Reshoring – is it a significant trend?

During 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 opposition of offshoring, it means moving said facilities back to the companies’ home countries. Several media outlets have jumped on a reshoring bandwagon, claiming that the “cheap China” period has ended, and publicizing some of the most famous cases, such as Caterpillar or Philips.

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

What are the main reasons for reshoring? China 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 the another factor, which role cannot be downplayed: it is one of the main reason why Phillips decided to move its production base back to the Netherlands. When only a handful of skilled laborers is needed to maintain automatic assembly line, labor costs drop down. Robots will not go on strike or demand higher wages. And the rise in wages in China is compelling: average annual urban income has risen from $3960 in 2007 to $6850 in 2011.

China’s government policy are 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 the Chinese prosperity. There were a lot of huge state-run investment programs, but the consumer consumption is the key to further development. Chinese understand it well and invest abroad, put more pressure on research and development and try to combat income gap, which affects working cost and makes some of the jobs too expensive.

But bringing manufacturing industry back home is not an easy thing. The verbal support from central and local government doesn’t solve the problem caused by strict and costly environmental regulations and high prices of resources. 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.

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 cost, 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. When Germany (the biggest importer to China) is mentioned, another trend must be also described: many western companies are changing the nature of the offshoring activities, producing not only for their own countries 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, but the growing domestic consumption will certainly lure more companies to step their feet on a 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 the consumer choices. However, it seems possible that in the following years the exodus of manufacturers from Western countries will be substituted with the equillibrium 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.

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