Even before U.S. tariffs muddied the global trade picture, the pace of reshoring to the Americas declined in 2017. After rising to a five-year high in 2016 — in the wake of a U.S. presidential election that paid a lot of attention to manufacturing, job losses and China — the A.T. Kearney Reshoring Index declined 27 basis points last year.
The A.T. Kearney management consultancy has been tracking reshoring since 2013. Among other metrics, (see full methodology at the end of this article) the Reshoring Index tracks the rate of U.S. imports versus U.S. manufacturing gross output. Goods imported from Asia’s 14 largest low-cost countries in 2017 rose by 8% to a staggering $55 billion — the largest one-year increase since the economic recovery of 2011, according to the firm. U.S. imports of manufactured goods from offshore trading partners reached $751 billion last year. Of that $751 billion, China remains the dominant partner with $494 billion of imported manufactured goods.
“Ironically, the U.S. manufacturing sector is doing really well,” said A.T. Kearney principal Johan Gott. “It’s rebounded from the 2008 crisis and it’s higher than it has been in more than four years. But imports from Asia grew even faster.”
In fact, the brewing U.S. trade war with China could further reverse the reshoring trend. Executives of U.S. manufacturing companies told the Institute for Supply Management that they may have to move production back to China to avoid the impact of tariffs. And the historic trend hasn’t been positive: The growth rate of imports from low-cost countries has outpaced the growth of U.S. manufacturing gross output in four of the past five years.
There are several reasons for this: there are still economic benefits from manufacturing overseas. Investments made in overseas manufacturing are not easily abandoned. The U.S. is currently experiencing a shortage of skilled labor. Considering that tariffs and political posturing could change the direction of the reshoring trend, there are several possible outcomes in 2018.
“I think the global supply chain is incredibly complex—there are a myriad of small things that make economic sense in the short term,” said Gott. “But you also have to have an efficient way to produce goods for the global consumer. The offshoring reality for companies is they must find the labor that they need and balance that with advanced manufacturing technologies. You can’t just walk onto a factory floor these days —manufacturing requires highly skilled machinery operators.”
Electronics make a u-turn
Electronics products have long been viewed as a prime candidate for reshoring. After more than a decade of high-tech manufacturing leaving the U.S. for China and other low-cost countries, U.S. domestic manufacturing in 2015 did increase its share relative to imports. As a result, in 2016, electronics imports from China declined by more than $7 billion.
However, 2017’s data shows a return to the trend of increasing imports of electronics. The supplier ecosystem in the U.S. is not big enough to support increasing volumes, the report said. More significant is tightening global capacity. Substantial growth in subcomponent demand from mobile, industrial, automotive, and internet of things products has consumed excess capacity at major original component manufacturers. As a result, the global electronics industry is experiencing a severe shortage of components.
U.S. manufacturing gross output was able to grow by 5.6% from 2016 to 2017 — the most since 2011. This domestic economic upswing prompted some manufacturers to rethink what to make in the U.S. versus elsewhere. There have been some high-profile reshoring cases: To accommodate the growing sales of Play-Doh, Hasbro Inc. opened a new manufacturing line in Massachusetts instead of sending production offshore. The company said the higher costs associated with domestic manufacturing would be offset by lower costs for transportation.
However, slim margins, a potential downturn in demand, and the significant investment of capital and time required are making component manufacturers cautious of expansion. Instead, they are moving large strategic customers to the front of the waiting list for constrained subcomponents, which is making OEMs and EMS providers wary of reevaluating their overall supply chain at the risk of falling to the back of the line.
High-tech imports are not the only goods that grew in 2017. Metals, plastics, and chemicals imports from China all grew at near-double-digit rates after 2016 declines. “This continues to be in line with our 2015 Reshoring Index, even though we saw a temporary drop in Chinese imports in 2016. We expect some correction in 2018 with the recent currency depreciation,” said Gott. “However, tariffs—and any sign of a prolonged trade war with China—could impact the direction of the Index. “
To further complicate matters, foreign countries are now starting to compete with American manufacturing in new areas. China is no longer only a production base for developed-countries’ brands. More products designed and marketed by Chinese companies are starting to appeal to American consumers, including Huawei’s telecom products, Anker electronics, and Haier home appliances.
According to A.T. Kearney, Chinese automotive giant GAC Motor is looking to enter the U.S. market for SUVs in 2019 in a move that echoes earlier efforts by Japanese and South Korean manufacturers. If this trend continues, Chinese imports will not be purely about low cost, but also about product design and features. This poses additional challenges to U.S. manufacturers as it could attack their competitive position in the domestic market.
If the goal of the U.S. is to expand its manufacturing base, reshoring isn’t the only solution, Gott said. American companies could manufacture more products in the U.S., and foreign companies, including those from China, could also expand their production in the Americas. The latter strategy, called foreign direct investment (FDI), could increase as Americans buy more consumer goods from Chinese and other Asian companies. China already has business-to-business operations in the U.S. for industrial products such as steel tubing and automotive parts.
The $1.5-trillion tax cut that President Donald Trump signed into law at the end of 2017 is unlikely to spur reshoring, A.T. Kearney said. The combination of an overstimulated economy and a jobless rate that is the lowest it has been in more than a decade will likely result in even more imports when domestic manufacturing can’t keep up with growing consumer demand.
“Even if you understand the supply chain, it’s incredibly difficult to predict the outcome of any single [trade or tax] activity. We advise our clients to run through scenarios with several different outcomes,” said Gott. “One thing we have on our radar is direct foreign investment. One paradigm we are starting to see is these companies are not just producing for other brands; they’re starting to produce their own brands. There are a lot of interesting dynamics to come—look at the example of Foxconn [manufacturing in the U.S.]. I think we are going to see more of that.”
Of course, the firm added, the global economy is an oil tanker rather than a speedboat. “It’s possible that the political posturing, potential tariffs, and tax cuts could turn the tide over time. But with many unknowns in trade policy, companies must understand all potential futures and develop contingency plans, including reshoring,” the report concluded.
Reshoring Index Methodology
The objective of A.T. Kearney’s U.S. Reshoring Index is to assess actual reshored manufacturing—not manufacturing related to foreign direct investment (FDI), which is triggered by a very different set of macroeconomic factors—by comparing U.S. manufacturing gross output to import data from 14 low-cost countries. To calculate the Index, we first look at the import of manufactured goods from the 14 Asian countries that have traditionally been offshore trading partners: China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, the Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia (see sidebar: A.T. Kearney Reshoring Database). Next, we examine U.S. domestic gross output of manufactured goods.
Then, we calculate the manufacturing import ratio (MIR), 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 MIR, expressed in basis points. A positive number indicates net reshoring, which occurs if gross domestic output grew relatively faster than imports from the 14 offshore countries.