Reshoring: The benefits and risks of reshoring

3 Benefits of Reshoring for the High Tech Industry

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For decades, offshoring was the name of the game. Businesses jumped at the opportunity to relocate operations abroad, particularly to countries like China with low labor costs and minimal regulations. However, in recent years, the supply chain landscape has changed drastically amid the large-scale disruptions of the pandemic, geopolitical unrest, and mounting pressure from customers and regulators to implement ESG initiatives.

As a result, offshoring has been on the decline, as companies are increasingly turning to strategies like nearshoring, onshoring, reshoring, and, with the emergence of a new buzzword, friendshoring. Each approach differs slightly, but at their core, these terms all reflect the high tech sector’s growing desire to rethink and relocate sourcing and manufacturing processes. While each strategy comes with its own set of advantages and drawbacks, reshoring is growing increasingly popular due to its ability to facilitate innovation, encourage sustainability, improve efficiency, and avoid complications due to international conflicts.

What is reshoring?

Before discussing the benefits of reshoring, it’s important to compare it to the business models. Offshoring is the practice of moving business operations abroad, often as a cost-saving measure. However, despite the potential savings, this practice is becoming less popular, as recent supply chain challenges have companies reconsidering whether it really is advantageous to outsource and complicate their production processes.

Meanwhile, nearshoring is moving operations to a country closer to a company’s target market. For instance, many businesses have shifted manufacturing to Mexico, where they benefit from inexpensive labor while also enjoying the logistical conveniences. But despite the advantage of proximity, nearshoring is not without its drawbacks. Supply chains are still at risk of disruption through issues like political conflict, tariffs and trade restrictions, and regulation.

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Friendshoring centers around geopolitical concerns, as businesses carry out operations in countries with favorable political and economic conditions. This approach can allow companies to avoid disruptions from turbulent political climates. But experts have raised concerns about the difficulty of identifying “friendly” nations, as well as the potential ramifications of dividing up the global economy into blocs.

Lastly, reshoring is the process of relocating operations to the country where a company does business. For example, Apple recently announced plans to start using chips manufactured in the US to avoid the disruptions of international semiconductor supply chains.

“In a world of increasingly expensive energy and transportation and higher foreign wages, the economics of manufacturing are tilting in favor of the U.S. For many goods destined to be sold here, the U.S. is becoming increasingly attractive as a place to make things.”

Harold Sirkin, Boston Consulting Group

Reshoring Benefit 1: Opportunities for Sustainability

Amid growing pressure from consumers and regulators alike, sustainability is emerging as a key priority for businesses in the high tech sector. To this end, companies are embracing reshoring to allow for more environmentally conscious supply chains. By moving production closer to where the goods will ultimately be sold, reshoring minimizes waste.

High tech supply chains are fraught with waste and inefficiency. Sources of waste range from end-of-life components to surplus raw materials and defective inventory. Reshoring allows for quicker responses to disruptions like demand fluctuation, raw material shortages, and evolving customer needs, allowing businesses to rapidly adjust production processes and avoid unnecessary waste. In addition, reshoring can allow for increased quality control to reduce errors in manufacturing that lead to waste.

Meanwhile, to make supply chains more environmentally friendly, businesses need to consider ways to reduce transportation waste. Reshoring can help with this issue as well: consolidating production in the country where a business operates eliminates the need for long-distance international transportation.

Reshoring Benefit 2: Seamless Innovation

When companies bring their manufacturing back to their home country, they allow for greater proximity between R&D teams and the production process. This partnership can open up new opportunities for feedback and innovation, an effect that is already being seen in the automotive industry. Tesla is expanding its massive factory in Austin, Texas, to house manufacturing, engineering, and innovation facilities all under one roof.

Reshoring often creates opportunities to bring manufacturing and design in-house. This synergy can enable new innovation and customization. For instance, GM’s Cruise unit, which develops self-driven vehicles, designed and built a new board in-house that is 90 percent cheaper and 70 percent smaller than traditional chips, while also using 60 percent less power.

A key trend across the industry in recent years has been the shift to a product-as-a-service model. Reshoring facilitates the implementation of this approach by shortening and centralizing supply chains to better allow businesses to manage the product life cycle, both during manufacturing and after sale.

Reshoring Benefit 3: Navigating Geopolitical Tensions

The past few years have seen unprecedented global supply chain obstacles. From the outset of the pandemic, lockdowns disrupted the labor force in factories around the world, particularly consequential in manufacturing hubs like China. COVID was also responsible for shipping delays, and generally exposed the instability of highly interconnected international supply chains.

In the semiconductor space, supply chains were unable to respond to the dual challenge of insufficient raw material availability and irregular consumer demand, leading to months-long lead times and a worldwide chip shortage. Just as the chip industry was recovering from these disruptions, escalating tensions between China and Taiwan threatened semiconductor production, which is overwhelmingly concentrated in Taiwan.

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On top of all these issues, Russia’s invasion of Ukraine has further destabilized high tech supply chains. Shipping routes have been modified, gas prices have skyrocketed, and raw material availability has been interrupted: Russia is a major producer of nickel, an essential raw material for EV battery production, while Ukraine is the source of 70 percent of the world’s neon, which is used in microchips.

Together, these problems have demonstrated the risks of the current highly decentralized and yet interdependent supply chain landscape. Reshoring can help businesses reduce their dependence on foreign countries and simplify supply chains. It is vital to increase resilience and strengthen production processes so they can withstand future challenges.

Final thoughts

Reshoring is a big decision and unfortunately there are no easy answers – no one-size-fits-all solution. Rather, it’s important to prioritize flexibility and resiliency in production processes and strategies. Businesses, especially those in the high tech sector, need to ensure that they can adapt quickly to stay ahead of the curve in today’s constantly evolving supply chain environment. And often, reshoring is a great strategy to enable that.

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Maanasi Chintamani
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