Reshoring has matured into a commercial reality, says Kearney

Reshoring and nearshoring have moved beyond the drawing table and into a commercial reality, according to Kearney’s 10th annual Reshoring Index report.

The management consultancy noted that reshoring initiatives have become so successful that manufacturers who took a wait-and-see approach are now scrambling to source facilities in Mexico and the US.

Kearney’s index tracks the extent to which America is reshoring manufacturing from low-cost countries (LCCs) in Asia. The index uses the manufacturing import ratio (MIR), which is calculated by dividing the import of manufactured goods from 14 Asian LCCs by the US domestic gross manufacturing output.

The US market in 2022 imported 14.1 cents worth of offshore production from Asian LCCs for every $1 of domestic production, down from 14.49 cents in 2021. The Reshoring Index uses basis points (1% change = 100 basis points), with a positive number indicating net reshoring. The index score of 39 bps in 2022 was the first positive score since 2019, when Trump-era protectionist policies severely pushed down Chinese imports – resulting in a score of 98.

Rebounding to net reshoring after a -154 score in 2021 was no small feat, with Asian LCC imports increasing 11% year-over-year and topping $1 trillion. Though large firms have been shifting production from China to other Asian LCCs (such as India and Vietnam), that obviously doesn’t count as reshoring – but it is part of the wider trend of reducing reliance on China.

Geopolitical tension is a big reason, despite executives telling Kearney that geopolitical risk isn’t even a top-five reason for their reshoring efforts. Russia’s decision to invade Ukraine despite the severe economic, political, and social consequences is a useful reminder that authoritarian leaders don’t think the way the C-Suite does. China’s political elite may, in fact, want to attempt an invasion of Taiwan because the goals of ultranationalistic expansion take precedence over stable economic growth.

That worst-case scenario is completely devastating for a supply chain that is still dependent on an increasingly unreliable trade partner. And it would have the double-whammy effect of neutralizing Taiwan, a global hub for computer chips and other high-tech manufacturing.

CEOs doth protest too much about the geopolitical risk angle, but it’s definitely in play. The current administration has signaled the foolishness of depending on China for critical components, so recent legislation such as the CHIPS Act and Inflation Reduction Act is seeking to rapidly reshore computer chip and EV component manufacturing.

Of course, the Covid-19 pandemic also drove home the heavy risk of completely relying on far-flung Asian supply chains. If it’s simply another pandemic shutdown that craters Asian production or disrupts shipping, instead of military conflict in the South China Sea, it’s still a risk that requires mitigation.

If executives’ stated reasoning for reshoring is to be believed, it’s apparently consumers’ increasing concerns about ESG, including emissions and countering human rights violations, and consumers’ willingness to pay a premium for US-made goods. If that’s the case, moving Chinese production to Vietnam or India doesn’t address those concerns.

Moving to Mexico is almost home plate, however, and counts as reshoring since it’s not an Asian LCC. Since the onset of the Covid-19 pandemic, American importation of Mexican manufactured goods has grown from $320 billion to $402 billion (26%). Chinese companies have noticed as much, and have been opening factories in Mexico to expand capacity closer to the US market.

Whatever the rationale, Kearney’s report says the reshoring movement is real. Ninety-six percent of surveyed CEOs said they are evaluating reshoring their operations, have decided to reshore, or have already reshored – up from 78% in 2022.

Increasingly affordable automation is also helping to drive the reshoring movement, especially since it overcomes a labor shortage issue. Half of manufacturers noted a struggle to fill vacancies – which is completely understandable given the 40+ year hollowing-out of the US manufacturing base in pursuit of lowest-cost Asian production, as well as the lack of incentive to move into a field that is prime automation fodder.

“We finally seem to be heading toward a sustained reshoring movement," said Omar Troncoso, partner in Kearney's consumer and retail practice. "Reshoring is becoming both a cause and an effect of companies significantly rethinking how they construct and operate a supply chain that will carry them forward into the next decade."