Companies and media punditry have been discussing “re-shoring” for years now. It picks up steam every time there is a significant distribution to supply chain from China. We saw it during the Trump-era tariffs, during supply chain shortages in the early days of COVID, and now again due to further shut downs in China costs and raising inflation. There have been academic papers on the subject and it comes up often as a major political goal especially in the United States and Canada.
While you have certainly heard this chatter, it does not answer the fundamental question: should my company re-shore our operations? Also, what type of shoring is best for you? To answer that question, we need to know what reshoring is and what it is not, and what you need to consider before moving forward.
Before we get started, we need to be clear about the terms.
Re-shoring: the practice of transferring a business operation that was moved overseas back to the country from which it was originally relocated.
Near Shoring: the practice of transferring a business operation that was moved overseas to a country in the same region from which it was originally relocated.
Offshoring: the practice of transferring a business operation to another, typically lower cost country.
Outsourcing: the business practice of transferring a business operation to an external organization.
Note that this blog is specifically about re-shoring. We will not be discussing the merits of offshoring or relocating production from China to Vietnam or from China to Taiwan, nor the advisability of nearshoring.
Re-Shoring Within the Manufacturing Industry
While re-shoring can take many forms (it is a very common practice in IT and call centers), in this context we are speaking exclusively about manufacturing. Additionally, while there is a difference between re-shoring outsourced operations (i.e. moving to domestic external partner to manufacture a product) and re-shoring and starting/restarting manufacturing in country, this blog will treat them as the same.
Now that we understand what re-shoring manufacturing is, how do you decide if it is good or not for your company?
Should You Re-Shore Your Manufacturing Company?
First start with the problem that you want to solve and what might be causing it. It may not be as simple as you think it is. For example, if you want to improve production capacity with minimal costs, it might be better to assess the supplier and see if the problem can be solved at that level rather than move production. Working with your existing suppliers is easier than moving production, depending on the product. It might not be the best solution, but it is often the easiest.
There too are many strategic advantages to reshoring, like enhanced supply chain control and alignment with consumer preferences, which are all desirable features for private equity firms looking to invest in manufacturers.
A number of our clients have expressed interest in re-shoring their manufacturing but shrink back when they see the initial costs. They worry about the higher labor costs and increased costs of regulation. Cost is a major factor, but it is important to see that it is not the only one.
Cost: Offshoring began as a method to reduce the operational cost of manufacturing. Companies swarmed to China to take advantage of abundant labor (and low costs). However, costs are more than just the cost of labor. Nearly every re-shored factory has higher person-per-person costs but that may only be a small portion of total costs.
Highly efficient manufacturing may be cheaper (or similarly priced) on a per unit basis and would have significantly lower transportation costs. There are also tariffs to consider. It is unlikely that tariffs between the US and China will lower any time soon.
Though it is not something we discuss often, currency fluctuations can be a major concern. A many developing markets can experience large fluctuations with little notice. New location may seem like a good idea but if it currency appreciates 30% in the next 2 years it might not be a profitable as it first seemed.
Risk: Offshored manufacturing comes with many risks. We have seen what happens when the supply chain slows down after a major event. Companies are waiting longer and/or paying much more for transportation from Asia to North America and Europe. These costs can erode any gains made from the lower costs. While this supply chain shortage is likely to work itself out over the next year, there is no telling when it will happen again.
The risk to quality can be even greater. Poor quality products may arrive over 6 weeks after they are produced. Many Chinese factories offer to replace anything that is defective, but you are still left with a 6 week wait and no guarantee that the replacement products will be any better. Depending on the company, the reputational risk alone may give reason alone to consider re-shoring.
Another element of risk is the supply chain. One of the primary advantages of working in China is a robust supply chain for materials and components. If a major of parts and/or critical parts still need to be shipped from China, the risks are still there. Additionally, if manufacturing is moved to a 3rd country away from both the Chinese supplier and the end market, the risk is compounded.
R&D and Product Protection: Many companies are, rightfully, fearful that their products may be copied by their supplier or that some products will be sold outright using their company logo in another market.
Agility: Markets and tastes move fast. Unwieldy supply chains and far off suppliers can make changes difficult. For companies that want to be more agile either with introducing new products or bringing quick customized products to the market should look at re-shoring and near shoring. The clothing industry is famous for this challenge. Clothing companies are usually the first companies to seek the lowest possible labor, so they often over produce in case they hit the trend correctly. If not, excessive stock is sold at the end of the season. Why do you think that they have sales so often?
The Bottom Line
So, should you re-shore your manufacturing operations? Maybe. There are many benefits to re-shoring, but you must also consider factors outside the manufacturing arena when making the decision to re-shore. Often times it is a contest between costs and ease versus the desire to offset risk, be more agile, and gain a few less tangible objectives like positive PR.
Balancing and weighing these considerations can be difficult and it is useful to bring in a neutral 3rd party that can help assess the situation and provide a recommendation and plan. In the next month, we will provide examples on how our team helps companies move production to a new location.
