As part of its record economic stimulus package released in April 2020, the Japanese Government announced a ¥220Bn (USD$2Bn) for Japanese manufacturers to reshore production from China to Japan arising from supply chain disruption caused by Covid-19, including ¥23.5Bn (USD$210M) to diversify supply chains to other Asian trading partners.  Japan exports a substantial percentage of parts and partially finished goods to China than other major industrial nations, according to a Japanese Government Panel on Future Investment.  37% of 2600 Japanese companies survey in February by Tokyo Shoko Research Ltd were diversifying procurement to other Asian destinations.

US insights

Kearney, a global management consulting house, tracks 3 measures in relation to US manufacturing output:

  • The Reshoring Index, which tracks the year on year percentage change of US manufacturing output / manufacturing imports from 14 low cost countries (LCC’s) namely China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, Cambodia
  • The China Diversification Index (CDI), which tracks the rebalancing of US manufacturing imports away from China to other LCCs, and
  • The near-to-far trade ratio (NTFR), which tracks nearshoring, sourcing of manufactured goods from Mexico (a LCC) relative to imports from other LCC’s. Nearshoring reduces supply chain lead times and reduces transport costs.  Labour costs in Mexico for example are 14% of comparable US labour costs. Mexico also has a skilled labour force and manufacturing infrastructure comparable to China in selected fields, reducing the investment otherwise needed to nearshore.  Combined with a free trade agreement, and when loaded with logistics costs, Mexico offers a cost benefit of 20-30% to manufacture goods for US sale.

Kearney’s analysis suggests that the rationale for sourcing and manufacturing product in China is being re-assessed as businesses realise that low-cost needs to be balanced against the risk to continuity of supply in the face of trade wars and geopolitical risk in the absence of supply chain diversification. The Trump trade war has already driven –

  • an increase in the Reshoring Index due to a 7% reduction in trade flows with LCC’s mainly comprising a 17% reduction in trade flows with China worth $80Bn
  • a rise in the CDI as USD$80Bn trade is diverted from China to other LCC’s
  • a rise in the NTFR due to a USD$30Bn lift in trade with Mexico

The COVID-19 experience will allow businesses to quantify these risks better and balance them against the known benefit of lower cost manufacture.  Although geographical diversification of import supply chains and nearshoring are likely to accelerate, the calculus is not that simple for reshoring.


Opportunities to reshore manufacturing value-adding to the US depends on business investment to upgrade and automate manufacturing equipment (Industry 4.0).   To make these investments viable, businesses need to realise forecast ROI benefits. This can be difficult if productivity benefits take longer to achieve or investing to increase throughput from existing technology is more certain, and /or labour costs are high and skilled labour is in short supply, or forecast growth in demand is uncertain. Even with the instant asset write-off tax benefits introduced in 2016, the cost of domestic production for US businesses remains stubbornly high compared to production costs on LCC’s which already have sophisticated scale manufacturing capabilities.  This makes rebooting US manufacturing difficult.

Australia is no different, and has two additional deficiencies – a significantly smaller domestic market, and no land-based access to a LCC like Mexico where scale infrastructure and skills may exist. This makes reshoring decisions difficult for the individual firm which often cannot justify investment in scale manufacturing infrastructure and skills development.  The role of Government Industry Policy is to provide investment support where the industry and macro-economic benefits of investing in skills and scale manufacturing or supply chain infrastructure cannot be captured by individual firms, and to shore up demand by providing longer-term procurement contracts to local firms – for example local sourcing of PPE

When might reshoring make sense?

Reshoring makes sense –

  • where control of components of global supply chains is required to secure a competitive advantage e.g. to protect IP or exploit high value-added innovation opportunities, or
  • when strategic sourcing is deemed essential for geopolitical or other reasons, or
  • when national comparative advantage or existing platform technologies can be used to exploit niche markets in global supply chains

In many ways there is no better time to reconsider reshoring.  Interest rates are likely to remain low and inflation also will remain low for the forseeable future.  A favourable exchange rate is also likely to persist given a helping hand to local manufacture of key components in the supply chain as well as improving the competitiveness of export products.  In an environment where there is no political downside to Government spending to support jobs and economic growth compared to the  ignominy of spending too little, export the Government’s Stimulus IV to provide $Bn support for local manufacturing.

Lessons for Australian policy-makers – the reshoring calculus  

Governments the world over are working with businesses in long term industry partnerships to develop local and export value-adding markets to create jobs and underpin economic growth, based on a more nuanced appreciation of the micro-economic calculus involved in firms reshoring decisions and the macro-economic benefits of lifting investment in manufacturing and value-adding supply chain infrastructure.  This form of ‘economic nationalism’ demands a more structured and detailed understanding of markets, competitors, technology trends, comparative advantage and how Australian businesses can win.

This requires new structures to enable cross-Government coordination with business, accompanied by integrated commitments to sector funding to develop value-adding infrastructure and labour skills across multiple electoral cycles.  These strategies must cross the political divide.  They must have tangible measures of success that are reported transparently so ROI can be assessed and improved.  Japan, Europe (member states and the EC), are pursuing similar strategies which are all coordinated and set for a 5-10 years.  The US in its own way does something similar.  COVID-19 just accelerates this trend..

The Morison Government’s commitment to Industry Policy, and the NSW Government’s commitment to Innovation Policy, given that both inquiries are business-led, will not be measured by glossy documents or high-level recommendations as much as Government commitment to establish the organisational structures and funding to go the distance.  Count this in the Billions, not the millions, every year.  This is innovation at work.


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