Reshoring from China: The Changing Landscape of Global Manufacturing

Last Updated on June 7, 2023

In recent years, the concept of reshoring has gained significant attention in the business world. Reshoring refers to the process of bringing back manufacturing and production operations to the home country from overseas, particularly from countries like China. This shift is driven by a variety of factors, including rising labor costs, supply chain vulnerabilities, intellectual property concerns, and the desire to support domestic industries. In this article, we will delve into the phenomenon of reshoring from China, exploring its implications, benefits, challenges, and the future of global manufacturing.

What Does Reshoring Mean?

According to Investopedia:

“Reshoring is the process of returning the production and manufacturing of goods back to the company's original country. Reshoring is also known as onshoring, inshoring, or backshoring. It is the opposite of offshoring, which is the process of manufacturing goods overseas to try to reduce manufacturing costs.”

The Covid-19 Pandemic, which greatly affected supply chains and the continuing rising costs of labor in China, have many US companies with manufacturing operations in that country considering moving their operations; more production operations are being relocated to Mexico. 

According to Forbes:

“U.S. companies are always reassessing their manufacturing and supply-chain footprint in China. China is no longer a cheap place to manufacture and the politics of tariffs have introduced another wildcard. On top of that, the disruptions caused by Covid-19 have highlighted the importance of supply-chain redundancy and resilience.”

Reshoring advocates claim that bringing the operations for manufacturing back to North America will help strengthen the economy by creating new manufacturing jobs from these operations, while also reducing unemployment and helping to balance trade deficits.

According to FDI Intelligence:

“After moving in tandem for much of the past decade, reshored jobs were up nearly 45% in 2020, and FDI jobs were down 40%. The report, which is based on job announcements and annualised data from the first half of 2020, supports early predictions that the pandemic is accelerating the trend of companies bringing overseas operations and supply chains back home.”

Understanding the Reshoring Trend

Reshoring from China has become a key strategic consideration for many companies around the world. The once prevailing trend of offshoring, driven by lower labor costs and access to large consumer markets, is being reevaluated due to changing circumstances. Rising wages in China, along with increased transportation costs and geopolitical uncertainties, have made it less attractive for businesses to maintain manufacturing operations there. As a result, many companies are opting to reshore their production to regain control over quality. This is to reduce supply chain risks, and improve responsiveness to market demands.

How Does Reshoring Work?

Reshoring may seem simple on the surface: move your manufacturing operations from China back to North America, but in practice it can be much more challenging. In addition to finding a manufacturing partner or facility, you will also need to source materials, secure labor, establish new supply chains, secure equipment, and then transition the operation out of the country where it previously operated. It may take as long as two years for your Mexico industrial manufacturing operation to be relocated and fully operational once you solve all the problems listed previously.

According to the Harvard Business Review:

“A manufacturer not only has to source all of the components of a product, it also has to scale up production. This task is often taken for granted, but it is part of the really hard work of taking a product to market. The process includes setting up the supply chain for all of the raw materials, designing an assembly process with the appropriate tooling and fixtures, building or securing test equipment, establishing testing and quality procedures, and working through materials handling, staffing, and countless other details.”

Robotics Business Review adds the following:

“So many companies make the mistake of simply comparing labor or tariff costs when determining their get-out-of-China pathway. But there is so much more to a decision to exit China. In particular, companies should consider all of the exit costs including employee payments, tooling and molds, IP protection, exit taxes, and fees when considering the restart-up costs in the U.S. or other countries.”

“New data produced by the Bank of America shows the reason for this: labor rates in Mexico can be lower than China by as much as 20%, quite a change from 10 years ago when Mexican labor rates were 188% higher than China.

Benefits of Reshoring From China

Reshoring offers a multitude of benefits for companies that choose to return manufacturing operations back from China. Firstly, it allows better quality control and oversight throughout the production process. Being closer to production facilities enables companies to maintain strict quality standards, reduce defects, and ensure timely product delivery. Additionally, reshoring reduces supply chain risks by shortening lead times and mitigating disruptions caused by natural disasters, political unrest, or trade disputes.

Another significant advantage of reshoring is intellectual property protection. Many companies face concerns regarding theft or imitation of their proprietary technologies and designs when operating in countries with weak intellectual property protection. By reshoring, companies can safeguard their valuable assets and maintain a competitive edge.

Furthermore, reshoring contributes to job creation in the home country. By bringing back manufacturing operations, companies stimulate local economies, create employment opportunities, and foster skills development within their own communities. This benefits individuals and families but also enhances national economic resilience and self-sufficiency.

Challenges and Considerations of Reshoring from China

While reshoring offers numerous advantages, it is not without challenges and considerations. One of the primary obstacles is the initial investment required to establish or expand domestic manufacturing facilities. Companies need to assess the cost implications and weigh them against the long-term benefits. Additionally, they must evaluate the availability of skilled labor and resources in the home country, as well as the impact on existing supply chain relationships.

Another critical aspect to consider is the potential impact on pricing and consumer demand. Reshoring can result in higher production costs, which may be passed on to consumers. This price increase could influence consumer purchasing decisions, especially in price-sensitive markets. Companies need to carefully analyze market dynamics and evaluate the price elasticity of their products before making the decision to reshore.

The Future of Global Manufacturing

Reshoring from China represents a significant shift in the global manufacturing landscape. While China has long been considered the manufacturing hub of the world, the tide is slowly turning as businesses explore alternative options. Several countries, including India, Vietnam, and Mexico, are emerging as attractive destinations for manufacturing due to their competitive labor costs, favorable business environments, and proximity to key consumer markets.

Moreover, advancements in automation and robotics are reshaping the manufacturing industry. With the increasing adoption of technologies such as artificial intelligence and machine learning, companies can streamline their operations, reduce labor costs, and enhance productivity. This trend, combined with the reshoring movement, is transforming the way goods are produced globally.

Is reshoring a trend that is expected to continue? If so, what are the factors contributing to it? Learn more from this video featuring Hal Sirkin, a senior partner at Boston Consulting Group.

Conclusion: Reshoring From China Represents a Strategic Response to the Changing Dynamics of the Global Economy

Reshoring from China represents a strategic response to the evolving dynamics of the global business environment. While it poses challenges and requires careful consideration, reshoring offers companies the opportunity to regain control over quality, mitigate supply chain risks, protect intellectual property, and stimulate domestic economies. As the manufacturing landscape continues to evolve, reshoring, coupled with advancements in automation, will shape the future of global manufacturing.

FAQs

Q: Is reshoring limited to manufacturing industries?
A: While reshoring is commonly associated with manufacturing, it can also apply to other industries such as services and technology. The decision to reshore is driven by various factors specific to each industry and company.

Q: Are all companies reshoring their manufacturing operations from China?
A: Not all companies are reshoring from China. The decision to reshore depends on a company's individual circumstances, including factors such as cost analysis, supply chain considerations, and market dynamics.

Q: Can reshoring help address environmental concerns?
A: Yes, reshoring can contribute to addressing environmental concerns. By reducing transportation distances and promoting local production, reshoring can help reduce carbon emissions and promote sustainability.

Q: Will reshoring lead to the complete elimination of offshoring?
A: Reshoring does not necessarily mean the complete elimination of offshoring. Some companies may choose to maintain a hybrid model, leveraging both domestic and overseas manufacturing capabilities to optimize their operations.

Q: How can companies prepare for the reshoring process?
A: Companies planning to reshore should conduct a thorough analysis of costs, labor availability, supply chain dynamics, and market conditions. They should also develop a comprehensive transition plan to ensure a smooth and successful reshoring process.