Paddling against the offshoring trend

Canon Inc. is trimming its supply chain by as much as half to lower costs and protect its intellectual property. The company, which has approximately 6,000 suppliers said last week it will cut the number to 3,000 by 2006 for a projected savings of $1 billion annually.

Wait a minute. Isn’t outsourcing the essence of efficiency? What gives? The answer may be found in a report by Deloitte Research released on last Monday, “Globalization Divided? Global Investment Trends of U.S. Manufacturers,” which makes the provocative point that companies outsourcing or offshoring production overseas “may be paying ultimately to create their own competitors.”

Deloitte found that rather than growing foreign direct investment (FDI) by American manufacturers has been falling for the past three years. Total FDI is down 32 percent from 2000. Moreover, the flow of investment to low-wage countries has fallen by 83 percent in the same time, indicating that companies are investing more heavily in advanced economies than emerging ones.

Canon’s move, which the Financial Times reports will cut about 10 percent of its procurement costs annually, will be implemented by increasing the performance and security requirements for supplier companies.

“From now on we will make the same demands on our suppliers for quality and excellence that we do for our in-house staff,” a Canon executive told the FT. “By putting pressure on them we hope they will be able to improve their operations. If these suppliers are able to meet our demands, we will have no reason to cut them.” The company’s production manager, Junji Ichikawa, also said that producing supplies in Japan is intended to protect Canon from intellectual property theft.

The question is whether the move to protect domestic intellectual property will hurt international market development. At every other stage in history when a dominant player has become isolationist, the choice has backfired.

Author: Mitch Ratcliffe

Mitch Ratcliffe is a veteran entrepreneur, journalist and business model hacker. He operates this site, which is a collection of the blogs he's published over the years, as well as an archive of his professional publishing record. As always, this is a work in progress. Such is life.