US retail giant Walmart invested US$250bn in local production in the last decade. The company also commits an additional US$350bn between 2021 and 2030 to support US manufacturing. Walmart is not alone in pursuing US-based production. Many other companies, including General Motors and Siemens, prefer to bring production back into the US – also known as reshoring. Reshoring has also become popular in telecom and service sectors. Several telecom and financial service providers (e.g., EE, BT, Santander, Vodafone) have decided to bring customer service jobs back to the UK from overseas territories to ensure seamless and efficient solutions to their customers’ problems[i]. A study conducted by Lloyds Bank found that 71% of companies intend to reshore to the UK to improve product quality[ii]. They aim for smooth access to critical infrastructure, minimum or no delays in production and control over the complex supply chain network.
The concept of reshoring has received traction in the last decade, with increasing evidence of large enterprises bringing operations back to their home countries. This is the reverse of offshoring, which was widely adopted in the early part of this century. The high production costs in suppliers’ countries, transportation costs and regulatory barriers often put organizations in a conundrum over the sustainability of offshored production. Due to these difficulties, reshoring has emerged as a viable alternative.
Many firms that had decades of offshoring strategies have decided on reshoring due to multifarious motivations. Reshoring is considered a strategic option to bring efficiency to the production process, which can potentially enhance operational and financial sustainability. Factors such as changes in the internal and external environments and financial and production efficiency also provide impetus for reshoring decisions.
Offshoring: the good, the bad and the ugly
The globalization of market and production opened up opportunities for firms to find production partners in other countries – often cheaper manufacturers in the developing world. The big attraction of offshoring in the first place was the pursuit of higher profit by outsourcing production in places like China or Indonesia, not least because the labor there was much cheaper. As a result, from the 1990s, a growing number of firms started to outsource their production to obtain cost efficiency. Offshored production became a common business model. From the readymade garments industry to automobile, a wide range of sectors witnessed seamless production processes heavily reliant on the global value chain (GVC).
However, in the rapidly changing world, business models do not offer the same benefits for a long period. The offshoring model lost its appeal in the last decade. Several factors have worked to reduce the financial incentives, that offshoring offered:
The production costs in the offshore partner countries (eg. China) have risen for various reasons, including inflation and higher labor costs, which erode the cost advantage. By bringing automation into the production processes, Western companies can narrow the production cost gap.
The efficiency of the global value chain depends upon smooth and stable transportation and stability in the currency market. Since COVID-19, most international business firms have struggled with supply chain disruptions. These difficulties severely diminish the benefits offered by offshoring.
The increasing speed and rapid change in product design require a much more agile and responsive production process. Production plants nearer a firm’s headquarters can speed up the design and testing process. Prof Dennis Novy an expert in trade economics at Warwick University, UK explains: “Production runs are becoming much shorter, products are changing much more rapidly, and having access to the manufacturers and the suppliers in a local area makes you much more flexible and that is a factor behind this”[iii].
Job losses due to offshoring created concerns amongst general people in many Western countries, fuelling the rise of ultra-nationalist and populist parties and policies. Firms often feel pressure to reconsider their decision to offshore.
The global political environment has become much more volatile in recent times, risking uncertainties in the supply chain network. The recent attacks on shipping in the Red Sea and the water shortage crisis in the Panama Canal serve as potent examples of the increased risks in the global supply chain and operations.
There have also been concerns regarding the ethical and employment standards in some of the low-wage countries where companies take advantage of suppressed organized labor, and where human rights legislations are not as robust as in the West. Human rights activists have been vocal against these companies and countries and put pressure on their Western buyers.
Finally, research suggests that consumers often prefer production to take place in the home country which can generate local employment and reduce carbon footprints[iv].
Reshoring: a panacea or further risk?
While reshoring has been on the agenda since the outbreak of the crisis, studies show that the strategy is gathering momentum. The Global Reshoring & Footprint Strategy report shows that more than 60% of supply chain executives expect to return some of their Asian production to Europe and the US.
However, not all companies intend to completely reshore the part of their production that was offshored in the past. Some companies are willing to reshore/onshore only parts of the production. This is driven by their intent to minimize risks and/or to continue with their existing partnerships in overseas countries which have achieved economies of scale. It could also be due to contractual obligations.
Furthermore, reshoring is not the only option companies consider as an alternative to offshoring. Pursuing cheaper or flexible production systems and consequent competitive advantage continue to drive them to find alternative production options away from their home country. Accordingly, nearshoring has emerged as a viable option. European companies are mainly considering Central and Eastern Europe as possible production destinations. These nearshore destinations may have higher labour costs (compared to offshored destinations). However, they offer manoeuvrability and flexibility leading to operational efficiency and agility. Central Europe is not the only nearshoring option. UK fashion and cosmetic retailer, ASOS recently nearshored in response to the ongoing shipping disruptions in the Red Sea and Suez Canal. By nearshoring to countries like Turkey and Morocco, the company avoids its ships having to reroute when traveling from Asia – which previously led to longer lead times and increased costs.
Some companies have also opted for friendshoring, particularly in the wake of complex geopolitical situations, emanating from the West’s recent relationship with China. While nearshoring may primarily offer geographical advantages, friendshoring focuses more on moving production to countries that are more politically aligned with the manufacturers’ countries. Apple has decided to move a significant part of its production from China to India. With the strained US/China relations, India offers a relatively more politically acceptable destination, although the country has a history of political instability.
Since Russian invasion of Ukraine and China’s indirect support to Russia, speculation about Chinese invasion of Taiwan has increased more than ever before. Any attack or invasion would result in widespread global sanctions against China. Many companies have learned from the Russian case and are worried about similar difficulties in China, which has bigger business implications. Hence, it would be strategic for them to plan alternative options.
Furthermore, the option for reshoring is not a plain and straightforward decision. This is not binary and equally applicable to all sectors in the same manner. A study conducted in 2019 indicates that reshoring options and strategic intents vary depending on the nature of the sector/industry (Figure 3).
Although the study is five years old, it offers useful insights into the sector-specific nature of reshoring. According to the study, 105 out of 2450 firms reported reshoring activities during the analyzed period. 11 Of these firms, reshored from their suppliers, and 2.6% from their own subsidiaries. Reshoring was more common in high and medium-high technology sectors (6.7 % and 6.2 % of surveyed high/medium-high technology firms). In addition, the study found that firms producing single units are less likely to reshore than firms in batch or mass production. Single-unit production requires closer interaction with customers and is less wage-sensitive.
As it has been widely discussed, reshoring is a difficult strategic decision. This requires astute strategic foresight and meticulous assessment to find a reshoring alternative. With the evolving international business and political environment, the future of reshoring will continue to unfold in the coming years and it remains to be seen to what extent global and international firms design and manage relevant strategies.
The article is based on the author’s opinions based on research and analysis.
Dr Bidit Dey
Director of Accreditation
& Senior Lecturer (Associate Professor) in Marketing
Sheffield University Management School
The University of Sheffield
LinkedIn: Bidit Dey | LinkedIn