Sunday Brunch: stronger for longer, not strongest for shortest
(Photo by Ruth Durbin on Unsplash)

Sunday Brunch: stronger for longer, not strongest for shortest

Offshoring has retraced recently driven by cost, nationalism and ESG. But is complete retrenchment the right move?

Soon her eye fell on a little glass box that was lying under the table: she opened it, and found in it a very small cake, on which the words ‘EAT ME’ were beautifully marked in currants. “Well, I’ll eat it,” said Alice, “and if it makes me grow larger, I can reach the key; and if it makes me grow smaller, I can creep under the door; so either way I’ll get into the garden, and I don’t care which happens!”

(“Alice’s adventures in Wonderland”, Lewis Carroll)

In Lewis Carroll’s 1865 classic, the cake that Alice eats makes her grow so big that her head hits the ceiling. She wanted to be smaller again, but, alas, while using the White Rabbit’s fan, she shrinks so much that she finds herself swimming through her own tears!

Over the past 30 years we have seen 'small' moving to 'big' and 'near' moving to 'far' with the advent of globalisation and the offshoring of manufacturing in particular.

While a central doctrine of classical liberal economics has it that economic interdependence leads to peace, the primary reason has been baser: cost.

But things are changing. Cost differentials have shifted, nationalism has risen in many countries and sustainability has come to the fore bringing in considerations beyond cost.

We have started to see a reshoring of production in part driven by locally incentivising legislation.

However, is a complete retrenchment to onshore necessarily the right move?

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Offshoring coming back onshore?

Management consultants Kearney noted that the US Manufacturing Import Ratio (MIR), a measure of the proportion of output from offshore production in value terms, steadily grew from 9.2% in 2008 to 13.1% in 2018.

Demand for cheaper consumer products, and hence cheaper manufacturing, drove a significant shift in offshoring. The main beneficiary was China with its very low labour costs, plenty of resources and political will to expand. Thailand, Vietnam and Mexico in recent years have also benefited from manufacturing outsourcing, while India has been more famous for drug manufacturing and IT services outsourcing, although that portfolio has been expanding with the 'Make in India' programme attracting car manufacturers and other industrials too.

2019 saw the first fall in MIR since 2011 down to 12.1% or a 100 basis points drop and whilst 2020 and 2021 saw modest rises, 2022 and 2023 saw MIR drop below 2015 levels. In other words, the US is bringing more of its manufacturing back onshore.

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