An In-Sourcing Opportunity?

For the moment, we may be looking in the wrong direction across the wrong ocean.

I checked the exchange rate between the dollar and the euro before I sat down to write this, and it’s hanging around 1.47 euros to the dollar. At that rate, visiting Europe is pretty expensive. Of course, conversely, if we were in the tourist business, this exchange rate could be viewed as a bonanza.

It is a risk pinning the point of my column on such a volatile metric such as exchange rates mostly because they tend to fluctuate, sometimes wildly. However, the imbalance between these currencies has been fairly stable for some time. Therefore, if, by the time you read this, the rates are still in the current relative ballpark, please continue because there may be an opportunity to take advantage of them for your business.

The term “in-sourcing” is the opposite of the well known and disconcerting term of “outsourcing.” Of course outsourcing is sending work from here to somewhere else to gain an advantage in cost of production. Many companies have devoted resources toward this exercise in the last decade or so to stem the effects of a strong dollar and demands for cost reduction from customers that insist suppliers look overseas, especially Asia, for alternative sourcing. In-sourcing is finding work for our domestic shops to manufacture.

Many companies have successfully made connections with Asian suppliers through joint ventures, acquisitions, partnerships or direct branch operations.

I submit that, for the moment, we may be looking in the wrong direction across the wrong ocean.  

It seems to me that with the exchange rate between Europe and the U.S. being where it is, the U.S.’s goods and services are at a price advantage. It’s a situation, like most, that has winners and losers. For a change, however, it seems to me that precision machined parts makers may be in a good position to supply competitive quality work to the Europeans.

It is my belief that indeed some Europeans are searching to outsource work for the same reasons that we do. We’ve always had a labor cost advantage, so with the exchange rate we are an attractive alternative. Historically, they had the choice of going to the former Eastern block nations to gain a competitive advantage. My understanding is that Eastern Europe is less attractive in part because most of those nations are now part of the EU. Therefore, a currency exchange advantage is gone, and historically depressed wages are climbing as these countries seek parity with Western Europe. It’s been 20 years since the Wall came down.

In an effort to confirm my suspicions, over the past few months, I have been conducting an unofficial poll among shops and OEMs that I talk with in order to determine if they are seeing an increase in RFQs from the EU. Most have told me that they have. Much of this comes from the Europeans seeking out shops in the U.S. that have a Web presence or previous connections to each other.

So my point for all this is that for shops that are in a position to be nimble, there may indeed be an opportunity to increase your global reach, not by looking to Asia, but by getting yourself known in Europe. Granted, this currency exchange imbalance may be temporary, but it may be a good opportunity to get some additional work today and lay a foundation for a European relationship in the future. After all, should the exchange rate flip again, you might be looking for a lower cost source in Europe someday.

Some say the bloom may be off the rose for China as far as doing business for a variety of reasons. I hear much less fear and trepidation about them these days. Therefore, Europe may be an excellent strategic backup for the longer term. Probably having a foot in both markets is the best strategy.

The key, though, is to be structured to move quickly. There’s one thing in the global economy that seems to be universal, be it Asia or Europe, opportunities come and go quickly, and it takes a nimble business to recognize, adjust and participate in narrow windows of opportunity. The current exchange rate imbalance between the euro and the dollar may well be one of those opportunities.