Why Do Companies Reshore?
Reshoring is the opposite of offshoring. It applies to companies that are bringing production and manufacturing “back home,” i.e. returning it to the country in which the company was first established.
In other words, if a company has moved some or all of its production operations overseas (offshoring) to reduce manufacturing costs, reshoring is the process of bringing some or all of it back. Reshoring is sometimes referred to as backshoring or inshoring.
Why Do Companies Reshore?
Although offshoring often reduces an organization’s labor costs, several factors make reshoring appealing.
- Increasing costs in developing countries — As countries around the world, especially in Asia, continue to develop, labor costs are increasing and shipping costs are becoming prohibitive. For some businesses, the cost difference between operating onshore or offshore is negligible, with the gap growing smaller every year.
- Instability of international trade — The geopolitical situation has changed dramatically over the past decade, with China taking a leading role internationally. Meanwhile, with the U.S. taking a more cautious stance and other changes happening in global trade relations (such as Brexit), having overseas operations presents a much higher risk.
- Supply chain management — Reshoring means that most links in the supply chain will be in the same time zone, making them easier to manage and creating leaner workflows.
- Regulatory factors — Conforming to material standards, quality control issues, and losing intellectual rights when working overseas can create problems for companies. Reshoring operations means that everything comes under one set of regulations.
- Boosting the national economy — Reshoring brings jobs, assets, and resources back to the original nation. This helps to increase GDP and bolster the economy.
- Risk mitigation — Reshoring can help protect supply chains from the inevitability of highly disruptive black-swan events that could result in significant production delays.
The Disadvantages of Reshoring
The main disadvantage of reshoring is the enormous cost involved in moving manufacturing operations from one country to another. For medium to large companies, this is a task that requires careful logistical planning and management. If the transition is not carefully executed, the initial cost of reshoring can seriously outweigh any benefits.
For this reason, many companies call in reshoring specialists and consultants to help plan and execute the transition.
If the materials and resources needed for manufacturing can be sourced locally, reshoring can stimulate the domestic economy. On the other hand, if the materials and resources need to be sourced overseas and shipped over, this may have a net negative effect on both economies. For example, if your business relies on making products from bamboo, it may make sense for operations to remain in East Asia, where there is a surplus of cheap material available.
Industries That Benefit from Reshoring
Reshoring has become a popular process for the following industries in the U.S.:
- Automotive and aerospace production
- Manufacturing of parts — e.g., die-cast mold tooling, plastic injection molding, CNC machining, etc.
- Manufacturing of complex or intricate products — any product or item that needs a lot of communication to get it manufactured correctly.
- Steel and aluminum — due to the Trump administration’s incentives for domestic production and penalties on imports.
The Growth of Reshoring
Over the past decade, there has been more and more pressure for companies that have overseas manufacturing operations to bring them back home, but it is only recently that major shifts have occurred.
In 2018, the number of U.S. businesses that began reshoring operations was the highest since records began.
In 2019, the imports of manufactured goods from low-wage countries in Asia decreased for the first time in five years, though U.S. domestic manufacturing output remained robust.
The reason for this growth is largely political, with corporate tax cuts and the easing of regulations. Combined with the rising cost of labor and material prices in China, there has been an “awakening” as to the increasing costs of offshoring and how costs are likely to increase further over the coming years
Reshoring in a Post-COVID-19 World
Despite the results of reshoring being difficult to predict, with companies and economies at risk of losing out, disruptive global events have long inspired commentators to predict the end of globalization and a rise in reshoring.
Perhaps nothing has disrupted supply chains quite like the COVID-19 pandemic, which has resulted in factory lockdowns, port closures, rising transportation costs, reduced demand, and shipping delays.
Organizations are quickly realizing the extent to which they underestimated the risks of manufacturing overseas. No doubt many will look to end their reliance on manufacturing in remote parts of the world, particularly when it comes to the production of critical supplies such as medicines, medical equipment, and PPE. As a result, the shift towards reshoring is likely to accelerate rapidly in the coming months and years.
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