US Reshoring: Over Before It Began?

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US Reshoring: Over Before It Began?
U.S. Reshoring:
Over Before It Began?
The reshoring phenomenon appears to have been
more a one-off aberration than an inexorable trend.
Data from 2015 confirms that offshoring is gathering
steam, while the reshoring train has yet to leave
the station.
U.S. Reshoring: Over Before It Began?
1
The Reshoring Engine Is Stalled
In 2014 A.T. Kearney published its first U.S. Reshoring Index. The results highlighted that even
though manufacturing in the United States was clearly on the upswing, the impact of reshoring
was significantly less than what press reports and pundits would have had us believe. In fact,
the 2014 U.S. Reshoring Index showed that—notwithstanding the hype—the rate of reshoring
actually lagged that of offshoring between 2009 and 2013, as the growth of overall domestic U.S.
manufacturing activity failed to keep pace with the import of offshore manufactured goods over
the five-year period. The one exception was 2011.
In 2015, there will be 12 cents of U.S.-bound
offshore production for every dollar of
domestic manufacturing output.
In 2015, the A.T. Kearney U.S. Reshoring Index shows that, for the fourth consecutive year,
reshoring of manufacturing activities to the United States has once again failed to keep up with
offshoring. This time the index has dropped to –115, down from –30 in 2014, and it represents
the largest year-over-year decrease in 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. Indeed, the 2015 data confirms that offshoring seems only to be gathering steam,
while the U.S. reshoring train that so many predicted has yet to leave the station.
2015 U.S. Reshoring Index: A Closer Look
To calculate the U.S. Reshoring Index, we first look at the import of manufactured goods from
14 offshore trading partners in Asia: China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia,
Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia. Next, we
examine U.S. domestic gross output of manufactured goods.
Then, we calculate the manufacturing import ratio, which is simply the quotient of dividing the
first number by the second. The U.S. Reshoring Index is the year-over-year change in the manufacturing import ratio, expressed in basis points. A positive number indicates net reshoring,
while a negative value indicates net offshoring.
In 2015, imports of manufactured goods from offshore trading partners are projected to
reach as much as $717 billion, mostly from China, but with increasing contributions from
countries such as India and Vietnam. U.S. domestic gross output of manufactured goods is
expected to reach $5,954 billion by the end of 2015. As a result, the forecast manufacturing
import ratio for 2015 is 12.0 percent, meaning that there will be 12 cents worth of offshore
production bound for the U.S. market for every $1 of domestic manufacturing gross output.1
As a result, the U.S. Reshoring Index will drop to –115 (see figure 1 on page 2). Thus, if the 2015
The 2015 forecast is projected from actual data for three quarters of offshore imports and two quarters of gross domestic output, which
has been seasonally adjusted at annual rates.
1
U.S. Reshoring: Over Before It Began?
1
Figure 1
Offshoring of U.S. manufacturing has consistently outpaced reshoring
Manufacturing import ratio and U.S. Reshoring Index score
%, basis points
+434 basis points
Net
reshoring
20
0
7.7%
8.2%
9.0%
9.1%
–18
9.2%
9.6%
10.5%
U.S. Reshoring Index score
Manufacturing import ratio
15
10.4%
10.6%
10.9%
12.0%
–12
–1
–11
–20
–30
–44
–40
–55
Net
off–60
shoring
–80
10.5%
–72
–80
–92
–100
–115
–120
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015f
Notes: The manufacturing import ratio is calculated by dividing manufactured goods imports from 14 Asian markets (China, Taiwan, Malaysia, India, Vietnam,
Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia) by U.S. domestic gross output of manufactured goods.
The U.S. Reshoring Index is the year-over-year change in the manufacturing import ratio.
Sources: U.S. International Trade Commission, U.S. Bureau of Economic Analysis; A.T. Kearney analysis
U.S. government forecasts hold true, the manufacturing import ratio will have increased by
434 basis points since 2004, with more than one-quarter of that increase occurring over the
past 12 months.
Our research points to two factors behind the precipitous drop in the A.T. Kearney U.S. Reshoring
Index: lackluster domestic manufacturing growth and the resilience of the offshore manufacturing sector.
Lackluster domestic manufacturing
Markit’s U.S. Manufacturing Purchasing Managers’ Index (PMI) fell to 52.6 in November 2015,
down from 54.1 in the month before, indicating that the U.S. manufacturing sector has lost some
growth momentum. For the whole year of 2015, and for the first year since the 2009 recession,
the U.S. Bureau of Economic Analysis expects U.S. manufacturing gross output—which includes
the input values of raw materials and intermediate goods—to shrink by as much as 3.6 percent.
Prices in 2015 have been depressed for oil and many other commodities, particularly those
related to food. And since petroleum products and food are two of the largest U.S. manufacturing industries, this year’s commodity price volatility affects domestic manufacturing gross
output disproportionately.2 As an intellectual exercise, to discount the effect of raw material
In fairness, manufacturing value add—which is up slightly—is probably a better measure of the absolute health of the manufacturing
sector, as it is less sensitive to underlying volatility in commodity pricing.
2
U.S. Reshoring: Over Before It Began?
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price declines on domestic manufacturing gross output, we calculated what the U.S. Reshoring
Index value would be for 2015 if manufacturing input value were held constant relative to 2014.
Of course, lower global oil and other raw material prices also impact the value of offshore
manufactured goods, but we chose to ignore that effect in the interest of making conservative
assumptions. Yet even in that conservative case, the U.S. Reshoring Index would still have
dropped to –26—admittedly far less than the projected level of –115, but still supportive of our
view that the widely predicted reshoring trend seems to be over before it got started.
Offshore manufacturing resilience
Meanwhile, despite some predictions to the contrary, offshore manufacturing for import into
the United States has been remarkably resilient and has in fact continued to trend upward this
year. Based on the first three quarters of data, offshore manufactured goods imports are poised
to grow by 6.5 percent in 2015, nearly matching the 6.9 percent growth rate from 2014. And the
growth is coming from some surprising places.
For example, when pundits in 2012 projected a wave of reshoring, they highlighted seven
primary industries as being on the tipping point because of their relatively modest labor content
and high transportation costs: computers and electronics, appliances and electrical equipment,
machinery, furniture, fabricated metals, plastics and rubber, and transportation goods. A look at
the numbers, however, tells a different story. Although these industries make up over half of the
reshoring case studies that we’ve observed over the past years (see sidebar: A.T. Kearney U.S.
Reshoring Database on page 4), at the same time they also are showing the highest increase in
offshoring among industries. The manufacturing import ratio for computers and electronics,
calculated based on imports from China alone, increased by nearly 840 basis points between
2010 and 2014, representing a massive outflow of manufacturing share from the United States
to China (see figure 2). And between 2014 and 2015, the value of manufactured goods imports
Figure 2
Massive outflow of manufacturing share to China in computers and electronics
Manufacturing import ratio for computers and electronics: imports from China only
%
60
+837 basis points
45
30
36.8%
39.6%
42.6%
44.9%
45.2%
2013
2014
15
0
2010
2011
2012
Note: The manufacturing import ratio is calculated by dividing manufactured goods imports by U.S. domestic gross output of manufactured goods.
Sources: U.S. International Trade Commission, U.S. Bureau of Economic Analysis; A.T. Kearney analysis
U.S. Reshoring: Over Before It Began?
3
A.T. Kearney U.S. Reshoring Database
The macroeconomic picture
portrayed in this report is corroborated by the data in our updated
U.S. Reshoring Database, which
holds roughly 700 reshoring
cases that have been announced
over the past five years. The latest
update of A.T. Kearney’s U.S.
Reshoring Database forecasts
around 60 reshoring cases for
2015, which is a significant drop
from the 2013 and 2014 levels (see
figure A). In 2015, documented
reshoring activity continues in
many sectors where reshoring
was expected: computers and
electronics, appliances and
electrical equipment, primary
metals, machinery, furniture,
plastics and rubber, paper, and
fabricated metals. Machinery and
miscellaneous manufacturing
lead the number of reported
reshoring cases in 2015, with 30
percent and 22 percent
respectively.
A look at the 2011–2015 historical
chart reveals that some sectors
that were identified as not apt for
reshoring, such as apparel, continue to make a strong showing
(see figure B). Miscellaneous
manufacturing is rising in the
ranking, since most of the category consists of parts manufacturing, which is a feeder industry
for the automotive sector. Over
the past two years, the number
and proportion of automotive and
miscellaneous cases have grown
hand in hand.
The right-hand side of figure B
also shows that the top reasons
for reshoring continue to be
improvements in delivery time,
quality, and costs (wages, freight,
total), but the weight of “Made in
USA” is still strong in the ranking.
Figure A
Published U.S. reshoring cases have declined in 2015
Published U.S. reshoring cases
250
200
210
150
100
50
208
104
64
~60
0
2011
2012
2013
2014
2015f
Source: A.T. Kearney U.S. Reshoring Database
Figure B
U.S. reshoring cases 2011–2015: industry breakdown and top reasons
Top 10 reshoring industries
% of
cases
Top 10 reasons
% of
mentions
Electrical equipment, appliances, and components
16
Delivery time improvement
23
Transportation equipment
14
Quality improvement
21
Apparel
12
Image or brand (“Made in USA”)
15
Computers and electronics
11
Wage cost improvement
15
Miscellaneous
11
Freight cost improvement
15
Plastics and rubber products
8
Total cost of ownership
15
Machinery
7
Customer responsiveness improvement
10
Fabricated metal products
4
Innovation or product differentiation improvement
9
Nonmetallic mineral products
3
Higher productivity
9
Furniture and related products
3
Government incentives
8
Source: A.T. Kearney U.S. Reshoring Database
U.S. Reshoring: Over Before It Began?
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from China is estimated to increase substantially for automotive and transportation equipment
(12.1 percent), furniture (10.8 percent), appliances (9.8 percent), and fabricated metals (7.4
percent), which would seem to indicate a loss of U.S. manufacturing share given the relatively
modest growth of U.S. domestic consumption in these industries.
Moreover, 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. In fact, if the U.S. dollar
value of manufactured goods imports from China will have risen by 33 percent between 2010
and the end of 2015, the increase from the other 13 U.S. offshore trading partners in Asia will
have grown by 43 percent over the same period (see figure 3). Removing relatively high-wage
markets such as Hong Kong, Taiwan, and Singapore would cause the increase to jump to a
staggering 57 percent. Among the countries with low labor costs, Vietnam’s manufacturing
development has perhaps been the most impressive. Vietnam has ably absorbed the lion’s
share of China’s manufacturing outflow, especially in apparel, and U.S. imports of manufactured goods from Vietnam in 2015 will nearly be triple of those in 2010.
The countries of South and Southeast Asia—even after India is taken out of the equation—
have labor forces that run into the hundreds of millions of workers, so the gradual shift of
certain industries to other Asian low-cost countries is likely to continue. Similar intra-Asian
movements of manufacturing flows have happened before, when Japanese manufacturing
Figure 3
Other Asian countries are taking over some of China’s share of U.S. manufactured
goods imports
U.S. manufactured goods imports from China vs. next 13 largest
offshore manufacturing countries
$ billion
China
Next 13 largest
+43%
+33%
500
400
300
428.3
415.3
389.9
474.8
454.8
356.1
200
168.9
196.6
189.0
201.4
218.2
242.0
100
0
2010
2011
2012
2013
2014
2015f
Note: The 13 largest offshore manufacturing countries after China are Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines,
Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia.
Sources: U.S. International Trade Commission; A.T. Kearney analysis
U.S. Reshoring: Over Before It Began?
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migrated to Southeast Asia and when South Korean companies extensively relocated manufacturing to China.
Still, it would be a mistake to count China out. Rumors of the death of China manufacturing have
been greatly exaggerated, as we explain in Get Ready for China’s Manufacturing Comeback.3
Cost headwinds have indeed hurt some Chinese manufacturers, particularly state-owned enterprises in commoditized industries. But private Chinese companies retain significant advantages,
not least the resiliency and competitive spirit of their management and staff. Many Chinese
manufacturers, then, are evolving rather than fading, and their growing capabilities will challenge
their Western rivals in new ways.
Looking Forward
As we look beyond 2015 at factors that influence companies’ decisions about where to
manufacture, they mostly seem to be moving against more reshoring to the United States. The
forecast strengthening of the dollar, the oil price slide, the tightening U.S. labor market in
manufacturing, and even political uncertainty in the run-up to the 2016 elections all weaken the
case for reshoring. The recent increase of nearshoring to Mexico also seems to indicate that,
even if U.S. companies consider leaving Asia, they may choose to stop south of the border.
Industries vulnerable to rising labor costs
in China have relocated to other Asian
countries—without incurring significantly
higher supply chain costs.
Looking a bit further out, the Trans-Pacific Partnership (TPP)—a trade agreement between 12
countries on the Pacific Rim, including several that are hosting industries theoretically ripe for
reshoring—will lower tariff barriers and the cost of trade. If ratified by the U.S. Congress, then,
the TPP may weaken the business case for reshoring further.
Then again, unexpected events may tip the scale for some companies in favor of reshoring. For
example, the dockworkers strike in early 2015 at U.S. West Coast ports caused many companies
to reexamine the potential benefits of reshoring, as they saw their profits evaporate because
they had to use expensive airfreight to get their products to the U.S. market. Also, developments
in the areas of digital manufacturing, 3D printing, and the Internet of Things will completely
change cost dynamics across the whole supply chain, so the speed with which these developments materialize will also factor into companies’ reshoring decisions. A shift in technology will,
however, require skilled, qualified staff—and that’s one obstacle U.S. manufacturing has yet to
overcome. In fact, speaking with several domestic companies that have reshored all or part of
their manufacturing operations, we heard that the shortage of skills is their greatest challenge,
a topic we already discussed in “Solving the Reshoring Dilemma.”4
Get Ready for China’s Manufacturing Comeback is available at www.atkearney.com.
3
“Solving the Reshoring Dilemma” was published in the January–February 2014 edition of Supply Chain Management Review. The full text
is available at www.atkearney.com and by subscription at www.scmr.com.
4
U.S. Reshoring: Over Before It Began?
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Another element in the equation are national manufacturing policies to encourage the formation of ecosystems of manufacturers, suppliers, and R&D entities. In 2014, the U.S. Congress
allocated $300 million over 10 years to the National Network for Manufacturing Innovation
(NNMI) to build a network of 15 institutes bringing together regional manufacturing stakeholders
from industry, government, and academia in order to facilitate advanced manufacturing
processes from basic research to implementation. Today, only a fraction of these are truly
up and running and so the impact is hard to gauge, but they could prove to be appealing to
companies looking to reshore.
Implications for U.S. Manufacturing
If the widely publicized reshoring boom largely turns out to be a bust, does that bode ill for manufacturing in the United States? Not necessarily. The United States still tops the list of countries
where companies from all over the globe want to invest in the coming years according to the
A.T. Kearney 2015 Foreign Direct Investment Confidence Index®, and it appears that many foreign
companies are more interested in (re-)establishing a manufacturing footprint in the United
States than their domestic counterparts are interested in repatriating their operations from Asia.
For example, in an interesting twist of fate, Chinese companies have actually invested $46 billion
in the United States since 2000, according to Rhodium Group, with most of that investment
happening in the past few years. Chinese manufacturers across industries are building U.S.
plants and creating new manufacturing jobs, often in small towns that years ago were abandoned
by domestic manufacturers that were offshoring their operations. In fact, of the approximately
60,000 new U.S. manufacturing jobs that, according to the Reshoring Initiative, were created in
2014 as a result of the combination of reshoring and foreign direct investment, about 8,000
were at China-owned companies.
Foreign companies that are investing in U.S.
manufacturing facilities seem to be taking a
long-term view of the market.
Other 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. Moreover, foreign companies now account
for roughly one-fifth of America’s manufacturing workforce, with companies headquartered in
Japan, Germany, and the United Kingdom leading the way. The fact that foreign companies
invest in “putting new steel into the ground” stands in contrast to U.S. companies that reshore
their operations, since most of the latter (74 percent according to our latest count) choose
instead to return to existing locations that were mothballed. This could point to two major
differences in how foreign and domestic companies think about manufacturing in the United
States. First, foreign companies seem to have a broader scope in mind. They appear to be
considering a longer time horizon, as it takes much longer to pay back the investment in a new
plant than in a recommissioned facility. Also, some companies are building high-capacity
facilities to target not just North America but also export markets farther afield. Second, for
foreign companies, proximity to the huge U.S. consumer market and the stability of the U.S.
U.S. Reshoring: Over Before It Began?
7
political and economic environment are main draws. And for Chinese manufacturers, there’s the
added benefit of being able to tap into American engineering skills and manufacturing know-how.
Arguments such as these play a key role in the decision of foreign companies to manufacture
in the United States, but they appear to be of less value, or are maybe taken for granted, by
domestic companies.
The End of a Trend
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.
Authors
Patrick Van den Bossche, partner,
Washington, D.C.
patrick.van.den.bossche[email protected]
Brooks Levering, director,
New York
[email protected]
Pramod Gupta, partner,
New York
[email protected]
Héctor Gutiérrez, consultant,
San Francisco
[email protected]
Johan Gott, principal,
Washington, D.C.
[email protected]
U.S. Reshoring: Over Before It Began?
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About the A.T. Kearney U.S. Reshoring Index
When we launched the A.T. Kearney U.S. Reshoring Index in 2014, much of the evidence for
reshoring was anecdotal, often highlighting no more than a handful of high-profile cases, and
the conclusions seemed to reflect wishful thinking or political agendas more than hard facts.
Even the best research focused more on promulgating models of future reshoring than on
accurately assessing the current reality. So our objectives were simple: (1) find out what U.S.
manufacturers were doing, and (2) separate the reality from the hype.
The A.T. Kearney U.S. Reshoring Index addresses these objectives by aggregating actual U.S.
manufacturing and import data to track what is really happening now, while providing a
powerful indicator of where manufacturing for the U.S. market is going. We start by analyzing
annual growth in both manufactured goods imports from key offshore trading partners (China,
Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh,
Pakistan, Hong Kong, Sri Lanka, and Cambodia) and in U.S. manufacturing gross output, based
on the nominal U.S. dollar value. Next, we calculate a simple ratio of annual offshore manufactured goods import values to U.S. manufacturing gross output, summarized as the manufacturing import ratio. Higher values of the manufacturing import ratio reflect greater share of
offshoring relative to domestic manufacturing. Finally, the U.S. Reshoring Index tracks the
year-over-year spread in the manufacturing import ratio—measured in basis points. Positive
values demonstrate a trend toward reshoring, while negative values show a trend toward
offshoring. Simple, but powerful!
U.S. Reshoring: Over Before It Began?
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