Offshoring
Based on Wikipedia: Offshoring
The Great Migration of Work
In the final weeks of 2018, something curious started happening in board rooms across America and Europe. Executives who had spent decades perfecting their supply chains—meticulously routing production through China's vast manufacturing hubs—began reaching for their maps and asking uncomfortable questions. What if those supply chains weren't as reliable as they thought? What if the world was changing faster than their spreadsheets could account for?
They were right to worry.
The story of offshoring is really the story of modern capitalism itself: a decades-long experiment in moving work across borders to wherever it can be done most cheaply. But that simple narrative—move jobs overseas, save money—masks a far more complex reality. And in recent years, that complexity has exploded into something that looks less like optimization and more like corporate chess played on a global board.
What Offshoring Actually Means
At its core, offshoring is straightforward: take a business process that's happening in one country and relocate it to another. Usually this means manufacturing—think of all those "Made in China" labels—but it can also mean accounting departments, customer service centers, software development, or really any work that doesn't require physical presence in a specific location.
But here's where the terminology gets slippery, and where many people get confused.
Offshoring is not the same thing as outsourcing, though the two often travel together. Outsourcing means having another company do work that you used to do yourself. Offshoring means having work done in another country. You can do one without the other, both together, or neither.
Consider a few scenarios. An American company opens its own factory in Vietnam, staffed by its own employees. That's offshoring without outsourcing. The same company hires a contractor in Kansas City to handle its payroll. That's outsourcing without offshoring. And if they hire a call center in the Philippines run by an entirely separate company? That's offshore outsourcing—both at once.
The distinction matters because the incentives and risks are different in each case. When you offshore but keep things in-house—what's sometimes called "captive" offshoring—you maintain control but take on the burden of operating in a foreign country. When you outsource, you lose some control but shed operational complexity. When you do both, you're playing with the most variables.
The Economics of Cheaper Labor
Economists have a clinical term for why companies offshore: labor arbitrage. Strip away the jargon and it means something simple. Workers in different countries will accept different wages for the same work. If a software developer in San Francisco costs two hundred thousand dollars a year and an equally skilled developer in Bangalore costs forty thousand, well, the math writes itself.
But wages aren't the only factor. Time-to-market matters too. A company might offshore not to save money but to access talent that simply doesn't exist in sufficient quantities at home. The United States produces about seventy thousand computer science graduates annually. India produces over a million.
And then there's the clock itself. A software team in California can hand off their day's work to a team in India, who develop it further and hand it back eight hours later. Round-the-clock development, with no one working overtime. This "follow the sun" model can theoretically triple productivity, though the reality often involves coordination headaches that eat into those gains.
What Makes a Job Offshorable?
Not every job can be moved overseas. A barista needs to be where the coffee drinker is. A plumber needs access to your pipes. But a surprisingly large number of jobs share characteristics that make them candidates for relocation.
The first requirement is that remote work must be possible. The work can't depend on physical presence in a specific location. Customer service calls can come from anywhere; customer service for in-person retail cannot.
The work must also be transmittable over the internet. This seems obvious now, but it was the revolutionary expansion of global telecommunications in the late 1990s that made modern offshoring possible. Before reliable undersea fiber optic cables, the idea of running an American company's back office from India was logistically impossible.
There also needs to be a significant wage difference between countries to justify the friction costs. Moving work overseas isn't free. It requires setup, training, management overhead, and accepting some loss in communication efficiency. If you're only saving ten percent on wages, those friction costs might eat up any gains.
Finally, the work should be somewhat repeatable and definable. Creative work that requires constant back-and-forth with stakeholders is harder to offshore than clearly specified tasks. This is why routine software maintenance offshores more easily than novel software architecture.
The Varieties of Offshore Outsourcing
The offshore outsourcing industry has spawned its own alphabet soup of specializations, each with its own dynamics and dominant players.
Information Technology Outsourcing, known as ITO, covers programming, system administration, and technical support. India has dominated this space for decades, with companies like Tata Consultancy Services and Infosys growing into multinational giants employing hundreds of thousands of workers.
Business Process Outsourcing, or BPO, handles operational functions like payroll processing, claims handling, and data entry. The Philippines became the world capital of BPO, particularly for voice-based services, thanks to a population with strong English skills and a cultural affinity for American idioms picked up through decades of Hollywood movies and American military presence.
Knowledge Process Outsourcing, KPO, takes things a step further into work requiring genuine expertise: financial analysis, legal research, medical diagnostics. This is the frontier where offshore providers are trying to climb the value chain, competing not on wage differences but on genuine intellectual capability.
And then there's recruitment process outsourcing, where companies hand over the entire challenge of finding and hiring employees to offshore specialists. It sounds counterintuitive—outsourcing the very process of building your organization—but for companies hiring at scale, it can make sense.
The Rise of Nearshoring
Offshoring's dirty secret is that distance creates problems. Time zones complicate meetings. Cultural differences lead to misunderstandings. And there's something psychologically difficult about managing people you never see in person.
Enter nearshoring: the practice of moving work to countries that are close by rather than on the other side of the world. For American companies, this often means Mexico or Central America. For Western European companies, it might mean Eastern Europe or Portugal.
The wage savings are smaller than offshoring to India or the Philippines, but the friction costs are lower too. A manager in Texas can fly to Mexico City in two hours. They share a time zone. Many Mexican professionals speak fluent English and have cultural familiarity with American business practices from trade, media, and family connections across the border.
Portugal has emerged as an interesting nearshore destination for European companies. Lisbon and Porto now host development centers for Mercedes, Google, Jaguar, and major European banks. The attraction is a combination of lower wages than Western Europe, excellent universities producing skilled graduates, and a time zone that aligns perfectly with London.
But the real power of nearshoring is the ability to visit. Something about actually walking through a facility, meeting the team, and sharing a meal creates trust that video calls cannot replicate. When problems arise—and they always do—that foundation of personal relationship makes resolution easier.
China's Manufacturing Empire and Its Cracks
To understand the current state of offshoring, you have to understand China's remarkable run as the world's factory floor.
After China joined the World Trade Organization in 2001, it offered something irresistible to manufacturers: rock-bottom labor costs, massive scale, and a government willing to subsidize just about anything to attract foreign investment. Cheap loans. Cheap land. Entire cities with populations exceeding a million, dedicated to producing a single category of product. The city of Yiwu, for instance, produces about sixty percent of the world's Christmas decorations.
For two decades, this worked spectacularly. The iPhone is perhaps the ultimate symbol: designed in California, assembled in China, shipped worldwide. Apple's contract manufacturer Foxconn employs more people than the population of many countries.
But cracks appeared. Chinese wages rose substantially as the country developed. Environmental regulations, once barely enforced, began to have teeth. And then came the friction that changes everything: geopolitics.
Starting around 2018, the trade war between the United States and China made companies nervous in ways that pure economics never had. Tariffs on Chinese goods jumped. Restrictions on technology transfer tightened. Companies began asking uncomfortable questions: What happens if relations deteriorate further? What if we wake up one morning and can't get our products out of China?
China-Plus-Many: The New Geography of Manufacturing
What happened next surprised many observers. Companies didn't simply pack up and leave China. That would have been economically devastating—decades of supplier relationships, institutional knowledge, and infrastructure don't relocate overnight.
Instead, they adopted what consultants call a "China-plus-many" strategy. Keep production in China for the Chinese market and as part of the global mix, but build parallel capacity elsewhere. Hedge your bets. Don't put all your eggs in one basket, even if that basket has been remarkably good at holding eggs.
Vietnam emerged as the single most popular destination for manufacturing relocations, particularly in electronics, footwear, and household goods. The country offered low wages, a young and growing workforce, and geographic proximity to existing Asian supply chains. Samsung already had massive operations there; others followed.
India attracted companies looking for a huge domestic market as well as an export base. Mexico benefited from its position next to the United States and existing trade relationships under the United States-Mexico-Canada Agreement (the successor to the North American Free Trade Agreement). Thailand and Taiwan rounded out the list of major recipients.
Crucially, many companies didn't move to just one alternative. Research on over two hundred manufacturing relocation decisions between 2018 and 2023 found that only about a third involved a single destination country. The rest spread production across two to six countries, explicitly designing supply chains for resilience rather than pure cost optimization.
The Reshoring That Wasn't
Politicians in wealthy countries love to talk about bringing manufacturing jobs home. "Reshoring" became a buzzword, with presidents and prime ministers promising to reverse decades of offshoring and restore blue-collar employment.
The reality has been more modest.
Of those two hundred-plus manufacturing relocation decisions studied between 2018 and 2023, only about sixteen percent involved reshoring to the home country. The vast majority were moves between foreign locations—from China to Vietnam, or from one Southeast Asian country to another.
Why the gap between rhetoric and reality? Several factors conspire against reshoring. Labor costs in wealthy countries remain dramatically higher than in developing economies. The skills and supplier ecosystems have atrophied after decades of offshoring; you can't simply recreate an electronics manufacturing cluster overnight. And automation, while advancing, hasn't progressed enough to fully substitute for human workers in most manufacturing contexts.
There have been genuine reshoring successes, but they tend to be in specific niches. Starbucks famously saved a ceramics company in East Liverpool, Ohio that was on the brink of bankruptcy, bringing mug production back to the United States. The move worked because customers valued the "Made in America" story and because advanced ceramics manufacturing requires less labor than many other industries.
Other reshoring efforts have stumbled. When Otis Elevators attempted to bring manufacturing back to the United States, the project went badly. The company later admitted it had tried to do too much at once, including implementing new supply chain software simultaneously with the geographic transition. The factory workers they were trying to hire often lacked the skills that had been standard in American manufacturing a generation earlier.
The COVID Shock and Supply Chain Awakening
If the trade war created concern, the COVID-19 pandemic created panic. In early 2020, factories across China shut down. Shipping containers became scarce and then obscenely expensive. Products that had always been available simply weren't.
Companies discovered, often painfully, how little visibility they had into their own supply chains. A manufacturer might know their direct suppliers intimately but have no idea who supplied their suppliers. When a critical component became unavailable, they sometimes learned of the dependency for the first time while scrambling to find alternatives.
The pandemic accelerated trends that were already underway. Companies that had been contemplating diversification away from China moved faster. Nearshoring gained appeal as the risks of having everything far away became viscerally clear. Resilience entered the vocabulary of executives who had previously spoken only of efficiency.
But the pandemic also revealed the limits of rapid change. Supply chains are sticky. Relationships built over decades don't transfer easily. And the fundamental economics hadn't changed: developing countries still offered compelling cost advantages for labor-intensive work.
The Hidden Costs of Offshoring
Every offshoring decision involves calculations that don't appear on simple cost comparisons. When a company moves jobs overseas, the unemployed workers in the home country don't simply vanish. They claim unemployment benefits. They require retraining. They vote.
Europe has historically experienced less offshoring than the United States, partly because European labor laws make layoffs more expensive. When closing a factory costs millions in severance payments and social contributions, the wage differential with cheaper countries has to be larger to justify the move.
There are less obvious costs too. Quality problems in offshore production may not appear immediately but can emerge months or years later. Communication overhead consumes management time that could be spent on other priorities. Intellectual property may be at risk in countries with weaker enforcement of patents and trade secrets.
And there's the cost that's hardest to quantify: institutional knowledge walking out the door. When experienced workers lose their jobs, they take with them decades of accumulated expertise about how things actually work, as opposed to how they're supposed to work on paper. That knowledge is nearly impossible to recreate.
The Technology Wild Card
Two technological forces are reshaping the offshoring calculus in ways that weren't imaginable when the practice began.
The first is automation. Robots and artificial intelligence are making it possible to produce goods with far less human labor than before. If a factory requires few workers, the wage differential between countries matters less. Production might move back to wealthy countries not because workers returned but because the work itself no longer requires many workers.
Robotic Process Automation—software that automates repetitive digital tasks—is doing to back office work what factory robots did to assembly lines. The call center in the Philippines handling routine customer inquiries may be replaced not by a call center in Kansas but by a chatbot that requires no humans at all.
The second force is additive manufacturing, better known as 3D printing. Traditional manufacturing requires enormous capital investment in tooling and benefits tremendously from scale. It makes sense to produce a million units in a massive Chinese factory and ship them worldwide. But 3D printing changes that equation. If you can produce items on demand, close to where they'll be used, the economics of global shipping look different.
Neither technology has fully matured, but their trajectory is clear. The world in which offshoring decisions will be made a decade from now will be substantially different from the world that produced the current global production map.
Friendshoring and the Geopolitical Turn
Perhaps the most significant recent development is the explicit integration of geopolitics into supply chain thinking. "Friendshoring"—the practice of preferentially locating production in countries that are political allies—has moved from academic concept to mainstream business strategy.
The logic is straightforward. If you're worried about a future conflict or severe diplomatic breakdown with a particular country, why place critical production there? Better to pay somewhat more to manufacture in a country whose relationship with your home country is stable and friendly.
This represents a fundamental shift from the logic that dominated the previous three decades. The post-Cold War consensus held that economic interdependence would prevent conflict, that if everyone's supply chains ran through everyone else's countries, no one would dare start a war. That thesis is now being tested, and many business leaders aren't waiting for the results.
The challenge is that "friend" is a slippery concept in international relations. Countries that are allies today may be competitors tomorrow. India, for instance, is seen as a friendshoring destination for American companies wary of China, but India has its own complex relationships with Russia, its own authoritarian tendencies, its own trade disputes with the United States. Political risk doesn't disappear; it just takes different forms.
What Comes Next
The era of simple offshoring—find the cheapest labor, move production there, ship products back—is over. What replaces it is more nuanced, more complex, and frankly harder to predict.
Companies are thinking in portfolios rather than single locations. They're balancing cost against resilience, efficiency against flexibility. They're learning that supply chains are not just logistical challenges but strategic assets that can become vulnerabilities.
Governments are waking up to the reality that decades of offshoring have hollowed out industrial capabilities that may be strategically important. The pandemic revealed that even wealthy nations couldn't produce basic medical supplies. Climate change and energy transitions will require massive manufacturing scale-ups for solar panels, batteries, and electric vehicles. Whether that production happens at home or abroad is now a political question, not just an economic one.
And workers in developing countries, who have benefited enormously from offshoring over the past three decades, face an uncertain future. Automation may eventually do to their jobs what their jobs once did to manufacturing workers in wealthy nations. The labor arbitrage that built the modern global economy may be approaching its limits.
What seems certain is that the map of global production will continue to shift. The question is whether those shifts will be managed thoughtfully, with attention to the workers and communities disrupted along the way, or whether they'll unfold chaotically, leaving wreckage in their wake. So far, the record on that front is not encouraging. But then again, the story isn't over.