Re-Shoring to Europe’s Core: Alarm Bells for the PIGS?

Written by | Friday, October 25th, 2013

It is not a secret that companies save billions by moving their operations offshore. An American Senate investigation from earlier this year found that Apple had paid a 2 percent tax on 74 billion USD in income by channeling profits via its subsidiaries overseas. April’s tragic factory accident in Bangladesh could serve as a reminder that some companies, whether American, European or originating from other mostly developed countries, take advantage of cheap labor or even child labor in developing countries to produce cheap products.
By the end of May this year, however, 11 American companies had brought their production and employees back home.  Motorola Mobility has become almost an iconic example. After the Google-owned company re-shored back to the United States, it opened a new plant in Texas – Moto X Factory – and created around 2,000 new jobs. Together with other companies, the U.S. think-tank ‘Reshoring Initiative’ estimates that about 50,000 jobs have been re-shored by mid-2013.
Perhaps inspired by the American ‘comeback’, re-shoring is slowly becoming an economic development strategy among developed economies everywhere. The Japanese firm, Suzuki, ended its manufacturing line of motorcycles and scooters in the Spanish city of Gijon. The Spanish plant had not been used up to its full capacity, and according to the director of the Suzuki Motor Spain, Masayoshi Ito, the plant incurred losses of 30 million euro in four consecutive years prior to re-shoring. Suzuki’s decision to leave Spain was among many similar re-shoring decisions. Since 2008, the country had lost about 23 percent of its manufacturing capacity as well as about four million jobs, most of which were in also in manufacturing. Southern Europe seems to be facing deindustrialization, an analysis of the French bank ‘Natixis’ suggests. Countries like Italy or Greece involuntarily found themselves in the same kind of problems like Spain. Eurostat adds that the total industrial capacity in Spain and Italy plummeted by one fourth over the last five years, while Greece’s declined even by almost 30 percent.
However, there are also winners of the deindustrialization – Germany, Austria, Belgium or the Netherlands, whose industrial capacity has risen from 4 to 11 percent over the last five years. This phenomenon is aided by the ongoing financial and debt crisis, which concentrates the manufacturing capacity in a selected number of countries while leaving other economies increasingly deindustrialized. In Germany, for instance, the re-industrialization process had begun already prior to the 2008 crisis. According to Bavaria’s Ministry of Economic Affairs, between 2004 and 2006, for example, only one in every seven German manufacturing companies moved parts of its production to another country. Moreover, the ministry reports that each year up to 500 firms are moving production facilities back to their home bases in Germany mainly from the new EU member states.
The ‘Reshoring Initiative’ comments that when a company’s senior management sits down to take a close look at the figures, the executives often realize that they have failed to take into consideration all the costs of doing business offshore. It often encompasses not only rising manufacturing and labor-connected costs in emerging and developing economies, such as China. An offshore-operating firm must account also for specificities of doing business abroad, such as the time cost or red tape. Yet, when the firm decides to take aspects like inventory carrying cost, quality control, impact on innovation and protection of intellectual property into account, it may well realize that it is sometimes better to keep operations at home.
Shifting manufacturing and production facilities abroad, however, also often necessitates the movement of labor. Former employees of re-shored companies are also following ‘their companies’ to their new homes. More and more workers from southern European states are moving to the Benelux countries or Germany to get their ‘lost’ jobs back. This development contributes mainly to a declining quality of life for affected households, but also a decreasing amount of taxes collected. Therefore, the plausibility and probability of southern European countries to pay back their debts is getting ever smaller.
Although the indebted southern Europe clearly loses from the decentralization of manufacturing and production operations from their countries to ‘traditional’ European producers, the European Union as a whole seems to be benefiting. Countries like Holland, Belgium, Austria and mainly Germany form the manufacturing core of Europe upon which other economies, and mainly the new EU member states, are dependent. Re-shoring or the moving of the production back to the core contributes to a more stable economic structure in Europe while generating a shield against potential financial and economic crises caused by other sectors of the economy.

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