Reshoring and New Globalization: The Future of Supply Chains

By Luigi Gentili

Reshoring is an economic phenomenon that has increased during the pandemic crisis. Many governments and businesses decide to repatriate their production lines from abroad in order to be more resilient. It’s happening particularly in the US, the UK, Europe and some Asian countries. The benefits for the economy are many in terms of innovation, employment and attracting investment. Because of reshoring, global supply chains are basically set to change, creating a new phase of globalization.

Aftermath the worldwide coronavirus pandemic explosion, many international companies have decided to repatriate their productive activities. Offshoring, practised for more than 20 years, seems to be outdated. Recent research carried out by McKinsey uses the term “great rebalancing”¹ : by starting from 2025, 25% of world exports could be affected by the phenomenon of reshoring, i.e., the re-location of productive activities previously transferred abroad. This worths a 4.500-billion-dollars value. Reshoring is the opposite of offshoring, indicating the return of the industry transferred out of the national borders, especially in Asian countries, such as China or Vietnam, and Eastern Europe, such as Romania or Serbia. The phenomenon mainly affects the long supply chains, which are very distant from the relocating companies and not the short ones, which are deployed in neighbouring countries. The short supply chains, in contrast, are being strengthened, as it is happening in several European countries:  companies previously relocated abroad, back down to their home country (backshoring) or neighbouring countries (nearshoring).

Reshoring is not new. The term was coined in the United States of America when Michael Fields, former president of Oracle Software, begins to talk about it in an interview at the monthly Fortune² : the main topic is reshoring from India in information technology³. The United States has never yielded the first position in the ranking of the reshoring. The sectors that have mostly benefited from reshoring are electronics and mechanics, followed by clothing⁴. Reshoring has contributed enormously to the recovery of the US economy, so much that the companies that implemented it are considered national heroes. General Electric Co. and Ford Motor Company, for example, have created from 2012 to 2016 thousands of jobs by means of it. The USA supremacy in reshoring depends on some typical figures that only this nation possesses and is able to better manage. In fact, the decisive factor that favoured reshoring was the reduction of energy costs due to the discovery and exploitation of shale gas coupled with the availability of public funding for technological innovation, partially aimed at support specific technological clusters.

Among Western countries, France and the United Kingdom have also assumed a decisive role in pro-reshoring policies⁵. In 2013, France identified different types of intervention depending on size and strategies of the companies, and developed ad hoc services for each of them. In 2014, the United Kingdom launched the “UK Reshore Plan”, which provides such support services to assess the probability of a reshoring initiative success, assisting in the definition and implementation of the return strategy, and incentivising the improvement of the quality standard of firms. In addition, the “Advanced Manufacturing Supply Chain Initiative” was signed, which encourages suppliers to increase the competitiveness of British value chains. In Asian countries, however, South Korea has a leading role in pro-reshoring policies. In 2013 and 2016, the government offers financial subsidies, tax reductions and incentives for innovation to companies returning home.

There are many reasons to drive companies back home. On the industrial side, reshoring is no more motivated because of the rising labour costs in the emerging countries, and more emphasis is given both to the differential of production costs and to the total cost sourcing components (i.e., transport costs, logistics, insurance processes, customs duties, etc.), which, cumulated, can set to zero the economic convenience of the low labour rate. This trend also takes advantage of and follow the development of Industry 4.0: robots, 3D printing, the internet of things, and cloud computing, which are all factors that are going to progressively reduce the presence of labour in companies, especially those related to low or medium skills, which markedly characterize the base of the work transferred abroad. On the marketing side, instead, reshoring is stimulated by the lack of timely response to the needs of the company’s customers, the continuous change of tastes and customization of purchases⁶. Always linked to marketing, there are other reasons: the quality of the products, the ability to produce in small series, the reputation and the corporate image. For some countries, such as Italy, there is even the exploitation of the “made in” effect: in fact, the “Made in Italy” is largely considered by consumers a guarantee of quality in the food and fashion sectors ^7,8.

Today, to these causes is added another due to Covid 19 because it has shown how critical are the mechanisms which rule the global economy and that it needs to be protected against the risks of blocking or slowing down supply chains. It has been immediately clear that during the pandemic, delays in the supply of many goods caused several difficulties to Western countries: the Covid 19 was a big obstacle the production and distribution of iPhones, cars, health masks, gloves, respiratory and active pharmaceutical ingredients, too. Such Countries as China, where off-shoring is most targeted, have been criticized for excessive economic dependence. Hence it comes the need to bring home (reshoring), diversify or recompose and make shorter, flexible, resilient and sustainable the industrial supply chains. The acceleration towards reshoring was widespread, investing many countries and the strategic responses of governments have been diverse and significant, even if their actions are still in progress.

Japan’s economic policy, for example, includes manufacturing exodus from China. Tokyo began to support reshoring with an ample $2.2 billion financing plan⁹. In the European Union, reshoring is considered a fundamental means of creating employment growth and scientific research. In France, the “Plan de Reliance” points to the reshoring of strategic sectors, such as the energy transition and the battery, hydrogen and artificial intelligence sectors. Germany, concerned about the lack of semiconductors needed by the car industry, calls on the EU to significantly increase the market share of “chips”. In the USA, President Biden has included the repatriation of activities in the medical equipment and products sectors among the main points of the stimulus plan for economic recovery.

In addition to government decisions, there are business decisions. According to a recent study by Bank of America, even 80% of multinationals have already drawn up plans to repatriate relocated productions¹⁰. Generally, large companies are more involved in reshoring: in Europe, for example, 60% of these are organisations with more than 250 employees¹¹. There are also cases concerning particular production chains; this is the case of the maxi-project advanced by the big companies of the drug according to which about sixty small and medium-sized companies belonging to the drug supply chain have decided to relocate production in Italy to remove it from the dependence of China and India.

Reshoring is part of the new globalization. Value chains restructure themselves locally, thus shortening the distances between national companies and foreign subcontractors. At the same time, not only the global interdependence links remain and become stronger, but long production chains are organizing to become more resilient to sudden interruptions, too. One of the consequences of this new globalisation will also be an improvement in the innovation capacities of companies, being interdependence and innovation conducive to technological development: by reducing the distances, not only physical but also cultural, between production sites and Research & Development centres innovation is consequently favoured. All this encourage productive investments at the territorial level, creating a leverage effect for industry 4.0.

However, for a proper success of the industrial policy, the managerial errors that in the past have characterised offshoring must be overcome. It’s not just by avoiding the managerial errors that rise from the inability to assess the hidden costs in re-shoring projects¹², but also by avoiding accounting errors due to hasty and ill-considered decisions, and managerial errors due to the socio-organizational structure of companies. Ade Asefeso has analysed the coordination errors in offshoring projects by referring to the context of the seven deadly sins: pride, sloth, greed, lust, envy, gluttony and wrath¹³. As a result of this work, it is suggested to avoid organizational inconsistencies in order not to repeat the same mistakes or additional ones by focusing on the following issues: too much arrogance, too much laziness, lack of interest in the destiny of the business, excessive frenzy to resolve the impediments, too much rivalry with opponents, the excessive thirst for profits and too much haste to find a scapegoat for mistakes.   

What will be the future of reshoring? Although it is real difficult to say, it is clear enough to experts that on the long term it will depend on the choice between two reshoring approaches: single firm or supply chain¹⁴. While at the level of single-firm, the process is easier to be implemented, even if a lot of structural rigidities faced by companies during Covid-19 would remain, in the case of supply chain it becomes possible to face sudden variations and increase resilience, responsiveness and restoration capabilities. There is no doubt, however, that it becomes more difficult to attract an entire supply chain within a single country. Consequently, proper cooperation with countries in close macro-regions could become an incentive in favour of nearshoring initiatives. 

About the Author

Luigi Gentili is a sociologist, professor of Brand economy and Media studies at the Pantheon Institute, Design & Technology of Rome. He is also the president of CEIMA, Centre for the Study of Managerial Innovation. He has worked with various business schools, enterprises networks and professional associations. As a speaker, he often gives speeches at conferences and conventions for prestigious institutions.  His primary research interest is management studies, economic sociology and industrial development. He is the author of many books published in Italy, including “Economia liquida” (Liquid economy) and “Ripartire dalla crescita” (Restarting from growth), recently published by Armando Editore.

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