InvestmentsNov 19 2014

Reshoring gathers steam

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The reshoring of jobs from low-cost, high-volume countries, such as India and China, is gathering pace as companies look to improve quality and reassess their financial, logistical and distribution needs.

A recent report by consultancy firm PricewaterhouseCoopers (PwC), entitled ‘Fit for Business’, shows nearly two thirds of 384 non-financial companies operating in the eurozone reshored some activities during the past year, with production operations being the most relocated activity, followed by tax, legal and information technology.

The research shows nearly half of respondents said they planned to reshore production activities in the next 12 months, although the trend is for companies to reshore one or more activity, rather than entire operations.

Nick Sheridan, a European equities manager at Henderson Global Investors, says: “Companies are now seeing the benefits of productivity and cost management by having their supply chains located in domestic markets.”

Italian companies are the most likely to have reshored activities, with 44 businesses having brought back some activities during the past year, compared with Ireland (22), Spain (32) and Germany (30).

In its March 2014 UK Economic Outlook report, PwC estimated reshoring could create between 100,000 and 200,000 extra UK jobs in the next 10 years and boost annual national output by roughly £6-12bn at today’s values by the mid 2020s.

It said traditional manufacturing sectors, such as textiles, electrical equipment and machinery, look set to benefit from reshoring, with business support services and telecommunications possibly gaining new business.

UK food manufacturer Symington’s and mobile phone business EE have brought some activities back home, while retailers such as River Island and Topshop have reshored some operations, due to the need to be able to respond quickly to changing consumer fashions and concerns about the security of supply chains.

The reshoring trend certainly dovetails neatly with the UK government’s wish to rebalance the economy away from its reliance on the service sector for jobs and growth, now that manufacturing has shrunk to roughly 10 per cent of GDP.

Paul Stephany, Newton portfolio manager, UK equities, says: “Against this background, reshoring could give manufacturing a much needed boost. Potentially it could boost the equity performance of many companies, particularly those in the industrial sectors.”

In terms of the US, PwC’s March 2014 Economic Outlook estimated reshoring had transferred about 80,000 manufacturing jobs back to the country, partly to support its booming shale energy sector.

Professional services firm Grant Thornton believes reshoring could have a dramatic impact on the US economy.

Its survey ‘Strategic source and sell: Realities of reshoring’, published in November 2013, claimed that more than one third of US businesses would transfer goods and services, including IT, back home in the following 12 months. This means that up to 5 per cent of overall US procurement may have been reshored in the past year, boosting domestic manufacturers, retailers, wholesalers and service providers.

Concrete examples quoted by Grant Thornton include General Electric’s move in 2012 to reshore hot water heater and refrigeration production to two new assembly lines in Kentucky and Apple’s $100m (£63m) investment to build a Mac computer production line in the US.

So what might encourage further reshoring? A survey of 50 tax directors by accountancy firm Ernst & Young showed that when asked what would encourage them to invest in the UK, 18 per cent stated a widening of research and development tax incentives, 15 per cent wanted enhanced capital allowances and a further 15 per cent said a reduction in employment costs.

Certainty and stability in the tax system was also a recurring theme (18 per cent), suggesting that businesses need to be convinced that any measures introduced will last for the mid to long term.

As to the principal drivers for reshoring, Chris Sanger, head of tax policy at Ernst & Young, says: “While tax clearly is not the only factor companies look at when deciding where to invest, other, more important criteria – such as proximity to customers, access to skills and political stability – can quickly become hygiene factors [standard] once they have been met.”

PwC economist John Hawksworth attributes reshoring to the narrowing wage gap between the eurozone and emerging markets, particularly China, whereas he claims exchange rate factors are a less important factor than production costs, such as labour and transport.

“The bigger changes are in the costs of potential suppliers in Asia,” he says.

But Mr Sheridan thinks exchange rates are an important driver. “With approximately 57 per cent of sales for eurozone companies going to external markets, reshoring also reduces the impact of currency volatility on profits,” he explains.

“With the euro weakening against the dollar, this is of particular benefit when selling to US markets.”

So could reshoring contribute towards the beginning of some form of economic recovery? Experts think reshoring’s impact will vary from country to country.

Mr Stephany believes reshoring could bring much-needed jobs to economies, such as the US and UK.

“In the longer term, it may also help create new investment opportunities, even to help economies heavily reliant on the service sector, such as the UK, to boost their domestic manufacturing industries, while increasing logistical efficiencies,” he says.