Cheap labour, growing local markets, less red tape and digital communication were some of the main reasons behind a wave of western companies shipping operations overseas at the end of the 20th century. By the turn of the millennium, over half of US businesses and a quarter of western European manufacturers had implemented a corporate offshoring strategy in a bid to cut costs.
But the trend among companies of switching west for east appears to be reversing, or at least balancing out. According to a survey conducted earlier this year by the body representing British engineers and manufacturers, EEF, one in six UK companies reshored some production in the previous three years, while the same proportion switched sourcing to a British supplier.
Although hardly groundbreaking, this increase in numbers will be well received by David Cameron, who made reshoring an integral part of his policy to rebalance the economy. A year ago Mr Cameron pleaded for more companies to return home and then responded by setting up an agency, Reshore UK, to help them through the transition.
Your country needs you
The government’s eagerness for Britain to become “the reshore nation” makes sense when considering estimations made by PricewaterhouseCoopers in its March 2014 UK Economic Outlook report. According to the findings, reshoring could create up to 200,000 extra jobs and boost annual national output by roughly £6bn-£12bn in the next 10 years.
Similar incentives have been tempting struggling European companies to head back west. Last November, a PwC survey of 384 eurozone non-financial companies discovered that almost 60 per cent had reshored some operations, against 55 per cent who had done the opposite. Topping the list of reshorers was troubled eurozone country Italy, followed by fellow strugglers Spain, Germany and Ireland.
Just as Europe imitated North America’s lead in offshoring businesses, it now looks to be admiring the benefits of the reverse. Indeed, since the likes of General Electric (US: GE), Apple (US: AAPL) and Google (US: GOOG) started moving production back stateside, other nations have been observing the fruits of what some have dubbed a manufacturing renaissance.
Kully Samra, UK branch director at broker Charles Schwab, partly attributes this manufacturing resurgence to a surge in US energy production. A downward pressure on energy prices following the fracking and shale boom, he says, has made it cheaper for manufacturers such as Dow Chemical (US: DOW) to return. After a decade spent moving production to the Middle East and Asia, in 2011 the US’s largest speciality chemicals company started building crackers and industrial plants back home to take advantage of low gas prices and the opportunity to supply extraction equipment.
This factor, coupled with rising costs in emerging markets, has encouraged more US big guns to return operations to their origins. In fact, Mr Samra reckons that the cost gap between the US and China has shrunk by nearly half since 2004 to roughly 16 per cent today, driven by rising labour costs in Asia.
Take the power back
John Hawksworth, chief economist at PwC, agrees that the wage advantage in China is rapidly disappearing and predicts that the gap will continue to dwindle over the next decade and a half. This shift, he notes, has been aggravated by a combination of things, such as real exchange rate movements and the financial crisis reducing wages and employee power in advanced economy manufacturing.
To the detriment of western companies, workers in emerging markets are no longer so willing to work long hours in factory jobs and are starting to be backed by stronger rights. In China, for example, industrial action resulted in a new labour law being introduced six years ago to protect employees, including granting them the right to a permanent contract after a year of employment.
Two years later, in 2010, Japanese carmaker Honda (JN:7267) gave workers at a Guangdong province factory a 47 per cent pay rise after a series of strikes, with a string of similar events then culminating in the Chinese government introducing a five-year plan to increase the minimum wage by an average of 13 per cent a year.
Cost saving gap narrows
| United States – Selected Southern States | 2000 | 2015 (E) |
| Wage rate ($/hour) | 15.81 | 24.81 |
| Wage growth (%) | 57 | |
| Productivity (%) | 100 | 100 |
| Labour cost/part ($) | 2.11 | 3.31 |
| China – Yangtze River Delta | 2000 | 2015 (E) |
| Wage rate ($/hour) | 0.72 | 6.31 |
| Wage growth (%) | 776 | |
| Productivity(%)1 | 13 | 42 |
| Labour cost/part ($) | 0.74 | 2 |
| Labour cost savings (%) | 65 | 39 |
| Total cost savings before transportation, duties, and other costs (%) | 16 | 10 |
Source: Charles Schwab
In the western world, meanwhile, high unemployment brought on by the financial recession has spawned a willingness to work for lower pay. Trade unions in troubled eurozone countries such as Spain are now accepting flexible working practices and salary freezes, which has subsequently motivated companies including Ford (US: F) and PSA Peugeot Citroën (Fr: UG) to open assembly lines there.
Indeed, things have changed so much over the past decade that wages for senior management in countries such as China, Turkey and Brazil now either match or exceed salaries in America and Europe, according to a study by the Hay Group (see above). In response, Nick Boulter, global managing director at the consulting firm, says that a large influx of investment in emerging markets by global corporations has led to a stronger focus on retaining key talent, whatever the cost.
Cost of senior management hires ($)
| 2001 | 2011 | % change | |
|---|---|---|---|
| China | 35,636 | 123,477 | 247 |
| South Africa | 44,405 | 151,273 | 241 |
| Indonesia | 25,250 | 74,353 | 195 |
| Turkey | 65,183 | 189,170 | 190 |
| Brazil | 57,809 | 162,651 | 181 |
| UAE | 90,341 | 204,421 | 126 |
| France | 78,929 | 169,719 | 115 |
| Poland | 65,961 | 136,602 | 107 |
| Netherlands | 85,894 | 175,401 | 104 |
| Italy | 87,462 | 165,168 | 89 |
| Germany | 104,155 | 193,594 | 86 |
| Russia | 86,576 | 153,229 | 77 |
| UK | 83,246 | 138,287 | 66 |
| US | 112,433 | 154,847 | 38 |
| Mexico | 116,882 | 145,509 | 25 |
Source: HayGroup
Putting customers first
Given growing wages and employee entitlements in key offshore destinations, some companies are now turning their attention to the latest cheap hotspots, including Bangladesh and Vietnam. Mr Hawksworth, however, believes most are likely to shun this option as they grow increasingly concerned with the level of quality demanded by customers.
His view was supported by a barometer conducted by the Manufacturing Advisory Service (MAS), in which quality ranked second to reducing costs as the most important reason for moving production. A fifth of respondents said they often found it difficult to monitor and guarantee the quality of goods and services produced, prompting Steven Barr, head of MAS, to comment that more than two-thirds of the companies that reshored in the past 12 months subsequently reported an increase in sales.
An increasing number of companies have been fretting over the security of supply chains in developing markets. This has been intensified in recent years by a growing number of issues linked to political unrest, theft of intellectual property and extreme climate events. A report by ARTNeT on the effect of natural disasters on supply chains found that the devastating 2011 earthquake in Japan spilled into several other countries in the region. Electrical component production plummeted by 17.5 per cent in the Philippines and by 8.4 per cent in Malaysia. The temporary halt in supply of raw materials had a severe impact on customers in the US, UK and Europe, as did disruptive autoparts supply chains, which derailed production in countries such as Thailand (19.7 per cent), the Philippines (24 per cent) and Indonesia (6.1 per cent).
Similarly, the 2011 floods in Thailand demolished factories and led to the global hard disc drive industry (HDD) suffering its worst downturn in three years. As the world’s second-largest producer of HDDs after China, Thailand is home to corporations such as Western Digital (US: WDC), Seagate (US: STX) and Toshiba (Ja: 6502).
Concerns over the security of supply chains also persuaded clothing retailers including Topshop and River Island to reshore certain activities. In the digital age such companies need to respond quickly to changing fashions, but have reported that distances make communication and changes in production runs more difficult, leading to higher inventory costs, lower profit margins and lost customers. Distances, too, are not being helped by the volatility of transport costs. Businesses that ship bulky consumer goods and appliances over thousands of miles were hit particularly hard in 2007-08 when international freight costs rocketed, and have seen plenty of volatility in prices since.
Who needs people?
But beyond the variety of growing costs already listed, to some the prospect of technological change is central to the long-term benefits of bringing production back to the west. At present, automated manufacturing techniques such as 3D printing and robots are still in the early stages, although both are predicted to grow markedly in the next five years.
Indeed, the days of majority human workforces could be a thing of the past as, according to MarketWatch, global demand for 3D printers is projected to rise by more than one-fifth per year over the period to 2017. The introduction of cheaper forms of advanced robotics is also expected to have a similar effect, with US consultancy firm McKinsey arguing that the average price of robots, relative to the cost of labour, has halved since 1990.
These types of technological advancements could alter the economics of production and undermine the benefits of offshoring to cheaper countries, particularly as they cost the same in the east as they do back home. And as western economies look to address structural economic issues such as unemployment – especially in the eurozone – 2015 could see the reshoring trend shift up a gear.
