Study: Pace of Reshoring Decelerates

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The trend known as reshoring remains controversial, depending on how success is measured. Many companies have been persuaded by incentives to not move offshore, and several large electronics manufacturers, including Apple Inc., have opened factories within the U.S. But when compared with the number of companies moving to other regions, reshoring comes up short.

In 2015, the A.T. Kearney U.S. Reshoring Index declined for the fourth consecutive year, the consulting firm reports. This time, the index dropped to -115, down from -30 in 2014, according to “U.S. Reshoring: Over Before it Began?” “The U.S. 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," said Patrick Van den Bossche, A.T. Kearney partner and co-author of the study,  in a release. Offshoring only seems to be gathering steam, he said, while the U.S. reshoring train “has yet to leave the station.” Some of the industries purported to be leaders in reshoring such as electronics, in fact, grew faster offshore than onshore.

To calculate the index, A.T. Kearney looks at the import of manufactured goods from 14 offshore trading partners and the U.S. domestic gross output of manufactured goods. The manufacturing import ratio divides total imports by U.S. gross output. The reshoring index is the year-over-year change in the ratio. A positive number indicates net reshoring; a negative number reflect net offshoring.

In 2015, imports of manufactured goods are projected to reach $717 billion, mostly from China, A.T. Kearney estimates. U.S. domestic gross output is expected to reach $5,954 billion by the end of the year. The forecast manufacturing import ratio is 12 percent, meaning there will be 12 cents worth of offshore production bound for the U.S. market for every $1 of domestic manufacturing gross output.

The leading factors behind the drop in reshoring are lackluster domestic manufacturing growth and the resilience of the offshore manufacturing sector. The domestic manufacturing sector has had a rough year as measured by the Institute for Supply Management’s leading index, the PMI. The PMI contracted for two consecutive months in November and December and 2015 overall underperformed expectations. Since petroleum products – which hit record low prices for much of 2015 – are one the U.S.’s largest manufacturing industries, price volatility has disproportionately affected gross output.

Low gas and oil prices also remain a double-edged sword for other U.S. manufacturers, according to Bradley J. Holcomb,  chair of the ISM's Manufacturing Business Survey Committee. Consumers, who are saving money on gas, are spending more on items such as clothing; and businesses have lowered their energy costs.  At the same time, the petroleum industry is a customer to U.S. manufacturers of equipment and transportation goods and services. These sectors have been hit hard by lower demand.

In the meantime, offshore manufacturing remains resilient in spite of increased labor costs and economic weakness in China. Imports of manufactured goods are expected to increase by 6.5 percent in 2015, according to A.T. Kearney. 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 U.S. to China. Industries likely to be most impacted by rising labor costs in China are finding refuge in other Asian nations: among the countries with low labor costs, Vietnam has grown significantly.

Factors that influence companies’ decisions about where to manufacture seem to continue to move against reshoring in the United States. Strengthening of the dollar, sliding oil prices, tightening of the U.S. labor market and even political uncertainty all weaken the case for reshoring, the research finds. The increase of nearshoring to Mexico indicates south of the U.S. border remains a top choice.

There are events that may tip the scales in favor of reshoring, however. Strikes at California seaports in 2015 caused many offshore companies to use airfreight which negatively impacted profits. Developments in the areas of digital manufacturing, 3D printing and the IoT will change the cost dynamics of the supply chain—the speed with which these developments materialize will factor into companies’ reshoring decisions, A.T. Kearney believes.

Another development in manufacturing is foreign companies’ interest in investing in the U.S. Chinese companies have actually invested $46 billion in the U.S. since 2000, according to Rhodium Group. Chinese manufacturers are building U.S. plants in areas abandoned by U.S. companies. Foreign companies expect their presence in the U.S. will enable them to sell more products in the U.S. market. Somewhat ironically, the same philosophy was true of U.S. companies that moved offshore so they could sell products into China.