For many years, China has been a place where European and American companies moved their manufacturing facilities to, mostly in order to take advantage of cheaper labor. “Reshoring” or “onshoring” is the opposite of offshoring. It means moving 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
Years ago, reshoring was at the center of American political discourse. President Obama was advocating the rebirth of manufacturing in the United States. It was 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, supported the efforts of companies that decided to move back to the USA.
Reshoring activities were popular in 2018-2019 as an answer to US-China trade war, or more precisely, to the China tariff. During the Covid-19 pandemic, zero-Covid policy in China forced manufacturers to tone down or even stop production. Hence, reshoring became a hot topic again. The “China+1” strategy stands for diversification of manufacturing by reducing reliance on China and moving a part of the activities to India, Thailand, Vietnam, or other country with low-labor costs.
In Europe, this phenomenon is also present but seems to be more territorially differentiated and is not making the headlines like the US. In 2015 it was found that US companies mainly reshored from China and other Asian countries, while European ones relocated mainly from other European countries.
What are the main reasons for reshoring?
There are many resons why companies decide to reshore:
- flexibility
- quality
- lead time
- IP rights
- labour cost reduction
- change in firm’s strategy
- coordination efforts and costs
- transport costs
- “Made in” effect.
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. Moreover, the rise in wages in China is compelling. In 2014, the China average yearly wage was around 60,000 CNY; in 2021 it was over 106,800 CNY.
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?
Bringing the manufacturing or any other sector back home or to a country that is not China is not easy. “Support” from the central and local government does not solve the problem of 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 cost is low, and the whole system is already there, performing well.
Is reshoring the future?
Right now, the reshoring trend is gaining momentum. A report shows that over 60% of supply chain executives expect to return some of their Asian production to the US and Europe by 2025. For the past few years, companies overhauled their network of factories due to the disruptions in the global supply chain. After all, onshore production is more secure than outsourcing it to the other side of the globe.