Offshore / Nearshore: the return of geopolitics?

Frédéric LASNIER

CEO & Chairman (Founding Partner)

The world is moving at a staggering pace. A few weeks ago, I lost myself in a political and economic analysis of the emerging world. Could I have been mistaken? Whatever the case may be, the tragic events of Tunisia, where people are dying today, are putting into perspective this geopolitical, or even geostrategic criterion. What about the wikileaks? Shouldn’t we fear that, sooner or later, this model will affect international companies which often indulge themselves in secrecy and political schemes that the politburo is claimed not to have denied?

All types of fears are surfacing:

1. The fear of technological plunder
A proof of this are the numerous and alarmist speeches on the risks inherent in technological transfers. Renault (a company which has fallen into the trap of a Chinese subcontractor) gets a rap on the knuckles from the state, while in the last few days, the Chinese army was carrying out the first flights with its stealth fighter-bomber (!), which is fueling justified fears related to the level reached by Chinese R&D. After all, the Rafale fighter jet made its first flight around 1990 if my memory serves me right. There is no doubt that the large offset contracts, in the weapons and civil aeronautics field, are transferring, in the narrowest sense of the word, a know-how that has been acquired over decades, thus enabling beneficiaries to make enormous shortcuts on the road to technological progress. Of course, offset contracts don’t have much in common with offshoring activities… which are being carried out in parallel. Competition on the aircraft market is so fierce that industrial manufacturers are going to greater and greater lengths to find more and more complex subcontractors, or even sub-assemblies. Isn’t the result analyzed today based on the emergence and boom of Embraer, of the Chinese C919 model or of the 100-seat Russian plane? Whatever the case, after having cut down on costs, aircraft manufacturers will now have to share their benefits. Louis Gallois gave a reminder in the press today that the world market of 100-200-seat aircraft would not be able to support the six competitors operating today.
As regards the “ Renault Gate”, it will probably not be the last. The culture of business relations has not reached the same level of maturity in certain regions and local court decisions on the breaches of confidentiality clauses discharge the guilty employees in almost all cases. For the time being, international groups have almost no control in this respect.

2. Instability risks
Due to regional tensions in the Far East, in the Arab-Muslim world and in Africa, all those who intend to establish long-lasting partnerships in these areas are having second thoughts.
Acts of violence against Christians in Egypt, the events in Algeria and Tunisia, in Niger or in the Ivory Coast, all of this does not encourage anyone to outsource services in the Maghreb or in Western Africa. In certain regions, when conditions become difficult, it can become virtually impossible for technological equipment to be passed across the border… except by offering a more or less substantial financial enticement. Pentalog had this experience in Moldova two years ago. Events lasted only for a few days but everything became a lot more complicated during that time. We only had to face a one-hour power cut and several hours at most without internet. The never-ending power of the old and weakened presidents of Tunisia, Libya and Egypt could bring about complex scenarios that could spread in the whole region. What about Libya? Won’t the USA try something in order to push the old dictator down the history ladder? Will Uncle Sam remain insensitive to Algeria, with its generals, its Islamists, its oil and its old president? In this context, Morocco, the only monarchy in Northern Africa, has undoubtedly become more popular. But let us keep in mind that not even Morocco is completely safe from the great interests that seem to draw to Northwestern Africa Islamists from all over the world, the French army, the Chinese… and the Americans who are only waiting for a French failure.

3. The legal criterion
The questions related to the movement of people, goods and equipment within the EU plead in favour of European nearshoring. I have already expressed this opinion in writing on several occasions.
But this criterion, which is the first to come to mind, isn’t the only one! Even the European tax system is about politics! While R&D operations are booming at Pentalog, French companies are making more and more requests for their services to be included under the research tax credit system, thus eliminating the competitive edge (price) of certain regions outside the European Economic Area. In certain fields, it so happens that, research tax credit included, our services are cheaper in Romania, which somewhat affects our strategy… but it is meant precisely for that.

At the end of the day, it is up to every offshore customer or investor to choose their constraints, needs and ambitions in terms of cost reduction. 2011 will be the year of Eastern Europe in France, I am almost sure of that. Actually, this is the region with the highest boom today, exceeding by far the other areas. India is clearly declining, while China is exploding. My best shore remains Romania, surpassing Bulgaria by a little, whereas Poland and Hungary are close behind. Therefore, I am placing EU in the lead. Outside its borders, former Soviet Union countries are leaders on the English-speaking work market: Russia is on top, followed by Belarus, Ukraine and Moldova. In the Far East, I find India to be a more inappropriate solution than ever for French companies. Its tariffs are high and its services must practically receive the same amount of support as in China or in Vietnam. Therefore, the last two hold an advantage, as their markets remain particularly stable for the moment.