Reshoring has been the talk for US manufacturing. But what do the data show?

A recent analysis by A.T. Kearney shows that reshoring of manufacturing operations to the United States has failed to keep up with offshoring, marking the fourth consecutive year it failed to do so. DCAT Value Chain Insights (VCI) takes an inside look.

Looking at the numbers 
The decision of where to locate manufacturing or source from manufacturers is crucial for all industries, including the pharmaceutical industry. While there has been much recent attention to possible shifts in manufacturing back to the United States, a recent analysis by A.T. Kearney shows that is not the case. The second annual A.T. Kearney US Reshoring Index shows that for the fourth consecutive year, reshoring of manufacturing operations to the United States has failed to keep up with offshoring. In 2015 the Index dropped to -115, down from -30 in 2014, and represents the largest year-over-year decrease in the last 10 years. Even if the effect of raw material price declines is discounted by, conservatively holding manufacturing input values constant relative to 2014 while ignoring that same effect on the value of offshore manufactured goods, the US Reshoring Index would drop to -26, still supporting the view that the widely predicted reshoring trend seems to be over before it started. Interestingly, foreign companies, including many from China, are the ones most eager to invest in US manufacturing, concluded the study.

The objective of the A.T. Kearney US Reshoring Index is to assess actual reshored manufacturing by aggregating actual US manufacturing and import data. The annual growth of both manufactured goods imports from key offshore trading partners (China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia) are analyzed along with US manufacturing gross output. A simple ratio of annual offshore manufactured goods import values to US manufacturing gross output is calculated, summarized as the manufacturing import ratio. The US Reshoring Index tracks the year-over-year spread in the manufacturing import ratio, measured in basis points.

Patrick Van den Bossche, A.T. Kearney partner and co-author of the study, commented on the findings. “The US 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. The 2015 data confirms that offshoring seems only to be gathering steam while the US reshoring train that so many predicted has yet to leave the station.”

The A.T. Kearney US Reshoring Database, which holds roughly 700 reshoring cases that have been announced over the last five years, is forecasting only around 60 reshoring cases for 2015, which is a considerable drop from 2013 (210 cases) and 2014 (208 cases). The study points out that industries vulnerable to rising labor costs in China have been successfully relocating to other Asian countries rather than returning to the United States. They have done so without incurring significantly higher supply chain costs despite the weaker infrastructure and supporting ecosystems of these new low-labor-cost destinations. Vietnam has absorbed the lion’s share of China’s manufacturing outflow, especially in apparel. US imports of manufactured goods from Vietnam in 2015 will be nearly triple the level of imports in 2010.

The A.T. Kearney US Reshoring Index and the US Reshoring Database provide a number of insights on the factors driving imports of offshore manufactured goods and manufacturing reshoring. Many of the report insights run counter to the points of view and attention regarding reshoring of manufacturing to the United States.It points out that some of the top sectors for reshoring from 2011 to 2015 are also sectors that have led the pack in further offshoring over that same period. The recent increase of nearshoring to Mexico also seems to indicate that, even if US companies consider leaving Asia, they may choose to stop south of the border. The forecast strengthening of the dollar, the oil price slide, the tightening US labor market in manufacturing, and the Trans-Pacific Partnership, if ratified by the US Congress, will likely further weaken the case for reshoring in 2016, concludes the story. Although reshoring of manufacturing by US companies is on the decline, non-US companies, including Chinese companies, increasingly invest in establishing or expanding their manufacturing footprint in the United States, according to the study.

Pramod Gupta, A.T. Kearney partner and co-author of the US Reshoring Index, stated: “These findings show that executives whose job it is to make critical business decisions based on what the future holds, need to constantly evaluate global currencies, labor rates, and energy costs, and reassess their manufacturing footprint, and that of their suppliers, on an ongoing basis to see if the boundary constraints have changed enough to warrant an adjustment.”