January 10, 2015    Volume 22, No. 1

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A.T. Kearney: Economic Data Does Not Support The Manufacturing Reshoring Story; Offshore Outsourcing Is Still Outpacing Reshoring

By Richard A. McCormack

An A.T. Kearney analysis of the manufacturing reshoring trend, which finds that it's "not what it's cracked up to be," is flawed, argues the Reshoring Initiative, the association created to monitor and encourage the return of manufacturing to America.

There has been a lot of buzz in the business press about how reshoring is gaining momentum and is creating thousands of new manufacturing jobs. But the trend is not amounting to many new jobs or economic activity in the United States, according to A.T. Kearney. "Even though manufacturing in the U.S. has clearly been on the uptake, the impact of reshoring on this turnaround is much less than the hype would indicate."

Almost all evidence of reshoring is anecdotal -- "a couple of case studies, a few expert quotes" and Walmart's pledge to buy $50 billion more per year in American-made goods, notes A.T. Kearney. "Even the best research on the subject has relied heavily on prognostication, with insufficient measurement and tracking of the actual results."

A.T. Kearney intends to change this and has developed a "Reshoring Index" based on data from the federal government and its network of manufacturing and supply chain consultants throughout the world. It found that there will be about 300 cases of reshoring to the United States in 2014, up from 210 in 2013, 104 in 2012, 64 in 2011 and 16 in 2010. These companies are bringing production back to the United States for all the reasons that have been discussed: delivery time and quality improvement; brand and image appeal of "made in America"; reduced freight and competitive wage costs in the United States; lower total cost of ownership; government incentives; and higher productivity. "Many of these cases in the A.T. Kearney Reshoring Database are still in the early stages of implementation and have yet to translate into real economic impacts," says the analysis. "But the fact that the number of reported reshoring cases appears to be no longer growing as fast as it did over the past three years is a first interesting observation that appears to contradict the hype."

The impact of reshoring is positive, but "it's minor versus what was announced and, from a macroeconomic point of view, still significantly less than the offshoring impact," states A.T. Kearney partner and co-author of the Reshoring Index, Patrick Van den Bossche. "Reshoring pundits have been talking for the last two- to three years about the potential of millions of jobs to be added by reshoring, but growth in jobs has most likely just come from a general growth of the economy versus from 'more reshoring,' so we've found that the number of reshoring cases doesn't tell the complete story and, in fact, leads you to overhyped conclusions."

The number of cases of reshoring must be put in perspective and a broader view of the trend is required, says A.T. Kearney. U.S. manufacturing output has been growing since 2009 by an average compound rate of nearly 6 percent, but imports of products from the 14 Asian countries to which U.S. manufacturers outsourced most of their production grew by 8 percent per year over the same period.

"In fact, nominal U.S. manufactured goods offshore import growth has exceeded domestic manufacturing gross output growth in nine of the past 10 years," notes the study.

In creating a ratio between manufactured imports and U.S. manufacturing output, A.T. Kearney found the manufacturing import ratio is on pace to be more than 11 percent in 2014 -- "an indication that the impact of the reshoring wave is waning."

When looking at individual industries, the reshoring story all but disappears. In computers and peripheral equipment, the value of offshore imports into the United States increased by $23 billion between 2009 and 2012, while domestic gross output decreased by $23 billion. Some industries, such as apparel, have bucked that trend, but the economic activity associated with reshoring has been small.

A.T. Kearney concludes: "As to the question of whether or not to reshore your operation. . . the answer may indeed be 'Yes.' But a follow-the-herd mentality is misplaced since, as it turns out, there's probably less of a herd than the hype may have led you to believe and for most industries, the answer is much more nuanced and dependent on the particular characteristics of each industry as well as your company's individual situation."

Sandy Montalbano of the Reshoring Initiative says that A.T. Kearney's data does not support its conclusion, which she describes as being "incorrect." The growth of reshoring cases over the past four years is 1,775 percent, she notes, an 18x increase, "which is an average growth rate of 100 percent a year. "Their data also shows the annual losses to offshoring shrank 60 to 70 percent," Montalbano notes. "Still, they have been quoted as saying that reshoring 'is not what it's cracked up to be' even though their own data would dispute reaching such a conclusion."

When asked by Manufacturing & Technology News to respond, A.T. Kearney partner Van den Bossche, noted that the data for the conclusions are drawn from the U.S. International Trade Commission and the Commerce Department's Bureau of Economic Analysis. "The number of cases is going up because companies found it to be good PR to make announcements about 'bringing manufacturing back' (even if in some cases the announcement precedes the actual, physical move by several years)," Van den Bossche responds. "The increase in 'cases' in the database is, however, not met by an equal increase in economic impact, so either the cases are becoming, on average, smaller (i.e. more mom and pop shops announcing reshoring) or there's a significant delay between the announcement of the reshoring activity and the start of its economic impact. Another interesting fact is that when we analyzed the cases, about two-thirds of them are bringing back manufacturing to existing facilities and/or equipment. These cases do not involve putting 'new steel' into the ground and/or do not involve new capital purchases, thereby reducing the initial cumulative effect of not just creating jobs and economic activity associated with the reshored operations, but also creating additional activity in the industrial construction/equipment manufacturing industry."

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