Is the re-shoring activity of US supply chains a factor in the Chinese economic slowdown?

China Economy SlowdownChina has been making headlines over the past few months with regard to the slowdown of its economy, and supply chain gurus are now contemplating whether or not the re-shoring of some supply chains that is taking place in the US is a significant factor that should be considered.

The re-shoring trend in the US

In recent years there has been a noticeable trend in the US towards bringing some of its global manufacturing activities closer to home shores and therefore closer to end users in the US.  According to a recent article written for the Harvard Business Review by David Simchi-Levi of MIT there are some data points that indicate that this so-called “re-shoring” activity being undertaken by some US companies may be having some effect albeit not directly.

The trend has been underway for some time. In 2010 Ford announced plans to move some of its manufacturing resources closer to home creating 2,000 new jobs in the US; Caterpillar sank money in building a new plant in Texas, and GE announced plans to build and/or extend 15 manufacturing bases in the US. Earlier this month (September 2015) Airbus also announced its intention to open a new manufacturing facility in the US.

The global trend towards re-shoring

The trend is not just happening in the US. According to a recent survey undertaken by MIT 15% of manufacturing companies all over the world are looking to relocate manufacturing closer to home shores and their consumers.

Another indicator of the change in trend toward re-shoring is the PMI (the Purchasing Managers Index) which is compiled and published on a monthly basis. Analysis of recent PMI activity clearly shows an increase in manufacturing activity in the US and many other manufacturing economies around the world, while Chinese manufacturing is clearly in decline.

Key drivers behind re-shoring

The driving forces behind re-shoring on a global basis are varied. One is rising labor costs in developing economies. In China for example, labor costs have risen as much as 20% over the past couple of years whereas over the same period of time the rise in the US is just 6%.

Another significant factor that is driving the re-shoring of supply chains is the risk factor. The further away from the home market that manufacturing takes place, the greater the risk; things like Tsunamis, and the more recent event of the factory explosion in China, which is believed to have been caused by a poor quality and health and safety regime; a factor that is often prevalent in many manufacturing sources in developing countries.

Automation and robotics is another factor that has an input. As companies in the West deploy greater depths of automation, so their costs come down, reducing the gap that existed over cheap labor economies; a gap which is also narrowing through increased labor costs as mentioned earlier.

An inevitable dampening effect

So the overall consensus of opinion is that is that global re-shoring of supply chains must inevitably have a dampening effect on the Chinese manufacturing economy which is after all the largest manufacturing economy in the world. The source nations from whence its orders come (not just the US) are to some degree involved in re-shoring.

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