Reshoring: A Reality Check

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For those who are not fans of TV’s Saturday Night Live, Debbie Downer is a character that finds the dark cloud in every silver lining. A.T. Kearney may just be the Debbie Downer of the U.S. manufacturing industry.

An A.T. Kearney report released late last year concluded that the trend toward reshoring manufacturing in the U.S.  is nothing to get excited about.  “While there has been an overall lift in U.S. manufacturing for five straight years since 2009, imports of offshored manufactured goods into the U.S. have increased at a faster rate than any return of manufacturing operations to our soil and, for the 14 top offshoring locations combined, amounted to $630 billion in 2013,” according to the report. In other words, U.S. imports of offshored goods outstrip any increase in onshore manufacturing activity.

The report notes that A.T. Kearney's Reshoring Index (below)  depicts flows of capital, not shifts in physical assets or employment levels. It represents the choice that U.S. executives make between domestic production and offshore production to meet domestic and U.S. demand. In other words:  an increase in U.S. manufacturing does not equal an increase in reshoring. The index is actually expected to show a year-over-year decline, lower by 20 basis points from 2013, as offshoring to foreign manufacturing markets outpaces reshoring.

"While the so-called reshoring trend has helped improve the mood of U.S. manufacturing since the Recession, the reality is that the import value of manufactured goods into the U.S. from 14 low-cost Asian countries has grown at an average of 8 percent per year in the last five years," added Pramod Gupta, A.T. Kearney principal and study co-author. "The 2014 Reshoring Index is not only an indicator of U.S. manufacturing capital flows, but also how the U.S. stacks up in terms of attractiveness as a source of manufactured products versus countries like China, Bangladesh, and Cambodia."

The Reshoring Index measures whether there is net reshoring  vs. net offshoring by measuring the year-over-year (YOY) change in the manufacturing import ratio (MIR, which is import dollars as a percent of total U.S. manufacturing activity), Gupta added in an e-mail to EPS.

"A net positive YOY change is indicative of net increase in domestic manufacturing activity relative to imports and a positive indication of the extent of the success of U.S. reshoring effort," Gupta said. “A net negative YOY change in the MIR ratio indicates that U.S. is importing more goods into the U.S. relative to the change in U.S. manufacturing activity, i.e. increasing manufacturing activity in the offshore operations (which may also imply more investment overseas)."

The index is the first in a series of studies looking objectively at the rate and pace of the return of manufacturing operations to the U.S., according to A.T. Kearney.  In this inaugural Index, manufactured goods flows are tracked over a 10-year period to show the change in ratio between U.S. manufacturing imports and gross output during that time period.

Patrick Van den Bossche, A.T. Kearney partner and leader of the firm's Americas Strategic Operations Practice and co-author of the Index, notes, "Our goal was to find out for ourselves whether companies are indeed leaning toward reshoring operations, and if so, what are the motivators driving them. We've been following these questions with interest since 2010, and have a growing database of 700+ reshoring cases across all industries."

Additional highlights of the report include:

• The top three reshoring industries, as measured by the number of cases in A.T. Kearney's database, are electrical equipment, appliance and component manufacturing, with 15 percent of the cases; transportation equipment manufacturing, with 15 percent; and apparel manufacturing, which previously had not been expected ever to come back, with 12 percent.
• Improvement in delivery time led the reasons executives gave in favor of reshoring, with quality improvement a close second and followed by brand/image.
• Those 14 top offshoring locations (China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia) are also included in the study, along with a tracking of the year-over-year change in Manufacturing Import Ratio from 2004 through 2014.

The analysis is consistent with other data collected regarding U.S. manufacturing. The Institute for Supply Management measures month-to-month domestic manufacturing activity and twice a year releases a semi-annual report. Two special questions were asked of the ISM panel in 2014. The first asked about unfilled job openings. The second asked whether manufacturing organizations plan to re-shore significant volumes of manufacturing/business processes in 2015.

Of the three possible answers, 10.4 percent responded “Yes,” 58.8 percent responded “No,” and 30.8 percent responded “Not Applicable.” For those organizations that responded “No,” the most often cited main reason for not re-shoring in 2015 was that the “Cost advantage of off-shoring was still too favorable,” with 53.7 percent of all respondents providing that reason.