Europe's About-Face on Offshoring

When $145-a-barrel oil sent shipping costs skyward in 2008, it was the first hint that globalization might have its limits. Now the downturn is forcing companies to think twice before heading abroad. An October survey by Cognizant, an IT outsourcing company, found 40 percent of European companies cut back outsourcing plans in 2009. The drop was even sharper in manufacturing. A November survey by Germany's Fraunhofer Institute showed a trend toward "backshoring"--bringing production home. One company is now returning to Germany for every three going abroad, compared with one in six in 2003. For the first time since 1995, many firms are abandoning China. Job losses to offshoring have slowed to a trickle.

Steffen Kinkel, the study's author, says the big difference from past recessions is that firms are focused less on slashing costs than cutting excess capacity amid reduced global demand. They've also found many offshore factories didn't deliver the expected savings, due to transport delays and hefty wage hikes in countries like China and Brazil. The calculus could shift again if states put a price on carbon emissions, which could raise the cost of shipping. Some economists are now talking about a revival of Western manufacturing. Even if that doesn't come to pass, more firms that once flew blindly abroad may be coming home to roost.