Reshoring: will Industry 4.0 enable leverage?

  • Experts

    27 August 2022

Délocalisation & relocalisation, le rôle de l'industrie 4.0

The Covid-19 crisis, in addition to the profound upheavals it has brought about, has highlighted our industries’ procurement difficulties in a context of international crisis. In a globalised economy, the closure of certain markets has a ripple effect on the entire industrial supply chain and destabilises production. Hence the idea of a “Made in France” industry, which would be more autonomous and therefore less vulnerable to crises. But what does this mean? Relocating our industries? Would it even be possible?

By definition, reshoring implies previous offshoring abroad. Offshoring is the transfer abroad of production that was previously carried out in the home country. It should be noted that industry is not the only sector affected by offshoring, as services are also concerned. As long as unemployment remained “manageable”, these competitive relocations were less controversial. But faced with the worldwide health, economic and political situation, change is inevitable.

Let us be clear, the purpose of a business is to make money. One of the strategic aims of offshoring is to maximise profits while reducing costs. This can be achieved in several ways. Let us look for a moment at the causes of competitive offshoring:

  • Wage overheads and taxes: in this unbridled globalisation, “competition” is unfair. Labour law and taxation schemes are highly distorted from one country to another, which pushes companies to relocate production and/or services.
  • The price of fossil fuels: low transport costs are generally correlated with low labour costs. The mathematics bear this out as long as economies of scale and labour outweigh the transport costs.
  • Mass production: until very recently, we lived in a mass consumption market. Consumption patterns encouraged people to produce with no thought for the consequences.

Offshoring & reshoring

Reshoring means relocating factories back to our home countries, which first means returning production, assembly or installation units to their country of origin. Reshoring is generally done because the initial offshoring failed for various reasons: underestimation of the cost, changes in the political or economic business environment, excessive staff turnover, quality problems, delays, etc. The original intention has therefore to be reassessed if the company wants to survive.

In the current global context, a relocation of industries linked to natural resources (such as mining, for example) and/or considered to be “too polluting” will certainly not be accepted in all countries (especially in Europe). The same is true for a large number of product manufacturing plants (for textiles for example), which are unlikely to be repatriated. Nevertheless, this crisis has shown us that we can in some cases adjust … but that it will not be sufficient in the long run! A blatant example of this is the episode of the masks or respirators.

On the other hand, by broadening the definition, if relocation is understood to mean the repatriation of assembly units close to markets (and not necessarily in the country of origin) or as the slowing down of the offshoring movement, then our perception of the problem is no longer the same. Note however, that it is not a question of copying the German model, which is based on “Made in Germany”, but rather on a strategy of massive exportation. The idea is to bring production plants as close as possible to the final consumer and to encourage shorter supply chains.

A return to production thanks to Industry 4.0

New market demands, shorter product life cycles, an increase in the range of products and services as well as seasonal variations require increased responsiveness. The ability to respond quickly to market changes can be difficult to reconcile with geographically distant manufacturing. In this new paradigm, the flexibility and responsiveness of manufacturers suffer from an increase in the price of transport but also from the delivery “delays” due to transport distances (by sea, road, etc.). The crises surrounding the price of a barrel of crude oil are there to remind us of this.

Moreover, innovation, automation and quality are all factors that may help improve the competitiveness of plants in which the proportion of labour costs in the production price becomes smaller. This is one of the leverage effects of Industry 4.0; whereas previously massive offshoring was a logical step due to the presence of an ever-cheaper labour force, it is no longer necessary with ever more automated factories. On-the-spot know-how of qualified operators is again at a premium and increasingly sought-after.

Finally, consumers are increasingly looking at the products they buy, the way they are produced, the impact of the productive apparatus on the environment; in other words, they want to make informed consumption choices. The logic of accounting, i.e., producing at the lowest cost, is therefore being questioned by consumers who are encouraging industrialists to meet their societal and environmental responsibilities. All of this reshuffles the cards as far as competitive offshoring is concerned.

It is possible for individuals, companies, regions, countries and Europe as a whole, to join forces in fighting for this relocation. Numerous financial and political levers are being implemented through different national and European plans to bolster the economy. Why not go further and profoundly transform our industries by making them even more attractive and competitive? Industry 4.0 is a transformative concept; why not include the circular economy in the production cycle? This would allow us to create new jobs and to put our engineering and production resources to work in new ways, as Renault is considering for one of its factories in Flins. 

industry 4.0 reshoring