US manufacturing reshoring trend ‘dead’

11 January 2016

Reshoring of manufacturing activities to the United States has failed to keep up with offshoring for the fourth consecutive year, according to a study.

The AT Kearney US Reshoring Index 2015 has dropped to -115 (with negative values representing net offshoring compared to reshoring), down from -30 last year, the largest year-on-year decrease in the past 10 years. The study also shows that offshoring of manufacturing is still increasing.

AT Kearney concluded that the trend towards reshoring, viewed by many as a decisive shift in global manufacturing, may actually have been just a one-off aberration.

The research attributed the drop in reshoring to lacklustre domestic manufacturing growth. Markit’s US Manufacturing Purchasing Managers’ Index fell in November, indicating a loss of some growth momentum, while the US Bureau of Economic Analysis expected manufacturing gross output to have shrunk by up to 3.6% in 2015. Depressed prices of oil and other commodities have affected domestic manufacturing gross output disproportionately, the research said.

Offshore manufacturing has also been “remarkably resilient” according to the AT Kearney, continuing to increase in 2015, with offshore manufactured goods imports expected to have grown by 6.5% in 2015.

The research also highlighted the fact that the sectors most projected to see offshoring due to lower labour but high transport costs - computers and electronics, appliances and electrical equipment, machinery, furniture, fabricated metals, plastics and rubber, and transportation goods - were also showing the highest level of increase in offshoring.

Industries vulnerable to rising labor costs in China have relocated to other Asian countries rather than returning to the United States, without incurring significantly higher supply chain costs, the research found. US imports of manufactured goods from Vietnam in 2015 will nearly be triple of those in 2010.

In the future, the forecast strengthening of the dollar, the oil price slide, the tightening US labour market in manufacturing, and even political uncertainty in the run-up to the 2016 elections are all factors likely to weaken the case for reshoring, AT Kearney said. It also noted a recent increase in nearshoring to Mexico, suggesting that any US firms leaving Asia could choose to stop south of the border.

Looking further ahead, ratification by the US Congress of the Trans-Pacific Partnership (TPP) - a trade agreement between 12 countries on the Pacific Rim - may weaken further weaken the business case for reshoring, the study said.

However, developments in the areas of digital manufacturing, 3D printing, and the Internet of Things were likely to completely change cost dynamics across the whole supply chain. The speed of these developments would factor into companies’ reshoring strategies.

Potential skills shortages due to new technology, and national manufacturing policies could also play their part in the future.

The US is an attractive location for foreign companies however, with many more interested in manufacturing in the US than domestic firms are interested in reshoring, the research said, with significant investment coming from China.

The report concluded: “Despite the many ifs and buts, it’s fair to say that reshoring as a trend is officially dead, at least for now. This does not mean that reshoring has totally stopped in its tracks, nor are we asserting that the predicted wave of reshoring will never happen.

"But this does serve as a needful reminder that – with global currencies, labor rates, and energy costs gyrating – as an executive whose job it is to make critical business decisions based on what the future is expected to hold, you need to reassess your footprint, and that of your suppliers, on an ongoing basis to see if the boundary constraints have changed enough to warrant an adjustment. And whatever course you take, be sure to build in flexibility, and stay nimble enough to correct course when the reality does not play out exactly as predicted.”

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