Reshoring is a hot topic these days. How hot? Consider the following:
- According to some estimates, US-based companies anticipate reshoring 20% of their manufacturing capacity within the next five to seven years. (Source: Reshoring Institute.)
- In a recent study conducted by Boston Consulting Group, it was found that 54% of all US companies with over $1 billion in revenues are either planning to or considering bringing at least some of their manufacturing back home.
- In the last decade, the US has gone from losing about 140,000 manufacturing jobs per year to gaining 10,000 or more per year. (Source: Reshoring Initiative.)
And that’s good news—for innovators, manufacturers, the labor market, and the economy alike. It’s also a simple solution for many who have been shipping their manufacturing overseas for some time.
Simple, but not easy.
That’s according to Rosemary Coates, Executive Director of the Reshoring Institute and President of global supply chain consulting firm Blue Silk Consulting. “Companies cannot expect to simply pack up shop, lock the doors, turn out the lights, and move back to the U.S.,” says Coates. In fact, if reshoring is to be successful, there are four crucial questions to consider when leaving China.
Two of the questions involve financial considerations, two deal with property—both physical and intellectual.
In this first of a two-part series, I’m going to address the financial implications of reshoring, offer insights into what you can expect, and provide key takeaways. The second blog installment will deal with the remaining questions around property, plus what to expect around these issues and key takeaways to consider.
First things first. If you’re ready to start your reshoring journey, read on.
Reshoring: Financial Implications
Your Overseas Workforce
As mentioned, the financial implications around reshoring are considerable, and there are two important questions to address before you begin. The first has to do with how your overseas workforce will respond to the change.
“Shutting down a Chinese factory and releasing workers must be done carefully,” cautions Coates, adding that companies must be prepared for retaliation by employees. That’s because, in China, it is not unusual for managers to be held by workers demanding back pay or other benefits owed to them.
And don’t look to local law enforcement for assistance, either. To their eyes, these types of things appear to be private business disputes, to be settled privately.
What to expect? According to Coates, if a company has allowed open-term contracts with its employees (meaning, there is no definitive ending date to their employment), it may fall to the employer to compensate employees for early termination. Alternatively, if employees are on fixed-term contracts, the employer may be required to pay wages until the end of the term.
Key takeaway: In order to be successful, the costs of early termination must be considered as part of the reshoring effort.
Taxes also play a significant role in reshoring. In fact, in order to protect Chinese creditors and others from manufacturers who may skip the country (leaving them high and dry financially), China’s Commerce Department has issued guidelines for withdrawal from China. “Under these guidelines,” observes Coates, “foreign investors are required to inform creditors of the closing, settle outstanding taxes and pending debts, liquidate property, and de-register the business.” In addition, she states, companies may be required to pay closure taxes.
Finally, if a business is partially run or owned by a State Owned Enterprise (SOE), companies may be required to gain permission from the Chinese Communist Party before they are permitted to shut down.
What to expect: Coates advises companies looking to leave China to prepare for the long haul. “Getting permission to leave and pay all of the associated fees and taxes will take some time,” she says, adding that a three- to six-month timetable is not unreasonable.
Key takeaway: Leaving without completing the exit process is not recommended and may disallow companies from ever returning to China.
Next Up: Reshoring and Property
In my next post, I’ll be covering crucial issues around reshoring and physical and intellectual property.
Till then, I’d love your feedback on this post. Feel free to leave questions or comments below.