Cost Reduction as Major Driver in Traditional Technology Business: Will Outsourcing Relations Come to an End?

Abstract

Traditional technologies can have an extended lifetime if companies use various cost-reducing strategies. One of these strategies employed in Western European countries in past decades has been low-cost outsourcing in Central and Eastern Europe, mainly derived from low wages. Specifically, the Czech Republic, Poland, and Hungary are prime destinations for low-cost outsourcing as well as foreign direct investment. However, there is a trend of increased wage levels in Central and Eastern European countries, urging the question of how long (time period) cost advantages can be gained there in the future. Accordingly, in a situation of diminishing cost advantages, the question can be posed to what extent traditional manufacturing will “return” to Western Europe if smart manufacturing methods are being used. This study adopts a scenario-analysis approach in which five scenarios are drawn, particularly focusing on labor cost development and the crucial cost advantage and other critical factors in outsourcing, such as the availability of low-skilled labor, productivity changes, and greening of manufacturing. In one scenario, “reshuffle,” cost reduction will be abandoned as the competitive strategy in favor of high product quality. Each scenario will be examined in terms of attractiveness for outsourcing and potential implications on decisions by companies for (continuing) outsourcing relationships with Central and Eastern Europe.

Keywords:

• traditional technology
• low-cost strategies
• outsourcing
• Eastern Europe
• comparative advantages
• smart manufacturing
• scenarios

ACKNOWLEDGMENTS

The authors are grateful to Wouter Berben, M.Sc., for drawing the basic scenarios.