After decades of relocation, companies are rethinking their supply chains and coming back home.
The phenomenon, known as reshoring, started more than a ten years ago and has been accelerating in the last two years.
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In the 2nd half of 20th century, Italy, as well as the main Western Countries, experienced a massive and growing delocalisation of production to regions or countries with more competitive advantages. These generally consisted in lower costs of production factors (especially labour), advantageous tax rates and low energy costs.
This strategy, known as offshoring, allowed many companies to significantly increase production capacity and, with extremely low production costs, generate higher profits.
In the period between 2001 and 2006, 13.4% of Italian SMEs transferred activities or functions previously carried out within their national borders abroad (similar trend in Europe). Of these, 62% relocated to reduce labour costs, and the remaining 32% to access new markets.
However, since the post-financial crisis period (2008) there has been a turnaround in this phenomenon, as confirmed by ISTAT.
The Statistical Institute’s survey shows that in the period 2015-2017 only 3.3% of SMEs transferred their business abroad, compared to 13.4% in the period 2001-2006. Again, the trend is confirmed at European level: the percentage of EU companies transferring activities or business functions across national borders has fallen from 16% in 2001-2006 to 3% in 2015 – 2017.
So that many companies have decided to bring back the production process that they had previously relocated to other countries. This economic approach, which consists in bringing back home companies that previously relocated, is known as reshoring.
There are two main reasons for the global spread of this phenomenon: first is market needs oriented, where consumers adopt purchasing choices increasingly oriented towards products with high quality standards, which are difficult to achieve through massive production; second, the change in the socio-economic context of many countries where companies had delocalised production, where there has been an increase in the cost of labour, fuel and raw materials, with a consequent reduction in the differential of total production costs between the country of origin of the company and the country of (de)localisation of production.
The trend accelerated further in 2021 (and continues in 2022) due to huge disruptions to supply chains in a context of lockdowns and labour shortages. As a result, logistics costs have risen to historic highs and delivery times have increased, while demand for goods has increased and supply has been unable to keep up. This led many companies to rethink their supply chains, shortening them and locating them closer to demand.
All the attention is focused on China, which many experts believe will be one of the areas most affected by reshoring. The last few weeks have reminded many companies that bringing supply chains closer together means being less vulnerable to turbulence in the global socio-economic environment. Indeed, at the moment, as a result of Chinese lockdowns, the supply chains of many companies are experiencing significant delays that translate into interruptions or slowdowns in production processes.
Reshoring brings benefits both to the company itself and to the economic environment in which the relocation takes place, as well as several favourable effects on the environment.
The social implications are improved wages and the creation of highly specialised jobs. On the environmental side, as mentioned, several favourable effects are evident. First, bringing supply chains closer to the final consumer reduces transport-related pollution. Secondly, shorter supply chains improve the efficiency of supply and demand dynamics, minimising energy consumption due to overproduction.
In conclusion, if on the one hand the data are comforting for Western citizens, on the other hand it seems clear that from now on there will be a need, on the role of the institutions, to ensure continuity to all those national and international companies that decide to return to bet on Italy as a place for their investments, through the creation and maintenance of an enhancing environment.
We found interesting, in this sense, a survey carried out by ISTAT that highlights the factors indicated by medium and large enterprises to choose to bring back to Italy activities or functions carried out abroad are:
- Reduction in tax pressure
- Policies for the labour market
- Incentives for R&D