There is little evidence of resort to eurozone business despite global tensions
Reshoring is a small part of corporate restructuring in the euro zone
Import-dependent industries have become increasingly vulnerable following events that have dominated the global stage over the past few years – including the pandemic, conflict in the Middle East and disruptions to supply chains following Russia’s invasion of Ukraine. In turn, this fuels assumptions that companies will bring production closer to home to reduce exposure to external shocks and raise expectations of de-globalization.
However, the European Restructuring Monitor (ERM) shows that reshoring among eurozone businesses remains limited for now. ERM tracks restructuring announcements by medium-large sized companies across member countries, as reported in local media or company websites. Although these medium-large companies represent only 1.1% of total businesses in Europe, they employ more than half of the workforce and generate almost 70% of added value. These companies are also generally more globalized than smaller companies, making them important contributors to industry trends. An event is included in the Monitor if it impacts at least 100 jobs or 10% of the workforce for companies with more than 250 people. The threshold does not apply to recovery, as it is difficult to predict the number of jobs added as a result. This makes reshoring likely to appear more frequently in the data, and therefore may be overestimated compared to offshoring in the first place.
The noted reshorings are of two types: companies bringing back activities to their home country that were previously transferred to another EU or non-EU country, and companies reshoring to an EU country that previously carried out offshore activities to a non-EU country. Offshoring refers to moving a company’s activities outside national borders, either to an EU or non-EU country. Although this data set does not cover all restructuring events as some of them are not reported, it provides interesting insights into production trends.
Since 2019, ERM has reported more than 4,500 restructuring events in the eurozone, such as business expansions, internal restructurings, closures, etc. Of this number, reshoring accounts for less than 1% (although this is likely an exaggeration), and offshoring about 4%. Even in 2022, amidst increasing supply chain problems, soaring transportation costs, and increasing shortages of raw materials, only 13 reshoring announcements can be tracked by Monitor. Although the numbers were initially low, the incidence prior to the pandemic was, interestingly, actually higher, even compared to the incidence overseas. Since 2019, reported cases of reshoring have fallen to lower levels compared to 2016-2018.
Except for that period, offshoring cases have surpassed reshoring. For reshoring, data collection began in 2014, while for offshoring it began in 2002. Offshoring has decreased since the global financial crisis, but has not completely disappeared. Even in the post-pandemic years, when de-globalization is being widely discussed everywhere, we still see offshoring companies outnumbering reshoring companies.
Offshoring and reshoring are concentrated in certain sectors and countries
Nearly half of all offshoring announcements came from companies located in Western Europe – Germany, Belgium and France. The industries that account for most of this amount are manufacturing, transportation equipment, electrical and electronic products, and machinery. Nearly 30% of announcements since 2014 occurred in the wake of the Covid-19 pandemic, suggesting that supply chain disruptions have not significantly dampened companies’ enthusiasm for offshoring. Several factors may explain why companies are still making efforts overseas, such as costs and labor shortages, catering more to local demand, large investments required to reshor, ease of regulation elsewhere, or specialized and highly integrated value chains that are difficult to change.
Although limited, reshoring has been widely carried out in France, Italy and Germany, in the manufacturing sectors of electrical products, textiles and leather, food and beverages, and transportation equipment. These industries accounted for nearly half of the announcements made since 2014.
Media coverage can of course be biased, perhaps towards larger companies and more significant sectors, which may explain why those countries and sectors dominate. However, the underlying message remains clear – even among Europe’s largest countries and industries, there is little evidence of a structural shift towards reshoring, at least visible through this real-time data set.
Although the evidence is limited, the risk of trade fragmentation is still relevant
So, despite warning signs around scattered supply chains in recent years, there is still very little evidence of any real recovery activity in the eurozone. The costs of local production outweigh the risks of moving abroad for most businesses.
Therefore, the main actions taken by European companies appear to be to limit activities in countries considered higher risk and diversify between production locations. If production is brought closer, it is often closer to shore than reshoring. In the coming years, geopolitical risks may add reason to do more production locally. For now, however, production costs in Europe alone appear too high to result in a widespread increase in remanufacturing activity.
Source: ING
