A rumour doing the rounds recently suggested that manufacturing was returning from overseas to many developed countries. A survey in the UK has shown that one in six manufacturers who moved production offshore, are now returning home in a move that is being described as “reshoring”. That ratio has increased from one in seven in 2009 and some countries are even hailing it as a rebirth in manufacturing.
The main reason for reshoring seems to be a desire to improve the quality of products and components. This is closely followed by a drive to overcome issues with customer service, speed of delivery and reductions in logistical costs.
Around 40% of reshored companies are already claiming an increase in turnover against 3% who have seen it fall. It is also interesting to note that 60% of reshored companies are reporting a moderate increase in profits and employment.
However, that still leaves five out of six offshore manufacturing companies who are presumably meeting the objectives they set when they took the decision to move production out of their home country. That decision was probably based on a number of factors not necessarily related to cost reductions. For example, many global companies “followed their customers” around the world, were driven by regulatory reasons or needed to gain market access in other countries.
Moving manufacturing overseas purely to save production costs has only ever provided short term benefits. When China joined the WTO (World Trade Organisation) many Western countries couldn’t compete. Due to very low comparative labour costs, Chinese companies could sell products cheaper than Western companies could make them. We then witnessed a wholesale shift of global production to China – with devastating effect on local economies.
Things are changing. In recent years, China’s costs have risen significantly faster than in Western nations. According to Boston Consulting Group, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005. That increased to 19% per year between 2005 and 2010. Those increases have created markets within themselves. The generation of “Little Emperors” as the Chinese call the children of the noveau riche, have developed a seemingly insatiable appetite for goods and fashion items that are traditionally seen as “Western”. It still makes sense to manufacture those items in China as there is now an established supply chain, local markets tend to seek locally manufactured goods and logistically it’s cheaper and greener. Shipping Chinese manufactured goods to the other side of the planet is neither. What’s more, consumers in the Western economies have a completely different attitude to purchasing than they did at the turn of the century. They want their purchases to be untainted by environmental or social effects. The phrases “environmental impact” and “sweat shop” used in conjunction with a brand can have very serious consequences on sales.
For every Ying there’s a Yang. The original drive to outsource all production to the Far East, has forced many Western economies to become more competitive and as a result, their manufacturing has become a lot leaner. The pendulum seems to now be swinging back to manufacturing locally as “reshoring” seems to confirm.
It will be interesting to see whether the trend extends to service industries, particularly those involved in customer support. Either way, the anticipated demand for skills and talent suggest interesting times ahead for many economies at a time when large numbers of the global workforce are nearing retirement.