作者：唐麦（Michael Thorneman）, Suvir Varma
Last November, technology giant Intel made worldwide headlines when it announced it was investing US$1 billion - more than triple the amount it originally planned - to build the world's largest semiconductor plant in Vietnam. With assembly and testing operations in China, the Philippines, Malaysia and Costa Rica, Intel could have chosen any country for its new facility.
It selected Vietnam, according to Brian Krzanich, Intel's vice-president and general manager for assembly and test, because of its "very vibrant population, increasingly strengthened education system, strong workforce and very forward-looking government", in addition to its low labour costs.
When companies choose to move to low-cost countries, there are three basic decisions to make: what to move, where to move and how to move.
Many managers lack a framework for making these decisions. A Bain & Company survey of 138 manufacturing executives in a range of sectors found that while more than 80 per cent say cost migration is a high priority, fewer than two-thirds have moved in that direction.
The fact is that deciding what, where and how to move are never easy or all-or-nothing propositions. Careful analysis is needed of each product line, focusing on relative labour costs, logistics costs, customer requirements and time to market.
The price of shifting an entire facility is often so high that it doesn't make economic sense. That's why cost leaders think in terms of functions, not factories. They realise that by shifting certain processes or activities they can often match the savings of moving facilities.
In deciding which functions to move, the leaders also carefully consider opportunities to build new markets in the host country. Intel stands to benefit from Vietnam's technology market, which is expected to grow by 20 per cent a year. For Emerson, China accounts for more than US$1 billion in annual sales. The US-based global technology company has 68 factories in China.
While China and India are the most popular destinations for multinationals, leading companies are far more likely to look beyond those two, recognising that each country has its own risks and benefits, and that they can change. As a result, they decide on a shortlist of targets, based on their long-term competitiveness, as well as existing costs and capabilities. For example, some companies feel China's political uncertainty and weak enforcement of property rights outweigh the benefits of low-cost labour. Hungary's labour cost is almost quadruple that of China, but its highly educated workforce and relatively low political risk makes it a better bet for some.
A company's own organisational structure often poses a major hurdle in the physical move. Leading companies drive their moves to low-cost countries from the top down, while laggards tend to leave decisions up to individual units. The latter encourages incremental decision-making rather than a strategic approach to cost management.
By contrast, a top-down approach allows the use of scale to advantage as firms build presence in low-cost countries. Also, sometimes it's the only way to overcome resistance to the redeployment of labour and resources.
The move to a low-cost country requires a major organisational effort and strong leadership. But by taking a methodical approach, companies can avoid many problems. And they can sidestep perhaps the greatest roadblock of all: decision paralysis.
Suvir Varma is a partner in Bain & Company's Singapore office. Michael Thorneman is a partner in Bain's Shanghai office