Onshoring vs. Reshoring: What Are the Differences?
Companies have long outsourced their production and services to other countries — especially Asian countries — to take advantage of lower labor costs. However, the rapid rise of automated robotics systems and the increasing cost of labor in developing nations has eroded this advantage. In addition to these drivers, the United States and some other governments have been incentivizing companies to reshore and onshore their production via tax benefits, local procurement preferences, the Chips Act, and other government support programs. The aim is to bolster local economies by injecting new jobs and capital into the market. Onshoring and reshoring are the two main models used to describe how companies implement local production.
This article will discuss both onshoring and reshoring and detail the advantages and disadvantages of each.
Onshoring is the process of situating a company's manufacturing capacity or services in the same country where those products and services are primarily sold or where the company's headquarters are situated. The company may maintain direct control of production or it may outsource that task to other companies in the country.
To learn more, see our article on Onshoring.
No. Onshoring is the process of locating production in your company’s home country. Outsourcing is a process of subcontracting some or all of your product’s production to another company. Outsourcing has no inherent location implications — you can outsource your work entirely onshore or you can outsource it to another country.
To learn more, see our article on Outsourcing.
Onshoring can generally be broken into two categories: in-house onshoring and outsourced onshoring. In-house onshoring means setting up local production or service capabilities under the same legal entity as the primary company. This gives you direct control over cost and quality while also streamlining communication and decision-making processes. Outsourced onshoring, by contrast, entails setting up partnerships or service contracts with companies that already have the skills and facilities your products need. This helps reduce up-front costs since you don’t need to invest in all of the production equipment yourself. Manufacturing companies are the primary ones who have to decide whether to onshore their operations.
The importance of onshoring in the larger global context cannot be overstated, especially in terms of bolstering local economies through job creation and reducing supply-chain vulnerabilities. New companies can now look at the histories of industry giants who previously outsourced operations to developing countries with low-cost labor pools. Ultimately, as these countries move out of the developing phase, those labor costs rise, eroding the key benefit of offshore operations. In addition, global turmoil can cut faraway supply chains which can be catastrophic for a company. Onshoring provides a more stable long-term outlook; the company gets more direct control over its supply chain while also being forced to innovate and invest in technologies like automation and machine learning to minimize labor costs.
Onshoring has several advantages as described below:
- A fragile supply chain is an existential threat to any company. When your supply chain breaks down, you cannot manufacture and sell products which can very quickly create a cascading effect that can cripple or even kill the company.
- It is often difficult to ensure consistent product quality when production facilities are on another continent. In-house or locally outsourced production can be directly and regularly audited to ensure optimal quality control.
- If your production takes place in the country where most of your customers reside, they spend less time waiting for products to arrive. This gives you a competitive advantage and improves customer satisfaction.
Despite its benefits, onshoring does have some disadvantages to consider as described below:
- Onshore labor usually costs more than offshore labor. This is especially true for US companies as the US labor market is, on average, more expensive than the Asian labor market. This was the primary reason so many companies relocated production to Asia in the first place. However, rising wages in Asia and improved automation are beginning to offset this challenge.
- Onshoring can require significant capital investment for machinery and training. This is especially true if you need skills and production facilities that are not already present in the local market.
- While onshoring can reduce supply chain risks due to global factors, it also reduces geographical diversity. For example, a company that outsources manufacturing to multiple regions gains a degree of resilience. If any one supply chain fails, the others may be able to pick up the slack. By onshoring your operations to one location, you forgo that type of flexibility.
Reshoring refers to the process of moving your manufacturing capabilities from overseas back to your company’s home country. Many factors may incentivize you to do this: increasing offshore labor costs, fragile supply chains, sustainable sourcing requirements, and attractive government incentives are all good reasons.
To learn more, see our article on Reshoring.
If your company decides it will be more beneficial to move production to its primary market, it will first need to decouple itself from the existing location. This can be a complex and difficult process that involves: retrenching existing overseas staff, ensuring that specialized knowledge is retained within the company, decoupling from existing supply contracts, and in some cases relocating or re-purchasing specialized machinery. In addition, local suppliers must be evaluated and new contracts negotiated.
Reshoring can be a costly exercise but is proving to be a good long-term decision for many companies. The fragility of globally distributed supply chains became clear during the pandemic. For some organizations, those chains broke down entirely. It crippled or destroyed many companies. Reshoring helps mitigate this risk by bringing supply chains closer to home in a more stable and favorable regulatory environment.
Reshoring has several advantages as described below:
- Reduces many of the inherent risks of overseas outsourcing. For example, lead times can be reduced and supply chains can fall under direct company control. However, it must be noted that local supply chains can still be crippled due to localized events or unrest.
- If a company's main consumer base is in the same country, then it makes sense to produce locally to reduce transportation costs. While ocean shipping is cheaper than trucks on the largest scales, it is still cheaper and quicker to make use of local transportation chains when production and supply are in the same region. You also won’t need to contend with import duties and similar expenses.
- Some governments are incentivizing reshoring by providing: tax benefits, property tax reductions, and local procurement policies, among other things. All of these incentives help offset the costs of reshoring and entice companies to make the move.
Despite its benefits, reshoring does have some disadvantages to consider:
- The process of reshoring is extremely costly. It can take many years to successfully reshore operations and years more before it bears financial fruit. This is why many companies are opting to onshore from the outset as a hedge against a potentially expensive future reshoring process.
- Some relevant skills may be unavailable at home. For example, assembly-line jobs are not desirable in most developed economies, so you may have trouble staffing them. In addition, some more advanced skills might not be available at all, so you may be forced to bring skilled labor in from the original overseas facilities so they can train local workers.
- Moving out of a host country can severely affect the brand image in that country, resulting in reduced sales. A product or service that used to be cheap and accessible due to its location will now become more expensive. This is especially important in large markets like China.
Onshoring and reshoring refer to different time frames in a business lifecycle, so they can’t be directly compared. However, if current global trends continue, most companies will be better off if they onshore some — or even all — of their production right at the start rather than planning to reshore at some future time when it will inevitably be more expensive and complex to do so.
A good example of onshoring is Tesla Motors. They built facilities in the United States from the start. Tesla produces the vast majority of their cars’ components locally in the US through their sprawling mega factories. It should be noted that at this point Tesla also outsources and has similar production facilities in other countries like China and Germany.
One of the most critical supply chains in the modern world is that of semiconductors. The manufacture of these chips is highly complex and requires specialized knowledge and facilities. Most of the largest semiconductor manufacturers are not based in the United States, a fact that worries American computing giants. Intel, an American company, has recently broken ground on a $20 bn chip fabrication plant in Ohio.
Ultimately, onshoring and reshoring boil down to the same thing once they are in operation — the company produces locally and uses local supply chains. The only difference is that onshoring is a decision made by a company in the first stages of its product lifecycle whereas a reshoring decision occurs after a company has produced overseas for some time.
This article presented onshoring vs. reshoring, explained each of them, and discussed their key differences. To learn more about onshoring and reshoring, contact a Xometry representative.
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