Earlier this month, HBS’ Working Knowledge journal carried this report on Porsche: “Porsche’s Risky Roll on an SUV”
The story examined how “Porsche’s Cayenne manufacturing brought the company full circle in a return to its eastern European roots….and raised the question how much does location matter in a globalizing world?…and could “products just be manufactured anywhere?”
Read the story to understand “Why would any company in the world want to locate in a high-cost, high-wage economy like Germany?”
Almost as radical was Porsche’s choice of locations to build this SUV, named the Cayenne. Even though wages in Germany are a good six to seven times higher than in eastern Europe, where many other automakers have moved production, Porsche erected a small but substantial plant in Leipzig in eastern Germany. And unlike BMW or Daimler-Benz, Porsche did not move closer to the main U.S. market.
…Porsche’s risky moves—which ultimately led to a successful turnaround—form the basis for a terrific debate on the importance of brand and location, according to Jeffrey Fear, an associate professor, and Carin-Isabel Knoop, executive director of the HBS Global Research Group. The two resulting cases, Dr. Ing. h.c. F. Porsche AG (A): True to Brand? and Dr. Ing. h.c. F. Porsche AG (B): Made in Germany, “really play off the idea of what exactly Porsche is and what it stands for,” says Fear.
…”I think the central question posed by the cases—and we can generalize this more broadly beyond Porsche—is, what difference does location make in a globalized world? Can products just be manufactured anywhere?”
One possible answer: Think about relative productivity costs. “In Germany in 2000, the labor costs were about 25-26 Euros per hour. In the Czech Republic it’s about four Euros per hour. So it’s quite dramatic. But how you assess these costs depends on productivity levels as well. And German firms are very, very productive.”
This is an interesting angle to outsourcing and offshoring. I do not have the data for relative productivity in technology or software between different countries but it should be a very interesting set of statistics.
The report also emphasises the point that wage differentials are not static and may not give the full picture:
“When you just look at that wage difference, it’s too static. One, you’re not looking at relative productivity at a given moment in time or the relative unit cost levers, for instance, of managerial expertise. And then two, you’re not seeing how fast wages are rising relative to increases in productivity…You shouldn’t be looking at a static number, but you really should be thinking about it more dynamically over time.”