Nearshoring and reshoring remains a threat to offshoring, on which much depends
 THERE is much said about nearshoring and reshoring of late, particularly in the United States where one presidential candidate made it a major plank in his campaign platform and his opponent dared not dispute it.
But when the dust clears and settles on the reality of what a US president faces, the general configuration of economic forces will largely dictate policy whatever the rhetoric employed on the hustings. That is, because options for 180 degree turns are delusional and whatever use one can make of them is largely symbolic to be deployed in electoral politics.
That doesn't mean that ambitious trade deals will fare any better, because often the are like the proverbial sausage that is a lot less appetising once one knows what it contains.
So while trade will likely proper overall, it may be bereft of utopian accords, which owe more to old time principles of Adam Smith or John Maynard Keynes without regard to whose ox is being gored in the here and now. Except when they don't, most trade deals are rife with secret side deals with special interests. These tend to be snakes in the grass that escape legislative review and only come up to bite later when lawyers cite particular clauses in court.
Grand trade accords aside, let us now take a moment to think about offshoring, nearshoring and reshoring - things that such trade deals take into consideration. Offshoring is when a company moves its manufacturing to a foreign country in an attempt to save money. For a long time, this model of manufacturing seemed to be the paragon of effective business.
It was cheaper than producing products in the developed world. In this way, big inventories can be built with little capital up front. When the global market expands, more manufacturers look to save money in other ways. For some manufacturers, having factories and operations in foreign countries was also beneficial to their foreign customers too.
So much for offshoring. Not that nearshoring and reshoring are that complicated. Nearshoring refers to when a company brings products closer to its home base, typically America or Europe. Reshoring is the opposite of offshoring. It is repatriation, and occurs when a company opts to move operations from overseas locations to its home base. This may include research and development, product manufacturing, product packaging, and shipping processes.
But having factories in the home country - where one's products are mostly sold - is also beneficial to home country customers. While this is true in some cases, and truer in some more than others, it is not necessarily the best way in all cases.
While it is politically attractive to think of every home country manufacturer repatriating operations, this is unrealistic and costly. While overseas markets are often volatile, and the cost of labour in foreign countries is rising, nine times out of ten it is still cheaper to offshore than use western labour.
Since one of the key benefits of reshoring and nearshoring focus on lower shipping costs and increased quality, those companies that keep chasing the lower labour costs will hurt. In assessing what's best when it comes to weighing relative costs and benefit by doing the math, though other factors intrude which we shall deal with later.
Global manufacturers have consumers abroad in other countries, so it is unlikely that every factory of a US or European manufacturer will return work to the home country or even a country within the home region.
But many western companies are redoubling their efforts to nearshore or reshore or both to get the benefits of lower shipping costs and increased quality. One reason is the rise of the Internet. This has given the average consumer access to more information, more products, and more competitors in the burgeoning world of e-commerce.
Thus, some companies offer drastically low shipping rates, and products that are competitively priced. Also western attitudes towards the value of a product are changing.
According to Consumer Reports, up to 80 per cent of Americans are willing to pay extra for products that are manufactured in the United States. Additionally, most of these respondents claimed to be willing to pay up to 10 per cent more for a US-made product.
Another issue is that political climates are becoming unstable. Domestically, home country electorates increasingly question the wisdom of globalisation and free trade. To high-toned internationalists who say we can't go back to days of yore because all those Joe Sixpack jobs are done better and more cheaply elsewhere.
Such people say, "We are much better at producing consumer software rather than consumer hardware." But that forgets the number of Joe Sixpacks who still need low-skill jobs in the west, and who do not have - and never will have - the skills to compete for the smaller number of high-skilled jobs available - not to mention the vast and rapidly growing numbers of foreign skilled workers who can make consumer software better and cheaper than the western workers can, and can do without crossing a border to do it.
Then were is country risk. Russia is continually testing the international waters of potential warfare, and terrorist activity has frightened the western world that yearns to be safe. China and the west might well find themselves in an argy-bargy over the South China Seas that threatens the utility of offshoring.
Even though these events do not necessarily represent a threat to home country soil, consumers want products that are related to safe areas. Combining this information with increasing costs of doing business overseas, manufacturers must be willing to return their operations home if they hope to continue to have a profitable consumer base there.
For businesses that plan to expand operations on a global scale, manufacturing is best achieved when it is closest to the end user, some say. In this case, each manufacturer that can operate as close as possible to its target demographic, which may include domestic and foreign markets, will have a higher chance of success.
Inputs from a foreign supply chain may lead to lower product quality, potentially costly product returns, and legal liability. Moreover, overseas supply chains reduce US manufacturers' flexibility to quickly react to customers' changing demands and requirements.
In the most basic sense, product quality means getting customers the product they want. At minimum, a product of acceptable quality meets a set of previously agreed-upon specifications. However, quality can also be understood more broadly as the ability to quickly meet, if not anticipate, constantly changing market demand.
In other words, it is no longer good enough for manufacturers to produce today a product that meets yesterday's specifications. Instead firms must produce to meet today's real-time specifications and be able to turn on a dime in order to meet tomorrow's as well.
It is not easy to quantify the extent or cost of poor product quality of manufactured goods, let alone with respect to specific countries or geographic areas. Data from the US Consumer Product Safety Commission (CPSC), however, do allow us to take a partial look at recalls by country.
The CPSC publishes online a listing of recalls by country or administrative area of manufacture and year. These recall counts point to sizable growth over the past decade in the recall notices of Chinese-made consumer goods from 58 in 2002 to 153 in 2015.
This is not surprising given the sharp rise in goods imported from China. In contrast, there were 47 recall notices of US-made consumer goods, four of consumer goods manufactured in Canada, and nine of goods from Mexico.
The trend towards reshoring and nearshoring will continue. But it can be expected to moderate and even reverse itself over time. Although reshoring appeared to diminish slightly in 2015, according to the AT Kearney Reshoring Index, a quick glimpse of any mainstream media broadcast almost always includes a segment on the value of products that are manufactured and completely "Made in America".
Ultimately, reshoring and nearshoring will be the most defining factors impacting the costs of products that are demanded both in the US and in foreign countries. |
