Posted By Jeff Moad, January 13, 2016 at 1:44 PM, in Category: Factories of the Future
Reshoring of production to the U.S. lost significant momentum in 2015 as manufacturers took advantage of opportunities in lower-cost countries in Asia and Southeast Asia, claims a new report by management consulting firm A.T. Kearney.
The company said that its so-called U.S. Reshoring Index in 2015, for the fourth consecutive year, indicates that reshoring of manufacturing to the U.S. is failing to keep up with offshoring. A.T. Kearney said that, in 2015, the Reshoring Index dropped faster than it has at any point over the past 10 years.
“Based on our data, we conclude that the reshoring phenomenon, once viewed by many as the leading edge of a decisive shift in global manufacturing, may actually have been just a one-off aberration,” declares the report.
Earlier A.T. Kearney reports, based on the U.S. Reshoring Index, have cast similar doubts on the strength of reshoring. And surveys by the Manufacturing Leadership Council have consistently shown that manufacturers continue to consider outsourcing as an important cost containment strategy.
A.T. Kearney describes the U.S. Reshoring Index as a simple formula factoring the import of manufactured goods from 14 offshore trading partners—such as China, India, Vietnam, and Thailand—and U.S. domestic gross output of manufactured goods. As such, it can be argued that the “Index” is more accurately a measure of manufactured imports from a developing region of the world rather than a clear picture of offshoring and reshoring by U.S. manufacturers.
Nevertheless, the report claims the index readings spell the end of offshoring as a significant trend among U.S. manufacturers. “Despite the many ifs and buts, it’s fair to say that reshoring as a ‘trend’ is officially dead, at least for now,” the report says.
The report cites two drivers for its findings: lackluster growth in domestic manufacturing activity, and the resilience of offshore manufacturing, particularly in Asia.
The slowdown in U.S. manufacturing growth—reflected in other recent reports—is attributable to factors such as the strong dollar, and recent drops in food, energy, and commodity prices.
And the report attributes resilience in offshore manufacturing, in part, to growth in Asian in low-wage countries such as Malaysia, India, Vietnam, Thailand, Indonesia, the Philippines, Bangladesh, Pakistan, Sri Lanka, and Cambodia. While rising labor costs have somewhat tempered growth of imports from China, the report says, manufacturers in these low-cost Asian countries have more than taken up the slack. While imports to the U.S. from China grew by 33% between 2010 and 2015, imports to the U.S. from those low-cost Asian countries grew by 57% during the same period. Exports from Vietnam tripled between 2010 and 2015, the report says.
“Industries vulnerable to rising labor costs in China, rather than returning to the United States, have instead been successfully relocating to other Asian countries—without incurring significantly higher supply chain costs despite the weaker infrastructure and supporting ecosystems of those “new” low-labor-cost destinations,” the A.T. Kearney report states.
The report predicts continued pressure against reshoring. Concerns about a looming manufacturing workforce shortage in the U.S. and even doubts related to political uncertainties in the run-up to the 2016 national elections could continue to suppress reshoring, the report states.
At the same time, many manufacturers seeking to move production closer to North American consumers are selecting a “nearshoring” strategy by increasing production in Mexico.
And the Trans Pacific Partnership trade agreement, if approved, could reduce reshoring momentum by cutting tariffs, the report notes.
But, even if reshoring doesn’t emerge as a major trend, U.S. manufacturing still has plenty going for it, says the report. Attracted by large North American markets, a rising dollar, and engineering expertise, many offshore-based manufacturers from China and Europe are launching or increasing production in the U.S., the report notes. And, unlike their U.S.-based competitors, many of them tend to build new plants, indicating a long-term commitment.
“Foreign companies such as Rolls Royce, Volkswagen, BMW, Siemens, Airbus, BASF, Bridgestone, and Michelin have all built or announced the construction of new manufacturing plants in the United States in the past three years,” the report notes.
Written by Jeff Moad
Jeff Moad is Research Director and Executive Editor with the Manufacturing Leadership Community. He also directs the Manufacturing Leadership Awards Program. Follow our LinkedIn Groups: Manufacturing Leadership Council and Manufacturing Leadership Summit
According to Harry Moser, founder/president of the Reshoring Initiative, “Some A.T. Kearney statements were completely misleading, chosen to get attention. They succeeded to the disadvantage of U.S. manufacturing. Recognition of the strength of the reshoring trend is a major factor driving companies to reevaluate offshoring and many individuals to choose manufacturing technology training, helping to fill the skilled workforce gap.”
Getting companies to understand all of the benefits of local production and adopt a more comprehensive total cost analysis could cut the trade deficit by 25% and bring back 1 million manufacturing jobs. Mainly this requires education of companies and is entirely under the control of our society. Detailed, objective reporting is necessary to motivate companies to reevaluate offshoring.
Numerous surveys consistently show that the trend is increasing. According to the Boston Consulting Group (BCG) Annual Survey released in December 2015, “the percentage of companies actively moving operations back to the U.S. continues to increase.” Of particular interest is the number of 2015 studies documenting the strength of the trend:
• BCG: Multinational industries actively reshoring increased 140% from 7% in 2012 to 17% in 2015
• Medical Design Technology: Of the 49% that outsourced offshore, 45% are returning
• Plastics News: 70% of plastics industry manufacturers have or will soon reshore
• Alix Partners: U.S. is favored over Mexico: 55% / 31%
• Walmart continues to make good progress towards its $250 billion 10 year goal
• Reshoring Initiative’s preliminary statistics for 2015 show the total of reshoring and FDI around 66,000 manufacturing jobs. Final results due out in early 2016.