INVESTING EXPLAINED: What you need to know about reshoring – where a business brings back to its own country production that has been farmed out
In this series, we bust the jargon and explain a popular investing term or theme. Here it’s reshoring.
What is it?
Basically, the opposite of ‘offshoring’. It is a process whereby a business brings back to its own country production that has previously been farmed out to another.
Offshoring, particularly to Asia, has been hugely popular in the era of globalisation because of the huge savings it has provided, particularly in labour costs.
You will hear reshoring also called ‘backshoring’, ‘inshoring’, ‘nearshoring’, or ‘onshoring’. Confusingly, people are starting to use reshoring to mean shunting production to a country with lower costs than China.
Good to be back: Reshoring is a process whereby a business brings back to its own country production that has previously been farmed out to another
Why do I care?
Mentions of reshoring (or any of its synonyms) are at their highest since 2005 in briefings to investors or company results meetings, according to the data analyst Sentieo. This is the result of the combined impact of Brexit, the pandemic, war in Ukraine and last year’s blockage of the Suez canal, which have disrupted or entirely impeded supply chains.
The combination has had a disastrous effect on some companies’ budgets. Costs have soared and production has sometimes had to be halted.
Any particular concerns?
Microchips – which are essential for cars, domestic gadgets, fighter jets, mobile phones and much else.
At the centre of this anxiety is the Taiwan Semiconductor Manufacturing Company (TSMC), which accounts for 51 per cent of the global chip market. Taiwan manufacturers make 90 per cent of the highest-tech chips.
Such is TSMC’s importance that its chairman Mark Liu said the world would be rendered ‘not operable’ if Taiwan were to be invaded by China, which regards the country as a breakaway province.
He made the comment during this week’s visit of Nancy Pelosi, Speaker of the US house of Representatives to Taiwan, when she met TSMC executives.
How has this happened?
In 1990 America had a 37 per cent share of the global chip-making market. But thanks to a policy of offshoring chip fabrication as a way to economise, the US now controls just 12 per cent, which is why it is so busily engaged in reshoring.
New chip-making plants are springing up in Phoenix, Arizona. These are being built by Intel, the US giant and by TSMC.
The new Chips and Science Act will provide $52billion (£43billion) of finance for the initiative, but there are fears this may add just 6 per cent of extra capacity over the next few years, while China may expand its production by about 40 per cent.
What’s happening in Britain?
Gigafactories for the production of lithium-ion batteries and electrolysers for green hydrogen are under construction.
In the wake of a report from the Office for National Statistics, published in the spring and which laid bare the chaos caused by supply chain issues, more UK businesses said they were looking to reshore.
Make UK, the trade group, says that three-quarters of companies have increased their use of UK suppliers and that half would continue to do so.
Investment in technology, including robotics, should make it easier to compete with the Far East on costs.
More ‘Made in Britain’ products are on their way!