- Frequent calls and travel are indispensable for American manufacturers who locate plants overseas or source their products abroad.
- The average American business traveler spent $3,830 per trip abroad in 2015, of which $1,956 was spent on airfare.
- Business travelers went abroad an average of 4.2 times in 2015 and the average length of each trip was 17.2 days.
Understanding the full array of tasks associated with conducting business long-distance is necessary in order to properly account for and assess the total costs to a business. The opportunity costs associated with oversight of operations here and abroad, like many direct costs, depend on each company's individual circumstances. However, several pieces of data allow us to make a general assessment of the costs and frequency of international business travel associated with oversight of foreign operations.
Often there is no substitute for in-person meetings and visits to worksites. Travel requirements to locations – plants or sourcing facilities – are likely to be intensive, especially in the start-up phase of a new plant's operations or a relationship with a new supplier. Executives and other employees may also need to travel to further develop or strengthen relationships; to oversee design, production, or shipping; or to resolve unforeseen issues like supply chain disruptions or production errors.
The Department of Commerce's Office of Travel and Tourism Industries (OTTI) conducts the Survey of International Air Travelers to estimate the characteristics and spending of international travelers entering the United States, as well as American travelers going abroad. According to the survey, the average American business traveler spent $3,830 per foreign trip abroad in 2015. A bit more than half of the total cost of these trips was airfare, while the rest was spent on lodging, food and other costs at the destination.
According to OTTI, the average international ticket for business travel cost $1,956 in 2015. Ticket costs can vary dramatically depending on several factors, including season, destination, lead time and the class of service. For business travelers in 2015, 64 percent of tickets were for seats in traditional economy or coach class, 21 percent in premium economy, 12 percent in business class and only 4 percent in first class.
To take a more detailed look at the cost of international travel by country, we can use data from the Department of Transportation's Bureau of Transportation Statistics. The following table shows the average cost of economy- and business-class round-trip tickets from the United States to select foreign destinations in 2016. For these destinations, flying business class meant paying more than three times as much as economy class. China, Brazil and Australia were particularly high-cost destinations for business class travelers, while Mexico represented a considerably less costly trip. By contrast, the Bureau of Transportation Statistics reports that the average domestic fare in the United States cost $349 in 2016.
Average Cost of Direct Round-Trip Flight from U.S. to Selected Destinations, 2016
|Business Class||Rank Among Business Class Ticket Purchases||Economy Class||Rank Among Economy Class Ticket Purchases|
Source: Economics and Statistics Administration analysis using data from Department of Transportation, Bureau of Transportation Statistics.
Note: Fare classes are determined by reporting carriers.
While flight costs can add up, the personal and professional benefits of global travel may outweigh the costs. OTTI reports that the United States welcomed a record 77.5 million international visitors in 2015. With respect to offshoring, however, an important factor to consider is the number and length of trips required to set up a new factory or node in a supply chain – as well as the recurring oversight trips required to maintain functionality or a good business relationship. Trips may be frequent and unplanned. According to OTTI, the average business traveler surveyed in 2015 reported traveling abroad 4.2 times during the previous 12 months.
Lodging and Other Costs
According to OTTI, 79 percent of American business travelers stayed in hotels or motels on their foreign trips in 2015, with each staying an average of 9.9 nights. While most of the remainder stayed in private homes, those trips were considerably longer – with an average length of 22.6 nights. Hotel, food and other similar costs can vary substantially depending on the country and city in which a traveler stays. To provide an idea of the magnitude and range of these costs, the following table shows the average per diem rates set for federal government employees traveling abroad to select countries in 2016:
Average International Per Diem Allowances for Federal Government Employees, May 2016
|Destination Country||Lodging||Meals and Other Expenses|
Source: Economics and Statistics Administration analysis using data from Department of State.
In addition to the direct costs of travel, there are many other oversight costs that are closely related to manufacturing offshore. One oversight cost that may be overlooked is the cost of selecting a vendor. This process requires a great deal of time – from six months to one year – as well as human capital, legal expertise and financial resources. One or two employees will likely be needed to work full-time on this project, which takes away from time that they could have been spending on other projects. Some companies even choose to hire an outsourcing adviser for about the same cost as doing it themselves. Because the selection of an offshore vendor is so critical to a company's success, employees will often travel to the site to confirm details and validate the decision before signing the contract – which necessitates additional travel expenses.
Next, the company must deal with the cost of the transition. The process of handing over the reins to an offshore business partner can take anywhere from three months to one year. In the IT business, for example, companies may need to bring offshore workers to the United States for training on applications, especially if it is the first time the company has worked with that particular vendor. Only so much can be achieved through telephone communication, and a lack of complete training can lead to mistakes that cost the company down the line. If this training occurs in the United States, the company needs to pay the prevailing U.S. hourly rate to offshore employees here on temporary visas, so the notion that once a company begins offshoring it will start saving money immediately is often misguided.
Finally, a company must oversee the infrastructure resources in an offshore plant location. While offshore partners or their home countries often incur expenses for infrastructure development, ultimately the U.S. company will also pay the price for infrastructure that does not meet its standards.
Companies should consider the indirect or opportunity costs that arise from having personnel or executives out of the office for extended periods of time. Coordinating overseas plants and supply chains requires frequent communication with overseas staff. Although telecommunication costs may be low, calls or video conferences, often at off-hours because of time zone differences, impose opportunity costs on U.S. employees, increasing stress or reducing attention to innovation.
As indicated above, OTTI found that the average international business traveler in 2015 reported making 4.2 trips abroad in the preceding 12 months. Given that the average length of each trip is 17.2 days, American businesspeople traveling abroad may be spending more than two months each year working overseas. Each day spent abroad likely represents a day spent away from the office or the plant back in the United States. Many companies may be prepared to invest in a dedicated employee or team to manage their international operations. While this choice offsets the opportunity cost of having other employees out of the office, it imposes other opportunity costs in the form of resources that could be spent on other projects.
Culture and Communication
A company may easily calculate some costs associated with the tangible aspects of travel, but there are other intangible costs of off-shoring that are more difficult to measure. Companies must take into account the broader need to understand differences in culture related to working in other countries.
One cultural difference that may affect productivity is how comfortable workers are offering suggestions about projects or pushing back if they see a more effective way of doing it. According to the CIO of GE Real Estate, an Indian programmer may complete a project without questioning it (under the assumption that the customer is always right), whereas an American programmer may be more likely to push back if the suggested way of completing the project does not seem to be the most logical or effective.
Differences in communication style can also slow – or even halt – productivity. A great deal of travel to the offshore location may be necessary to close the communication gaps that impede project advancement. Language may place constraints on the kinds of employees that a company is able to hire. According to a report from the Economist Intelligence Unit (EIU), nearly 90 percent of companies with an international presence or plans to expand internationally believe that improving cross-border communications improves profits, revenues, and market share. Almost half of the companies surveyed in the report say that they need some of their employees to speak a foreign language, and one quarter says a majority of their employees need foreign language skills. They cite "differences in cultural traditions" and "different workplace norms" as the largest threats to their international relationships. Companies developing cross-border relationships should be prepared to commit resources for hiring or training employees to manage cultural dynamics.
Manufacturers who are considering locating plants overseas or sourcing their products should consider the full array of travel costs, from direct costs like flights and lodging to indirect costs like time away from the office.