.

Luciano Fratocchi, a professor of management and engineering at Italy's L'Aquila University, said reshoring has become part of companies' survival strategies since the economic crisis.

Many Italian firms have reduced or overhauled their production lines because of falling demand, concentrating their remaining manufacturing closer to target markets.

Of the around 450 relocations analysed by Fratocchi since 2007, Italy has accounted for roughly a fifth, second only to the United States which had the lion's share with nearly half.

In Spain, trade unions have accepted flexible working practices and salary freezes due to high unemployment, encouraging companies such as Ford Motor Co and PSA Peugeot Citroen SA to open assembly lines.

The trend has affected even countries which weathered the crisis relatively well. German mid-sized companies like household goods brand Fackelmann and chainsaw maker Stihl have also reshored production. High-end teddy bear maker Steiff announced in 2008 that it was returning production from China because it had quality problems and transport took too long.

Often, however, rising wages in Asia are the main factor. According to consulting firm AlixPartners, official data show China's average wages in manufacturing rose 364 per cent between 2004 and 2014, albeit from a far lower base than in Europe.

The biggest narrowing of the wage gap is in the United States. Boston Consulting Group (BCG) said manufacturing costs in China are only 4 per cent below those in the United States, compared with 14 per cent in 2004.

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