Will regionalisation be the final concept to understand in the sourcing strategy debate?

The question of where to best locate production in the world has rumbled on and evolved for decades, giving rise to a swathe of jargon. For those somewhat familiar with the debate, the terms off-shoring and re-shoring1 have become commonplace and there is now a mass of literature devoted to them. Thankfully, an excellent recent paper by De Backer, et al. (2016)2 of the OECD summarises the available evidence in one review, which shall be further distilled here as a primer for one of the session’s at Ti’s upcoming Future of Logistics conference in London.

So where to begin? Essentially, the debate has reared its head more overtly in recent years thanks to increasing reports that manufacturers are relocating production back to their home country (reshoring) or to a neighbouring country (near-shoring). Some reasons justifying this supposed phenomenon (in no particular order) include:

  • Production costs in emerging markets and developed markets are converging as the former sees labour costs rise and increased digitalisation of manufacturing renders lower labour costs less important.
  • Many firms have under-estimated operating costs in emerging markets
  • Innovation is lower in longer supply chains (it’s better if R&D and production are close by)
  • An increased awareness of supply chain risk, leading manufacturers to build added redundancy into their supply chains by having multiple production locations
  • Greater flexibility to serve end markets, which will become increasingly important as the trend is towards consumers demanding increasingly customised products.

One seemingly important recent counter-argument would be the collapse in the price of oil. Cheap oil was one of the magic ingredients behind offshoring decades ago, and now things have come full circle. Of course, that argument rests on the notion that relatively cheap oil is here to stay for some time.

While these reasons are coherent, one of the great frustrations of the re-shoring debate is trying to quantify how significant it really is. Without going into too much detail, De Backer, et al. (2016) investigate the problem through various lenses: survey results, anecdotal evidence, trade data, aggregate business data and firm-level econometric evidence. Their conclusion is that the evidence for reshoring is “limited and mixed”. They assert that company surveys and anecdotal evidence tend to support the growing importance of reshoring, while the ‘aggregate’ evidence suggests the effects on national economies remain limited: “reshoring is still rather a trickle than a flood”.

It is also worth emphasising that reshoring by no means implies the end of offshoring. “Offshoring is still taking place at the same time that reshoring is picking up and the current evidence tends to suggest that offshoring is still more important.”

All of this is not really new. What is fairly new is that some sort of consensus seems to be emerging which asserts that offshoring and reshoring actually might not be that important in the long run. What will really describe the structure of global value chains going forward is regionalisation.

Regionalisation simply implies that production will become increasingly concentrated in regional or local hubs closer to end markets, both in developed and emerging markets. The benefits of reshoring laid out above are essentially also those that favour regionalisation: it is increasingly costly to be further away from your end market and the benefits of offshoring are gradually declining.

So why regionalisation over reshoring? Quite simply, emerging markets are becoming end markets too. For instance, according to an estimate stated in the paper, Asia (excluding Japan) could account for 40% of global middle class spending by 2040 and almost 60% in the long run. In 2000, it accounted for just 10%.

In summary, provided that emerging markets emerge, production costs converge and being close to your end market matters, regionalisation seem like the road that will be taken, with the caveat that this production orientation will clearly take several decades to fully materialise.

Source: Transport Intelligence, 26th April 2016

Author: David Buckby


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1Other ‘shorings’ include near-shoring, on-shoring, back-shoring, right-shoring, next-shoring and best-shoring. Unfortunately, this is almost certainly not an exhaustive list. ‘Shoring’ can also be swapped for ‘sourcing’ in a number of these and mean the same thing.

2 The paper of De Backer, et al. (2016) can be accessed from here