Is Home-Sourcing the Future

 The Nexus Q is entirely manufactured in the USA” 

But before we call upon the end of outsourcing and jump around excited about the prospect of new job generation and better economy in the Western world let’s take a step back and look at it more rationally. After all, the competition is fierce and prized at $99 the Apple TV offers not only a more mature ecosystem, but also more features at a much lower prize. Doesn’t it therefore seem questionable that Google opted to manufacture in the more pricy American market? A look at theory of sourcing and across industries can maybe help to paint a clearer picture.

The Art of Sourcing:

In the last 20 years, sourcing has become one of the ultimate management disciplines. Requiring meticulous planning, the emergence of smart IT systems, faster logistical options such as air transport and managerial process optimization techniques have created a field of intense interest filling complete programs at universities.

Especially in the past, moving manufacturing to low-cost markets such as China has become one of the key requirements to stay competitive in more and more price sensitive markets. But with the rise of labor costs in those markets, most competitors  taking similar approaches, the benefits of these cheaper productions have decreased. Additionally, since more and more companies are willing to pay a certain extra to obtain exclusive contracts with the most able and fastest manufacturers, finding reliable partners or obtaining necessary parts has become somewhat more difficult. Apple’s strong hold on SSD or high quality displays is just one form of this turn of events (Quote).

Considering these developments, voices grew louder - arguing that maybe moving away from oversees manufacturing back to home market sourcing may be better after all. But is that true? Sourcing can best be described as a three dimensional beast (Mol, 2007).

Decisions have to be made in three directions:

a) Home or Away

b) Inside or Outside of the Organization

c) Competitive or Co-operative

Each one is of considerable impact to a business and bears its own risks and opportunities. Moving away to a low cost labor market obviously offers most prominently cheaper production. With this benefit however the danger of different legislation or lack of abilities becomes an issue. Similarly, producing something inside and organization offers most control but affords more commitment and investment than outside production. Finally a more co-operative sourcing strategy allows for safer planning, but that is only until the partner suddenly decides he can do without you and steals your intellectual property. A companies competencies therefore play a big role in this decision and businesses such as Acer, who were merely assemblers for big PC manufacturers like IBM in the beginning but then suddenly became some of their biggest competitors, are further examples of such issues. As you can see, sourcing comes with many difficult decisions and finding the optimal mix is most certainly not an easy task.  Some academics (Kotabe,& Mol, 2008) have therefore argued that there is a certain phase cycle for sourcing. A company will continuously outsource to match competition and stay competitive. However there will be one point, be after problems in their outsourcing or invoked by other aspects where they will have to decide whether further outsourcing or bringing back production will offer greater benefit. So has Google reached that point? Google, a non-manufacturing company to begin with?

Marketing is King!

To be honest, in the case of Google things aren’t that easy. In recent years, Marketing has increasingly become an issue in the sourcing debate. Job creation and crafts tradition have become a counterforce to cheap prices and people started to boycott products that are produced in countries with bad/no labor laws. These CSR issues made companies think again over their sourcing strategy as it added a new dimension to the game. While discussions previously focused on cost and price, now “reputation” offered a third variable. By actively deciding against outsourcing, companies can create a positive public perception. If correctly marketed, this will allow them to differentiate themselves from competitors where differentiation has been getting tougher and tougher. This in turn will allow for a more flexible price setting with higher margins. To put it in a nutshell, there would be three main benefits to such a decision:

a) More flexible pricing opportunities allowing for better margins

b) Creating a positive public image, effectively improving brand/company recognition

c) Differentiation where little differentiation was possible.

A company using such a strategy in recent years is Jaguar. From bringing back first parts of manufacturing to the UK, Jaguar has announced to intensify this strategy (Quote). Arguing that Jaguar is a UK heritage and that the greater skill of UK workers creates benefit to the customers, Jaguar pleases the people and thus enhanced their brand value, which in years before was lacking behind the likes of Porsche or Ferrari.

And it is here that it gets interesting. Obviously a $299 media box won’t be able to grasp huge market shares, but for Google it doesn’t need to. In the past they have been often accused of copying other companies and their ongoing lawsuits on patent infringements or privacy issues have continuously eroded their corporate image. My guess is therefore that Google is not trying to become a dominant player in the market of media streaming devices with the Nexus Q. The high price would not allow this since as of now most consumers are still too price sensitive. But what the Nexus Q does, is give Google positive news coverage and rebuild some of the once very positive corporate image. It makes Google look friendly, which is exactly what they have not been in the last few months.

So why did they merely mention it during the keynote and not market it extensively? To answer this one would have to look into consumer psychology, which I personally don’t want to at this point. But my best guess is, that by actively marketing an aspect like this, the actually positive message might be perceived as corporate propaganda only intended to glorify oneself. It would be therefore not in the interest of Google themselves to put too much emphasizes on this aspect, but instead let the media handle this job.

What does this mean for the Nexus Q?

Considering what I’ve said before, the Nexus Q – at least partly – is a big marketing initiative. I am not saying that Google is not interested in the media streaming industry and that the Nexus Q is not a real product, but think of it like this: Why would a company that has been working with OEMs and Partners on Google TV now suddenly shift direction? Couldn’t they have achieved something like this working with one of the existing partners or building the technology into an existing hardware? They probably could have but didn’t want to. I think the Nexus Q will be around for a year or two – a lot like the original Apple TV with a different story – and then be replaced by a successor more directly aimed at the average consumer.

However I am not saying, that the Nexus Q isn't a brilliant move by Google. It might give them just the amount of positive attention they need right now.

So is Outsourcing still the Ultima Ratio?

In my opinion, right now there is not yet a mass market for more expensive home market production. However companies like Jaguar and products like the Nexus Q will show whether there is enough money to be made for companies to actually move away from outsourcing. Benefits seem to exist and so does a certain market. As always in business however it is the question of scale that will be essential. 

Obviously there is a lot more to say about this field, but I still hope you found this little expediture into the world of sourcing as interesting as I did. It was my first article and I hope you liked it. If you agree or don't, please let me know in the comments below and we can discuss things further.