Reshoring – is it a significant trend?

For many years, China has been a place where European and American companies moved their manufacturing facilities, mostly in order to take advantage of cheaper labor. “Reshoring” is the opposite of offshoring. It means moving said facilities back to the companies’ home countries. Several media outlets have jumped on the reshoring bandwagon, claiming that the “cheap China” period has ended. The most prominent examples are Caterpillar and Philips.

Reshoring

It can be said without exaggeration that reshoring is at the center of American political discourse. President Obama is advocating the rebirth of manufacturing in the United States. It is a strategy to recreate manufacturing jobs and therefore give relief to the crisis-stricken job market. The Reshoring Initiative, founded by Harry Moser in 2010, is supporting the efforts of companies that decided to move back to the USA. In Europe, this phenomenon is also present but seems to be more territorially differentiated and is not making the headlines.

What are the main reasons for reshoring?

China’s labor costs are rising and the support from the Chinese government, aimed at foreign investors, is shrinking. Many companies are finding it less profitable to produce in China and sell in their home countries. Automatization of the production process is another factor whose role cannot be downplayed. It is one of the main reasons why Phillips decided to move its production base back to the Netherlands. When only a handful of skilled laborers are needed to maintain an automatic assembly line, labor costs drop. Robots will not go on strike or demand higher wages. And the rise in wages in China is compelling. The average annual urban income has risen from $3960 in 2007 to $6850 in 2011.

China’s government policy is also playing an important role here. The country’s leadership aims to drive domestic consumption and cuts down the incentives for foreign investment. The recent economic downturn has proven that the strategy of dependence on foreign demand for goods may be dangerous to Chinese prosperity. There were a lot of huge state-run investment programs, but consumer consumption is the key to further development. The Chinese understand it well and invest abroad. They put more pressure on research and development and try to combat the income gap. It affects operating costs and makes some of the jobs too expensive.

Is reshoring possible?

But bringing the manufacturing industry back home is not an easy thing. Verbal support from the central and local government doesn’t solve the problem caused by strict and costly environmental regulations and high prices of resources. The resource chain for several industries in China is already very developed, and one supplier can be easily substituted by the other. For example, most of the factories of electronic devices are located in Guangdong province, the transport fee is low, and the whole system is working well.

Offshoring in Europe

The statistics in Europe show that more companies are offshoring than reshoring. The trend to offshore is especially prevalent in countries with high hourly labor costs, such as Denmark or Finland. Another factor is the labor cost dynamics, this particular reason stands behind the fast rise of offshoring in Slovenia. Some other countries with high labor costs, such as Germany and Austria, are not necessarily into offshoring practices.

In terms of Germany (the biggest importer to China), another trend must be mentioned. Many western companies are changing the nature of their offshoring activities, producing not only for their own country’s market but for the Chinese market as well. It is still hard to achieve the outstanding results of FAW-Volkswagen, which at its best times used to control the 40% of the Chinese automotive market. The growing domestic consumption will certainly lure more companies to step their feet on Chinese soil. There is no going back to the old world with big industry presence in Western countries.

Right now, the reshoring trend is losing its momentum. The advocates of reshoring may win public debates and be given more votes in online surveys, but the price is still the main criterion behind consumer choices. However, it seems possible that in the following years the exodus of manufacturers from Western countries will be substituted with the equilibrium between offshoring and reshoring. Whatever will happen, China, with its enormous domestic market and great production capabilities, will still remain a key part of the global supply chain.