Re-shoring, near-shoring, near-sourcing. Whatever you call it, the terms to describe the shift of manufacturing closer to destination markets in North America may be a permanent part of the logistics lexicon and supply chains in general.
But for at least one very important segment of the manufacturing world — those making high-value goods — the re-shoring discussion is just that: a discussion.
That’s the conclusion of a new report by Macquarie Equities Research, which says any shift of high-value manufacturing back to North America will be minimal because supporting “value chains” no longer exist in many sectors.
There’s no doubt that manufacturers across several industries are reacting to rising land and labor costs in China, slow-steaming shipping strategies and rising transportation costs to adopt more regionally focused supply chains, especially in North America, where original equipment manufacturers that opt to reshore production also can benefit from falling energy costs.
But any manufacturing shift to the U.S. of higher value-added products such as electronics will likely be minimal, Macquarie says. Manufacturing centers tend to prosper in hubs where original equipment manufacturers, component suppliers and researchers can interact, Macquarie’s report says. But in many Western countries, including the U.S. and U.K., but not Germany, these “value chains” have almost ceased to exist in key sectors, making re-shoring difficult to achieve, it says.
“Destruction in these value chains is likely to make it extremely hard to rebuild any meaningful presence in these higher-value-added industries,” said Viktor Schwets, Macquarie’s head of Asian strategy.
David Goldberg, senior vice president for Asia-Pacific ocean freight at DHL Global Forwarding, agrees that any shift would be limited because the support structure some industries rely on is no longer available. “Re-shoring won’t start replacing east-west trade.
“Cost is only one factor,” he said. “Industry competency is more important, and certain industries just don’t exist in the U.S. any more. You need core components for what you are producing. In China, they have this, so I just don’t see a major shift happening.”
According to Macquarie, countries that run significant trade deficits for a decade or more in a given industry are unlikely to prove viable homes for the transfer of high-value manufacturing back from Asia-Pacific locations. Other keys indicators of the diminishment of a country’s “value chain” are the consistent loss of market share in global trade of final products as well as components, and a flattening or declining flow of license and management fee net exports.
Declining performance on these three indicators pointed to the substantial destruction of supply and value chains, with a fall in license and management fee exports, usually the result of research laboratories having followed OEMs overseas, Schwets said.
Using this criteria, he concluded that the U.S. — theoretically the single largest threat to value-added manufacturing in the Asia-Pacific because it has the size, scale and depth to compete at the middle and higher-end manufacturing with China, Taiwan, Japan and South Korea — has suffered significant value chain damage over the last decade.
High value-added manufacturing — defined as including electronics, information technology, transportation and scientific equipment, pharmaceuticals and biotechnology — has run consistently rising net trade deficits in the U.S. for more than 15 years. “Whereas in 1995, the U.S. trade in higher-end value manufacturing was broadly balanced, by 2012 the U.S. was running a net trade deficit of almost $370 billion or around 2.5 percent of the U.S. GDP,” Schwets said.
The U.S. is currently running a net trade deficit of $40 billion in electronics, up from a broadly break-even result a decade ago, while its deficit in telecommunications equipment trade is almost $60 billion and that of office and automation equipment is closer to $80 billion.
The U.S. position on electronic components is better, but its relative position also has deteriorated significantly over the last decade, Schwets said. “Whereas early in the decade the U.S. was deriving net trade surpluses of $20 billion to $25 billion, this had shrunk to less than $3 billion in 2012,” he said.
U.S. market share in the trade of both “final” products, as well as components, also has been on a rapidly declining curve for two decades. “For example, in electronics, the U.S. had a market share of 16 to 17 percent in the mid-1990s. This was down to 8.5 percent by 2012,” Schwets said. “Similarly, the U.S. market share in telecom equipment dropped from 16 percent to 7 percent and in the office automation sector from 17 percent to 9 percent. “In components, the U.S. market share dropped from over 20 percent in 1996 to less than 8 percent in 2012.”
And although the U.S. is capturing value in the form of license and royalty fees, this flow is starting to stabilize and stall, while merchandise trade deficits continue to expand. “License and service exports are nowhere near compensating for the United States’ gaping and growing merchandise trade deficits,” Schwets said.
“It appears to us that there is a significant body of circumstantial evidence to suggest that over the last 20 years, significant damage has been inflicted on supply and value chains that are an absolute imperative for successful growth and resurrection of higher value- added industries, particularly electronics and IT,” he said.
There is also evidence that in a number of industries such as telecommunications, broadcast equipment, office machinery and non-road vehicles, China now offers a full suite of supplier and value chains, while retaining its position as the leading “last mile” assembler in most electronic segments.
“In other words, in a number of segments, China now has a large and sustainable market share not only in final products, but also increasingly for components and supplies,” Schwets said. “The same largely applies to Korea, even though it also remains a significant net payer of royalties and license fees.
“At the other extreme, it seems indisputable that, unlike the U.S. or U.K., Germany and Japan have managed to maintain the bulk of their supply and value chains and hence their strong position in both visible and invisible trade,” he said. “We believe that it is likely that any manufacturing renaissance in countries as far apart as the U.S., U.K. or France would be more complementary rather than directly competing against (the Asia-Pacific’s) higher value-added manufacturing, in particular electronics.”
There were some positives on re-shoring to the U.S from Macquarie, however. Although the re-shoring of higher-value goods production from Asia might prove difficult, more success could be found in other sectors. Schwets said the combination of the U.S. strength in commodities as well as relatively low unit labor costs, was increasing U.S. competitiveness in more traditional industries such as crude materials, metals, agribusiness, chemicals and petrochemical cycles.
Contact Mike King at email@example.com.