Is Reshoring Still a Reality?

November 9, 2010

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In 2009, many U.S. manufacturers began to bring offshored production closer to home. As the economy slowly improves, will the "reshoring" trend continue or will offshoring to low-cost countries pick up again?

Since the recession first took hold across the globe, several factors forced U.S. OEMs to rethink the strategies that led them to offshoring in past decades. Reshoring, or bringing manufacturing processes in far-flung locations back to the U.S., gained some popularity last year due to higher costs for labor, fuel and transportation, as well as theft of intellectual property and higher rejection rates for foreign-made goods in developing countries.

"After a decade of rapid globalization, economists say companies are seeing disadvantages of offshore production, including shipping costs, complicated logistics and quality issues," the Wall Street Journal reported earlier this year.

According to a survey of major third-party logistics providers in 2009, CEOs in North America and Europe reported that, on average, nearly one-quarter of their customers had taken steps during the past year to shorten supply chains. Of the 35 CEOs surveyed, 20 reported that some of their major customers had shifted manufacturing activities from Asia to North America, Central America or Eastern Europe.

And, for a brief period, the move to repatriate work to the U.S. (onshore) or nearby locations (nearshore) after initially outsourcing it to far-flung, low-cost countries seemed to be taking hold.

"Costs to do business in previously lower-cost countries are steadily increasing due to labor rates and currency fluctuations," Mitch Free, CEO of online sourcing marketplace MFG.com, told Machine Design this summer. As a result, more manufacturers either have or are seriously considering a backshore strategy to save costs, improve quality, and better manage brands and technology, he said.

According to MFG.com's latest MFGWatch survey of North American manufacturers, in mid-2010, nearly one-third (38 percent) of respondents said they will begin investigating onshore or nearshore options for production currently performed in low-cost countries, up from 31 percent in the first quarter.

Moreover, as domestic manufacturers reassess the total costs of their products, a significantly higher number of large North American manufacturers have already repatriated production or moved production closer to North America. The survey, conducted in June, found that 13 percent of large North American OEMs had already returned some production from low-cost countries in the first quarter of 2010.

According to a survey of 3PL leaders this fall, 27 of the 31 CEOs surveyed noted that some of their manufacturing customers began to move toward nearshoring options over the past year. In North America alone, 14 out of 16 executives reported a shift of some customer manufacturing back from Asia to North or Central America.

The increased interest in reshoring or backshoring is at least partly due to risks inherent in managing production across extended supply chains (e.g., costs, supplier reliability, etc.). According to the MFGWatch survey findings, 44 percent of North American manufacturers experienced a significant disruption to their supply chain that forced them to select or contact alternative supplier sources, up from 35 percent in the previous quarter.

Despite these signs of repatriating work to the U.S. becoming more prevalent, other data indicate that offshoring to low-cost countries is picking up again.

While many companies actively pursued nearshoring and onshoring in 2009, or expected to do so in the future, Grant Thornton's 2010 survey of U.S. manufacturing executives concluded that the trend remains active but dampened since last year.

"[N]earshoring appears to have lost some momentum over the past year," Grant Thornton explains. "While some companies brought operations closer to the U.S., fewer did than in our 2009 survey. Fuel prices — one driver of nearshoring — came down, at least temporarily. So, too, did raw materials prices such as steel."

Interestingly, in the auditing and risk management firm's 2009 survey, 45 percent of companies projected they would move sourcing closer to the U.S., "but this largely did not come to pass. Despite their plans, one year later, only 20 percent report that they actually did so. Moreover, only 12 percent of respondents project that they will move facilities closer to home in the coming 12 months, a steep drop-off from the projections from our 2009 survey."

In fact, Grant Thornton found that 82 percent of respondents made some portion of their supply chain purchases internationally, up from 77 percent last year. China remains the top choice, with 28 percent sourcing from that country, up from 22 percent in 2009.

A separate 2010 survey, of 100 chief financial officers (CFOs) at leading technology companies located throughout the U.S., forecast China would be the leading location for future outsourcing in the high-tech industry. According to the BDO 2010 Technology Outlook Survey, CFOs are currently outsourcing to more locations, and 28 percent of respondents said they are looking at Chinese service providers in particular. Southeast Asia was the second favorite at 22 percent and India was a close third at 20 percent. In contrast, last year the United States topped the accounting and consulting firm's list at 22 percent.

"Last year, fraud issues and international strife caused U.S. companies to focus on domestic services as opposed to outsourcing," according to Don Jones, a partner in BDO's Technology Practice. "This year, however, the economy has significantly squeezed margins and companies have had to resume outsourcing to reduce their operating costs. Asia and India are the leading outsourcing locations because both regions have already built the necessary infrastructure to quickly support increased demand."

BDO's annual technology survey of high-tech companies concluded that when 2010 ends, it will have mirrored 2008 when it comes to offshore outsourcing locations: China and India will garner almost 80 percent of the high-tech business because of their low-cost offerings.

Despite the diminished nearshoring highlighted in its 2010 survey, Grant Thornton believes that U.S. companies serving U.S.-based customers with operations in Asia will continue to bring operations closer to home, including to U.S. soil. Among the companies that are currently nearshoring, the largest group is actually repatriating some aspects of sourcing to the U.S. Nearly six in 10 (59 percent) of those moving operations closer to home are locating those operations in the U.S., followed by Mexico (49 percent).

Resources

The Supply Chain in Uncertain Times: Is Nearshoring Losing Momentum? Grant Thornton, February 2010

The Shifting Geography of Offshoring: 2009 Global Services Location Index A.T. Kearney, May 18, 2009

Geography of Offshoring is Shifting A.T. Kearney, May 18, 2009

MFGWatch Quarterly Survey of North American Manufacturers MFG.com, Summer 2010

MFGWatch Survey: Backshoring Trend Accelerates, Supply Disruptions Persist, Employment Flat With Small Manufacturers MOJO blog (MFG.com), May 5, 2010

MFGWatch Survey: Supply Chain Risks, Backshoring Rise; Small Manufacturers Add Jobs, Large Manufacturers Cut MOJO blog (MFG.com), July 22, 2010

Backshoring Gains Momentum as More U.S. Companies Bring Production Home by Kenneth J. Korane Machine Design, July 7, 2010

Top Supply Chain Industry Trend Penske Logistics, Sept. 27, 2010

Competition and Government Regulation Challenge Tech Sector Funding... BDO, Feb. 16, 2010

Caterpillar Joins 'Onshoring' Trend by Kris Maher and Bob Tita The Wall Street Journal, March 11, 2010

Where Are Buyers Going Next? by Anand Ramesh Outsourcing Center (Everest Group), Sept. 1, 2010

Re-shoring Article Link Library National Tooling & Machining Association

Re-Shoring to Bring U.S. Manufacturing Jobs Back Home National Tooling & Machining Association and Precision Metalforming Association, May 12, 2010

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