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.