Re-Shoring benefits US manufacturers more than European – Why?

There was a "surprise increase" last week in the US Purchasing Managers Index, while the Euro zone data moved further into negative territory.  One of the possible reasons for this was covered in a recent report.  MFG.com surveyed US and European smaller manufacturing, and it was covered by my US colleagues:

“In Europe, only 23.4% of respondents (out of a sample size of 154 in the study) suggested that their "company benefited this year from work that has been re-shored," which is defined as work that was previously sourced to a supplier in another country. In the US...  40% of suppliers responded in the affirmative to benefiting from re-shoring initiatives. Put another way, the US number was 70% higher, a not-so-insignificant difference”.

Clearly, such a major differential would explain why the PMIs are looking rather different. But the MFG.com survey didn’t get into the “why” questions that sit behind the finding. There are many possible hypotheses, but Jason Busch at Spend Matters US gave us three:

  • European manufacturers outsourced less to China in the past decade, relying on Central and Eastern European suppliers where the cost basis of manufacturing has not shifted as much in recent years (e.g., in-country tax, VAT changes, currency and commodity cost volatility as components of total cost have played less of a role)
  • Amidst continued economic concern in the EU, companies are being more cautious with new orders and sticking to current suppliers as volumes have remained steady or declined (versus shifting spend to new suppliers)
  • As oil prices have increased in the past twelve months and transportation costs have risen a result, the costs of exporting from China to the US have risen disproportionately compared with the costs of European manufacturers re-shoring that was put on trains or shipped overland from Eastern/Central Europe previously

I don’t disagree with any of these, but I might add one or two more.

Are European firms – and buyers – just less entrepreneurial and willing to embrace change? Do US procurement managers take the initiative more to look for opportunities to change suppliers, even change the sourcing country, where they see an opportunity, while Europeans are intrinsically more cautious?

Or perhaps we could look on it more positively and say Europeans have more supplier loyalty – even where that loyalty is to suppliers far away from their home territory! I’m not sure I buy that, but it is another possible explanation.

Mitch Free, MFG.com's CEO, had this to say about the discrepancy, as well as the impact on sourcing activity: "As the data illustrated, job shops in America seem to be benefiting from re-shoring more than their European counterparts. The challenge for job shops in Europe is that the Euro is strong, productivity is low and social costs are very high. In general, the cost of doing business is Europe out of line with the rest of the western world”.

It’s hard to argue with that – it may be there are capacity issues as small manufacturers, even if they see some opportunity, are hesitant about expanding in many European countries. That is understandable with both the lack of availability of bank financing and the risks in taking on new staff given the social costs and the difficulty of getting rid of employees.

Manufacturing isn’t the silver bullet to our economic  woes, as some would see it, but a stronger performance in that sector would undoubtedly help the UK and all of Europe. And there will undoubtedly be opportunity for re-shoring as countries like China see increased cost of production in their own factories. But how are we going to make that happen? Who is going to build, run and drive this new capacity? There’s not much sign of it happening yet in Europe, so that’s the big question.

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