Home or Abroad?

Home or abroad?

WHAT AND HOW much of its production to offshore to other countries is one of the most important choices a company can make. France’s two big carmakers illustrate the point. PSA Peugeot Citroën, the younger of the two, has tried over time to find cheaper places than around Paris to make its cars; in the 1950s and 60s Citroën opened a factory in Brittany and started manufacturing in Spain and Portugal, the China and Vietnam of their time for offshoring. Nowadays it makes cars cheaply in Slovakia and in the Czech Republic. But two-fifths of its global production is still in France, where it has seven expensive factories. One reason is that the company is family-owned, and families tend to be particularly loyal to their countries of origin.

Renault, on the other hand, has determinedly pursued a low-cost strategy, setting up factories in Morocco, Slovenia, Turkey and Romania, and now makes only a quarter of its cars at home. Unsurprisingly, it is Peugeot that is now in dire financial straits. Last autumn, amidst a fierce political storm, the company announced plans to stop car production at one of its biggest French factories, at Aulnay-sous-Bois, just outside Paris. But that may be too little, too late.

Yet there are also examples of highly successful companies that choose not to offshore to any great extent, even in labour-intensive industries. Zara, the main clothing brand of Inditex, a Spanish textile firm, is famous for making its high-fashion clothes in Spain itself and in nearby Portugal and Morocco. This costs more than it would in China, but a short, flexible supply chain allows the firm to respond quickly to changes in customer tastes. It sells the vast majority of its outfits at full price rather than at a discount. Its decision to stay close to home has become its main source of competitive advantage.

The practice of outsourcing is as old as business itself. A 19th-century manufacturing company might have had its own machines but not its...