U.S. Reshoring: Over Before It Began?

U.S. Reshoring: Over Before It Began? The reshoring phenomenon appears to have been more a one-off aberration than an inexorable trend. Data from 20 confirms that offshoring is gathering steam, while the reshoring train has yet to leave the station. 1

The Reshoring Engine Is Stalled In 2014 A.T. Kearney published its first U.S. Reshoring Index. The results highlighted that even though manufacturing in the United States was clearly on the upswing, the impact of reshoring was significantly less than what press reports and pundits would have had us believe. In fact, the 2014 U.S. Reshoring Index showed that notwithstanding the hype the rate of reshoring actually lagged that of offshoring between 2009 and 2013, as the growth of overall domestic U.S. manufacturing activity failed to keep pace with the import of offshore manufactured goods over the five-year period. The one exception was 2011. In 20, there will be 12 cents of U.S.-bound offshore production for every dollar of domestic manufacturing output. In 20, the A.T. Kearney U.S. Reshoring Index shows that, for the fourth consecutive year, reshoring of manufacturing activities to the United States has once again failed to keep up with offshoring. This time the index has dropped to 1, down from 30 in 2014, and it represents the largest year-over-year decrease in the past 10 years. Based on our data, we conclude that the 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. Indeed, the 20 data confirms that offshoring seems only to be gathering steam, while the U.S. reshoring train that so many predicted has yet to leave the station. 20 U.S. Reshoring Index: A Closer Look To calculate the U.S. Reshoring Index, we first look at the import of manufactured goods from 14 offshore trading partners in Asia: China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia. Next, we examine U.S. domestic gross output of manufactured goods. Then, we calculate the manufacturing import ratio, 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 manufacturing import ratio, expressed in basis points. A positive number indicates net reshoring, while a negative value indicates net offshoring. In 20, imports of manufactured goods from offshore trading partners are projected to reach as much as $717 billion, mostly from China, but with increasing contributions from countries such as India and Vietnam. U.S. domestic gross output of manufactured goods is expected to reach $5,954 billion by the end of 20. As a result, the forecast manufacturing import ratio for 20 is 12.0 percent, meaning that there will be 12 cents worth of offshore production bound for the U.S. market for every $1 of domestic manufacturing gross output. 1 As a result, the U.S. Reshoring Index will drop to 1 (see figure 1 on page 2). Thus, if the 20 1 The 20 forecast is projected from actual data for three quarters of offshore imports and two quarters of gross domestic output, which has been seasonally adjusted at annual rates. 1

Figure 1 Offshoring of U.S. manufacturing has consistently outpaced reshoring Manufacturing import ratio and U.S. Reshoring Index score %, basis points U.S. Reshoring Index score Manufacturing import ratio Net reshoring 20 0 20 7.7% +434 basis points 8.2% 9.0% 9.1% 9.2% 9.6% 10.5% 10.4% 10.5% 10.6% 10.9% 12.0% 18 1 12 11 30 Net offshoring 40 60 55 44 80 100 120 72 80 92 1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20f Notes: The manufacturing import ratio is calculated by dividing manufactured goods imports from 14 Asian markets (China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia) by U.S. domestic gross output of manufactured goods. The U.S. Reshoring Index is the year-over-year change in the manufacturing import ratio. Sources: U.S. International Trade Commission, U.S. Bureau of Economic Analysis; A.T. Kearney analysis U.S. government forecasts hold true, the manufacturing import ratio will have increased by 434 basis points since 2004, with more than one-quarter of that increase occurring over the past 12 months. Our research points to two factors behind the precipitous drop in the A.T. Kearney U.S. Reshoring Index: lackluster domestic manufacturing growth and the resilience of the offshore manufacturing sector. Lackluster domestic manufacturing Markit s U.S. Manufacturing Purchasing Managers Index (PMI) fell to 52.6 in November 20, down from 54.1 in the month before, indicating that the U.S. manufacturing sector has lost some growth momentum. For the whole year of 20, and for the first year since the 2009 recession, the U.S. Bureau of Economic Analysis expects U.S. manufacturing gross output which includes the input values of raw materials and intermediate goods to shrink by as much as 3.6 percent. Prices in 20 have been depressed for oil and many other commodities, particularly those related to food. And since petroleum products and food are two of the largest U.S. manufacturing industries, this year s commodity price volatility affects domestic manufacturing gross output disproportionately. 2 As an intellectual exercise, to discount the effect of raw material 2 In fairness, manufacturing value add which is up slightly is probably a better measure of the absolute health of the manufacturing sector, as it is less sensitive to underlying volatility in commodity pricing. 2

price declines on domestic manufacturing gross output, we calculated what the U.S. Reshoring Index value would be for 20 if manufacturing input value were held constant relative to 2014. Of course, lower global oil and other raw material prices also impact the value of offshore manufactured goods, but we chose to ignore that effect in the interest of making conservative assumptions. Yet even in that conservative case, the U.S. Reshoring Index would still have dropped to 26 admittedly far less than the projected level of 1, but still supportive of our view that the widely predicted reshoring trend seems to be over before it got started. Offshore manufacturing resilience Meanwhile, despite some predictions to the contrary, offshore manufacturing for import into the United States has been remarkably resilient and has in fact continued to trend upward this year. Based on the first three quarters of data, offshore manufactured goods imports are poised to grow by 6.5 percent in 20, nearly matching the 6.9 percent growth rate from 2014. And the growth is coming from some surprising places. For example, when pundits in 2012 projected a wave of reshoring, they highlighted seven primary industries as being on the tipping point because of their relatively modest labor content and high transportation costs: computers and electronics, appliances and electrical equipment, machinery, furniture, fabricated metals, plastics and rubber, and transportation goods. A look at the numbers, however, tells a different story. Although these industries make up over half of the reshoring case studies that we ve observed over the past years (see sidebar: A.T. Kearney U.S. Reshoring Database on page 4), at the same time they also are showing the highest increase in offshoring among industries. 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 United States to China (see figure 2). And between 2014 and 20, the value of manufactured goods imports Figure 2 Massive outflow of manufacturing share to China in computers and electronics Manufacturing import ratio for computers and electronics: imports from China only % 60 +837 basis points 45 30 36.8% 39.6% 42.6% 44.9% 45.2% 0 2010 2011 2012 2013 2014 Note: The manufacturing import ratio is calculated by dividing manufactured goods imports by U.S. domestic gross output of manufactured goods. Sources: U.S. International Trade Commission, U.S. Bureau of Economic Analysis; A.T. Kearney analysis 3

A.T. Kearney U.S. Reshoring Database The macroeconomic picture portrayed in this report is corroborated by the data in our updated U.S. Reshoring Database, which holds roughly 700 reshoring cases that have been announced over the past five years. The latest update of A.T. Kearney s U.S. Reshoring Database forecasts around 60 reshoring cases for 20, which is a significant drop from the 2013 and 2014 levels (see figure A). In 20, documented reshoring activity continues in many sectors where reshoring was expected: computers and electronics, appliances and electrical equipment, primary metals, machinery, furniture, plastics and rubber, paper, and fabricated metals. Machinery and miscellaneous manufacturing lead the number of reported reshoring cases in 20, with 30 percent and 22 percent respectively. A look at the 2011 20 historical chart reveals that some sectors that were identified as not apt for reshoring, such as apparel, continue to make a strong showing (see figure B). Miscellaneous manufacturing is rising in the ranking, since most of the category consists of parts manufacturing, which is a feeder industry for the automotive sector. Over the past two years, the number and proportion of automotive and miscellaneous cases have grown hand in hand. The right-hand side of figure B also shows that the top reasons for reshoring continue to be improvements in delivery time, quality, and costs (wages, freight, total), but the weight of Made in USA is still strong in the ranking. Figure A Published U.S. reshoring cases have declined in 20 Published U.S. reshoring cases 250 200 0 210 208 100 50 0 64 2011 104 2012 2013 2014 ~60 20f Source: A.T. Kearney U.S. Reshoring Database Figure B U.S. reshoring cases 2011 20: industry breakdown and top reasons Top 10 reshoring industries % of cases Top 10 reasons % of mentions Electrical equipment, appliances, and components 16 Delivery time improvement 23 Transportation equipment 14 Quality improvement 21 Apparel 12 Image or brand ( Made in USA ) Computers and electronics 11 Wage cost improvement Miscellaneous 11 Freight cost improvement Plastics and rubber products 8 Total cost of ownership Machinery 7 Customer responsiveness improvement 10 Fabricated metal products 4 Innovation or product differentiation improvement 9 Nonmetallic mineral products 3 Higher productivity 9 Furniture and related products 3 Government incentives 8 Source: A.T. Kearney U.S. Reshoring Database 4

from China is estimated to increase substantially for automotive and transportation equipment (12.1 percent), furniture (10.8 percent), appliances (9.8 percent), and fabricated metals (7.4 percent), which would seem to indicate a loss of U.S. manufacturing share given the relatively modest growth of U.S. domestic consumption in these industries. Moreover, industries vulnerable to rising labor costs in China, rather than returning to the United States, have instead been successfully relocating to other Asian countries without incurring significantly higher supply chain costs despite the weaker infrastructure and supporting ecosystems of those new low-labor-cost destinations. In fact, if the U.S. dollar value of manufactured goods imports from China will have risen by 33 percent between 2010 and the end of 20, the increase from the other 13 U.S. offshore trading partners in Asia will have grown by 43 percent over the same period (see figure 3). Removing relatively high-wage markets such as Hong Kong, Taiwan, and Singapore would cause the increase to jump to a staggering 57 percent. Among the countries with low labor costs, Vietnam s manufacturing development has perhaps been the most impressive. Vietnam has ably absorbed the lion s share of China s manufacturing outflow, especially in apparel, and U.S. imports of manufactured goods from Vietnam in 20 will nearly be triple of those in 2010. The countries of South and Southeast Asia even after India is taken out of the equation have labor forces that run into the hundreds of millions of workers, so the gradual shift of certain industries to other Asian low-cost countries is likely to continue. Similar intra-asian movements of manufacturing flows have happened before, when Japanese manufacturing Figure 3 Other Asian countries are taking over some of China s share of U.S. manufactured goods imports U.S. manufactured goods imports from China vs. next 13 largest offshore manufacturing countries $ billion +43% China Next 13 largest 500 +33% 400 300 356.1 389.9 4.3 428.3 454.8 474.8 200 168.9 189.0 196.6 201.4 218.2 242.0 100 0 2010 2011 2012 2013 2014 20f Note: The 13 largest offshore manufacturing countries after China are Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia. Sources: U.S. International Trade Commission; A.T. Kearney analysis 5

migrated to Southeast Asia and when South Korean companies extensively relocated manufacturing to China. Still, it would be a mistake to count China out. Rumors of the death of China manufacturing have been greatly exaggerated, as we explain in Get Ready for China s Manufacturing Comeback. 3 Cost headwinds have indeed hurt some Chinese manufacturers, particularly state-owned enterprises in commoditized industries. But private Chinese companies retain significant advantages, not least the resiliency and competitive spirit of their management and staff. Many Chinese manufacturers, then, are evolving rather than fading, and their growing capabilities will challenge their Western rivals in new ways. Looking Forward As we look beyond 20 at factors that influence companies decisions about where to manufacture, they mostly seem to be moving against more reshoring to the United States. The forecast strengthening of the dollar, the oil price slide, the tightening U.S. labor market in manufacturing, and even political uncertainty in the run-up to the 2016 elections all weaken the case for reshoring. The recent increase of nearshoring to Mexico also seems to indicate that, even if U.S. companies consider leaving Asia, they may choose to stop south of the border. Industries vulnerable to rising labor costs in China have relocated to other Asian countries without incurring significantly higher supply chain costs. Looking a bit further out, the Trans-Pacific Partnership (TPP) a trade agreement between 12 countries on the Pacific Rim, including several that are hosting industries theoretically ripe for reshoring will lower tariff barriers and the cost of trade. If ratified by the U.S. Congress, then, the TPP may weaken the business case for reshoring further. Then again, unexpected events may tip the scale for some companies in favor of reshoring. For example, the dockworkers strike in early 20 at U.S. West Coast ports caused many companies to reexamine the potential benefits of reshoring, as they saw their profits evaporate because they had to use expensive airfreight to get their products to the U.S. market. Also, developments in the areas of digital manufacturing, 3D printing, and the Internet of Things will completely change cost dynamics across the whole supply chain, so the speed with which these developments materialize will also factor into companies reshoring decisions. A shift in technology will, however, require skilled, qualified staff and that s one obstacle U.S. manufacturing has yet to overcome. In fact, speaking with several domestic companies that have reshored all or part of their manufacturing operations, we heard that the shortage of skills is their greatest challenge, a topic we already discussed in Solving the Reshoring Dilemma. 4 3 Get Ready for China s Manufacturing Comeback is available at www.atkearney.com. 4 Solving the Reshoring Dilemma was published in the January February 2014 edition of Supply Chain Management Review. The full text is available at www.atkearney.com and by subscription at www.scmr.com. 6

Another element in the equation are national manufacturing policies to encourage the formation of ecosystems of manufacturers, suppliers, and R&D entities. In 2014, the U.S. Congress allocated $300 million over 10 years to the National Network for Manufacturing Innovation (NNMI) to build a network of institutes bringing together regional manufacturing stakeholders from industry, government, and academia in order to facilitate advanced manufacturing processes from basic research to implementation. Today, only a fraction of these are truly up and running and so the impact is hard to gauge, but they could prove to be appealing to companies looking to reshore. Implications for U.S. Manufacturing If the widely publicized reshoring boom largely turns out to be a bust, does that bode ill for manufacturing in the United States? Not necessarily. The United States still tops the list of countries where companies from all over the globe want to invest in the coming years according to the A.T. Kearney 20 Foreign Direct Investment Confidence Index, and it appears that many foreign companies are more interested in (re-)establishing a manufacturing footprint in the United States than their domestic counterparts are interested in repatriating their operations from Asia. For example, in an interesting twist of fate, Chinese companies have actually invested $46 billion in the United States since 2000, according to Rhodium Group, with most of that investment happening in the past few years. Chinese manufacturers across industries are building U.S. plants and creating new manufacturing jobs, often in small towns that years ago were abandoned by domestic manufacturers that were offshoring their operations. In fact, of the approximately 60,000 new U.S. manufacturing jobs that, according to the Reshoring Initiative, were created in 2014 as a result of the combination of reshoring and foreign direct investment, about 8,000 were at China-owned companies. Foreign companies that are investing in U.S. manufacturing facilities seem to be taking a long-term view of the market. Other foreign companies such as Rolls Royce, Volkswagen, BMW, Siemens, Airbus, BASF, Bridgestone, and Michelin have all built or announced the construction of new manufacturing plants in the United States in the past three years. Moreover, foreign companies now account for roughly one-fifth of America s manufacturing workforce, with companies headquartered in Japan, Germany, and the United Kingdom leading the way. The fact that foreign companies invest in putting new steel into the ground stands in contrast to U.S. companies that reshore their operations, since most of the latter (74 percent according to our latest count) choose instead to return to existing locations that were mothballed. This could point to two major differences in how foreign and domestic companies think about manufacturing in the United States. First, foreign companies seem to have a broader scope in mind. They appear to be considering a longer time horizon, as it takes much longer to pay back the investment in a new plant than in a recommissioned facility. Also, some companies are building high-capacity facilities to target not just North America but also export markets farther afield. Second, for foreign companies, proximity to the huge U.S. consumer market and the stability of the U.S. 7

political and economic environment are main draws. And for Chinese manufacturers, there s the added benefit of being able to tap into American engineering skills and manufacturing know-how. Arguments such as these play a key role in the decision of foreign companies to manufacture in the United States, but they appear to be of less value, or are maybe taken for granted, by domestic companies. The End of a Trend Despite the many ifs and buts, it s fair to say that reshoring as a trend is officially dead, at least for now. This does not mean that reshoring has totally stopped in its tracks, nor are we asserting that the predicted wave of reshoring will never happen. But this does serve as a needful reminder that with global currencies, labor rates, and energy costs gyrating as an executive whose job it is to make critical business decisions based on what the future is expected to hold, you need to reassess your footprint, and that of your suppliers, on an ongoing basis to see if the boundary constraints have changed enough to warrant an adjustment. And whatever course you take, be sure to build in flexibility, and stay nimble enough to correct course when the reality does not play out exactly as predicted. Authors Patrick Van den Bossche, partner, Washington, D.C. patrick.van.den.bossche@atkearney.com Brooks Levering, director, New York brooks.levering@atkearney.com Héctor Gutiérrez, consultant, San Francisco hector.gutierrez@atkearney.com Johan Gott, principal, Washington, D.C. johan.gott@atkearney.com 8

About the A.T. Kearney U.S. Reshoring Index When we launched the A.T. Kearney U.S. Reshoring Index in 2014, much of the evidence for reshoring was anecdotal, often highlighting no more than a handful of high-profile cases, and the conclusions seemed to reflect wishful thinking or political agendas more than hard facts. Even the best research focused more on promulgating models of future reshoring than on accurately assessing the current reality. So our objectives were simple: (1) find out what U.S. manufacturers were doing, and (2) separate the reality from the hype. The A.T. Kearney U.S. Reshoring Index addresses these objectives by aggregating actual U.S. manufacturing and import data to track what is really happening now, while providing a powerful indicator of where manufacturing for the U.S. market is going. We start by analyzing annual growth in 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) and in U.S. manufacturing gross output, based on the nominal U.S. dollar value. Next, we calculate a simple ratio of annual offshore manufactured goods import values to U.S. manufacturing gross output, summarized as the manufacturing import ratio. Higher values of the manufacturing import ratio reflect greater share of offshoring relative to domestic manufacturing. Finally, the U.S. Reshoring Index tracks the year-over-year spread in the manufacturing import ratio measured in basis points. Positive values demonstrate a trend toward reshoring, while negative values show a trend toward offshoring. Simple, but powerful! 9

A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit www.atkearney.com. Americas Atlanta Bogotá Calgary Chicago Dallas Detroit Houston Mexico City New York Palo Alto San Francisco São Paulo Toronto Washington, D.C. Asia Pacific Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Taipei Tokyo Europe Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Middle East and Africa Abu Dhabi Doha Dubai Johannesburg Manama Riyadh For more information, permission to reprint or translate this work, and all other correspondence, please email: insight@atkearney.com. The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring essential rightness in all that we do. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited, a company organized under the laws of England and Wales. 20, A.T. Kearney, Inc. All rights reserved.