Gianluca Fiorindi, Cristina Pensa, Matteo Pignatti and Chiara Puccioni

• Over the last three years, governing global production and supply interdependencies has proven problematic especially for companies with a 'tight' international supply chain with little supplier diversification. It has become more important to consider the trade-off between exploiting cost competitive advantages and vulnerability, as each supply chain is not stronger than its weakest production node.

• Various strategies can be implemented: from relocation of activities (reshoring of production and/or supply) to a country other than the country of first location (offshoring), to expansion (redundancy) or supplier diversification.

• Reshoring of production is, in general, a more complex strategy than reshoring of supply, due to high sunk costs related to investments in the destination country. One of the necessary conditions is the presence of supply networks that are already structured and thus able to make use of strong positive externalities in the country to which the production activity is relocated.

• The data collected in the Centro Studi Confindustria and Re4It (Reshoring for Italy) survey on offshoring and reshoring strategies of manufacturing companies in 2021 confirm a limited use of production backshoring choices (total or partial). The main reasons for companies to bring production back home relate to the increase in costs (also connected to the growth of offshoring countries) and time in the management of the global production chain.

• The results of the CSC&Re4It survey and the recent survey by Centro Studi Tagliacarne-Unioncamere (April 2023) highlight the presence of supply backshoring among Italian manufacturing companies. Approximately 75% of the total respondents to the CSC&Re4It survey purchased supplies totally or partially from foreign companies and 21% of these companies carried out total or partial supply backshoring between 2016 and 2020. The share of companies surveyed by the Tagliacarne-Unioncamere Study Centre that declare an increase in Italian suppliers ranges from 15% (if they are local, i.e. present in the same region) to 20% (outside the region).

• Both surveys identify increased resilience, reduced distance and improved product quality as the main factors influencing the decision to relocate their suppliers to Italy.

• The choice of supply backshoring is fully compatible with production offshoring, as relocating the supply chain does not necessarily entail moving any production activities carried out abroad and in certain cases can be a way of strengthening the global value chain.

• Backshoring should be stimulated with measures to increase the attractiveness of the area and the competitiveness of companies, exploiting synergies with existing policies for the 'Green Deal', digitisation and skill upgrading.

• The shortening and regionalisation of value chains appear to be linked to an increase in sustainability, as they enable the reduction of emissions and greater ethical-social control of production. On the other hand, the prospect of large-scale backshoring on a global as well as national and European scale does not seem concrete or even desirable. Instead, it would be desirable for relocation in Italy to concern mainly strategic activities and, more generally, those with higher added value.

1. The reconfiguration of companies' production chains in a new world scenario

Volatility, uncertainty, complexity and ambiguity

Rising geopolitical tensions, a globalisation that has never fully involved all the world's economies, the UK's exit from the European Union, the spread of the Covid-19 pandemic and, finally, Russia's invasion of Ukraine have highlighted the fragilities of the deep interdependencies between economies, directly impacting businesses. These events are also accompanied by a sharp increase in natural disasters and cyber attacks.

Together, these factors have changed the reference scenario in which businesses and policy makers operate, making it more volatile, uncertain, complex and ambiguous (VUCA, from the acronym: volatility, uncertainty, complexity and ambiguity).

Managing global production and consequently supply interdependencies, which have been created over the last thirty years, has proven to be more problematic over the last three years, especially for those types of companies that have over time built a "tight" global value chain, with little supplier redundancy, aimed at the efficient utilisation of various competitive advantages, hinged on the organisation of production with a predominantly financial management of the warehouse (just-in-time). The international organisation of production, which also includes that of supply, therefore conceals a potential cost to be taken into account, which is related to its possible lock-in.

It becomes, therefore, increasingly relevant for companies to increase their degree of resilience, the strength to react to unforeseen and unpredictable events, while preserving their efficiency. Medium-term strategies push towards a reconfiguration of supply chains that also implements the technological innovations that will take place.

Possible reallocations in supply chains and production processes

Over the next three years, the World Economic Forum in May 2023 predicts changes in the structure of supply chains, which will push towards their shortening. According to an Economist survey of 3,000 senior executives worldwide, the proportion of those who said they adopt nearshoring, the relocation of their supplies in favour of suppliers located in geographically closer countries, as their primary strategy in 2022 increased (from 12% in 2021 to 20% in 2022); at the same time, there is an increase in the proportion of those who opt for backshoring, a shift in favour of suppliers in the country of origin (from 5% to 15%).

In addition to the reconfiguration of supply chains, there may also be phenomena of reallocations at home - of individual stages (selective backshoring of production) or entire production processes (backshoring of production) that were previously relocated - or shifts of activities to countries that are geographically closer (nearshoring of production) or politically closer (friendshoring of production). The relocation of previously relocated production activity is generally more complex than that of supply, due to the presence of high sunk costs associated with large investments in the destination country.

For some economies, mainly the European ones, characterised by already structured supply networks and thus able to benefit from strong positive externalities, it may lead to the initiation of a re-industrialisation process; for others - many of those still emerging - it may lead to an early de-industrialisation, with an increase in the difficulty of being able to extend the supply matrix in the future.

The trade-off between producing in-house and relocating elsewhere

However, the complexity and cost of disinvestment processes act in themselves as a strong disincentive to the international reallocation of production, not only when they involve forms of vertical re-integration, but also when they involve reallocations of demand for intermediate inputs from 'distant' to closer suppliers. This is bound to happen whenever the costs of re-appropriating skills ceded to emerging economies in years long gone by - and thus now definitively dissipated in the countries that have relocated them - are greater than those incurred in those economies that now supply these goods. Not under all conditions will this be the case, because the enormous impact of the pandemic, first, and the war, now, on the 'security demand' in terms of availability of essential goods has structurally altered the trade-off between producing one's own and outsourcing production to a market located elsewhere.

This spectrum of solutions must therefore be flanked by another, which consists in the re-location of supply chains not in areas closer to them, but in areas just as far away (further offshoring), which, however, prove capable of guaranteeing production costs that are again lower than those where they had already been relocated, or at least with a reasonable degree of proximity from a political-economic point of view. The intensity with which this phenomenon may manifest itself is, in turn, a function of the gradual increase in production costs that the development of manufacturing itself has fuelled in the emerging economies targeted by the first wave of offshoring processes (predominantly that of China). In this case we are dealing with a further diversification of the recipient areas of phenomena of international decentralisation of supply, potentially able to favour an extension of manufacturing development towards economies that are still lagging behind (if they are able to have adequate infrastructural networks, such as the countries of the Asian Far-East).

This scenario actually corresponds to a resilience perspective of global value chains, which could continue to exist and unfold on a global scale after going through a partial transformation process to adapt to new geopolitical, economic, social and technological conditions. Examples of such transformations are increased digitisation, allowing for better remote control of supply chains, but also increased automation and thus cost reduction - even in high labour cost countries - and partial geographical reconfiguration through the transfer of some activities from one country to another, without losing the global dimension. The perspectives - backshoring, regionalisation/nearshoring, friendshoring and resilience/further offshoring - are not mutually exclusive and could coexist.

2. The CSC-Re4It survey on company location choices

The phenomenon of reshoring (in its broadest sense: back/near/further off-shoring) implemented by Italian companies has not, until now, been analysed by means of primary data, since no ad hoc surveys had been carried out in Italy. The analyses carried out had been based, almost entirely, on secondary data.

The collaboration born in January 2021 between the Centro Studi Confindustria and the Re4It group made it possible to fill, at least partially, the lack of primary data. In fact, a questionnaire was prepared in order to analyse the location strategies of both the production activities and supplies of Italian companies, trying to bring out the underlying motivations behind their choice.

The survey was launched in June 2021 and completed in February 2022, through the involvement of the Confindustria System (63 territorial and 96 trade associations) by means of online questionnaire administration to member companies.

The sample has a large response size for categories of companies most directly exposed to the reshoring analysis and only considers manufacturing companies.

The total number of responding enterprises is 762. More than 90% of the respondents are small and medium-sized enterprises (SMEs) and more than 7 out of 10 companies have a propensity to export more than 10% of their product. The sectoral distribution of the sample is uneven: half of the respondents belong to the two sectors of machinery and metal products, which are also those with the highest than average propensity to export compared to the total of the manufacturing sectors considered.

The geographical distribution is also uneven, although the sample of responding companies made it possible to cover the entire Italian territory, as more than 60% of the responding companies are concentrated in the first four regions: Lombardy, Emilia-Romagna, Veneto and Tuscany. However, it should be noted that, considering the number of companies at regional level according to ISTAT's territorial FRAME database, the same regions occupy the top positions. The only region with a high presence of manufacturing companies but which does not have adequate representation in the survey is Lazio.

With regard to production and procurement methods, 84% of the responding companies have not implemented production offshoring since they carry out their entire production process in Italy, either at their own plants or by outsourcing production. Only 16% of respondents, therefore, may have implemented a strategy of relocation of production phases previously delocalised abroad, highlighting that the phenomenon of production backshoring may concern, even ex-ante, a very limited number of Italian companies. On the contrary, the survey revealed a greater exposure of Italian companies to foreign supply, given that almost 73% of the responding companies source the materials needed for production abroad  (Figure A). In this case, the sample potentially interested in relocating its suppliers from abroad to Italy, i.e. in implementing supply backshoring, increases by almost five times compared to that of production. In this sense, however, it should be borne in mind that a generalised return of supplies would be unlikely, as our country is characterised by a lack - or at least a great scarcity - of many materials, so that foreign suppliers could not be replaced by domestic ones.

3. Signs of production backshoring

As of 2021, about 30% of the 121 companies that also carried out production offshoring abroad stated that they had already realised a change in their location strategy, while 55% continue to maintain their location choice unchanged. In particular, the backshoring of production (total or partial) has so far been chosen by 16.5% of the companies that had realised production offshoring, while more than 12% stated that they planned to bring back to Italy the production currently located abroad in the medium term, with a time interval ranging from a minimum of three years to a maximum of more than five. A slightly lower percentage, 14%, opted instead for a change of location while remaining in a foreign country; possible options include both nearshoring and further offshoring⁹. In the next four to five years, nearshoring will be implemented by slightly less than 2% of those who have productive offshoring (Figure B).

It is important to emphasise that implementing production backshoring entails very high costs for the firms that carry it out, both in terms of non-recoverable fixed costs, the so-called sunk costs, and in the sense of loss of specific investments. This makes the analysis of the Italian companies that have chosen to partially or completely backshoring their production activities to Italy even more relevant in order to understand the underlying motivations behind their choice.

The motivations behind localisation decisions: offshoring versus backshoring

The comparison of the motivations that led companies to the initial offshoring is important as it constitutes the prerequisite for potential backshoring. In fact, this information was provided both by those who, following offshoring, never relocated and by those who later decided to undertake a backshoring choice, as well as by those who instead undertook a relocation choice to another foreign country.

The main reason for the initial relocation remains the reduction of labour costs, regardless of the choice made later, but it is even more important for companies that later decided to relocate to a third country. These also identified the availability of both resources and competent subcontractors abroad and the demand for relocation by customers as the main reasons for initial relocation to a greater extent than companies that pursued the other two strategies: those who never relocated and those who, instead, brought back to Italy the production activity previously located abroad.

The overall assessment of the responding companies that opted to return to Italy the production activities previously delocalised is very positive; moreover, it clearly emerges that the difficulties encountered are much less than the advantages obtained through production backshoring. The main motivation underlying the return can be summarised as a need to improve the quality of the goods and services offered, through a reduction in delivery times, better performance in terms of quality produced and greater responsiveness to customer needs. Although some difficulties were encountered on return, these were assessed as very limited compared to maintaining activities in the foreign country where they had been relocated. In particular, the two main obstacles to production backshoring are: (re)creating production skills from scratch as they disappeared following the relocation and finding qualified personnel. 

Drivers for offshoring

The relevant factors that drove the responding companies' decision to locate phases of production activity abroad can be summarised in three of the four main motivations recognised in the literature as drivers for offshoring: the search for lower-cost production inputs (resource seeking), an increase in the volume of sales on the foreign market (market seeking) and the appropriation of comparative advantages that can be obtained by geographically diversifying production phases (efficiency seeking).

Overall, it is possible to observe how companies that have relocated to another foreign country, a second-tier location, have on average higher values for all three identified factors (Figure C). In general, the factor summarising cost competitiveness, efficiency seeking, is the one to which all companies regardless of their location choices following offshoring attributed a higher average value.

Drivers for production backshoring

Of the 26 drivers considered in the survey to identify the motivations for companies to bring stages of production activities back to Italy, 15 remained, which were distributed over 4 different factors: efficiency seeking, quality and social issues, resource seeking and keeping and customer value (Table A).

The main factor that prompted companies to relocate production processes previously offshored to Italy belongs to the same category that many years earlier (the range is between 10 and 30 years prior to 2021) had made them opt for offshoring: efficiency seeking. However, the drivers that make up the cost efficiency factor are fundamentally opposite to those that had prompted companies to offshoring, signalling that the contextual changes that have taken place in the time interval considered have led to a re-evaluation of the return home, as actual costs and time have become higher than expected. This is followed by the need to improve the value offered to their customers both in terms of services (Customer value) and product as well as the need to maintain knowledge and exploit new technologies available in the home country (Resource seeking and keeping), which also includes the changes in the production paradigm induced by Industry 4.0. In last place, but still at a level close to the average (Likert scale), social and quality issues contributed to the return choice (Quality and social issues). Above all, one of the drivers included in the last factor could increase its level of appreciation a lot in the near future, when the ecological transition will start to be fully realised.

4. Supply Backshoring Signals

The information provided by the questionnaire makes it possible to identify the use of foreign suppliers for the companies analysed. Out of 762 respondents, it turned out that 568 companies (i.e. 74.5% of the total number of respondents) had purchased supplies (totally or partially) from foreign companies. Of these, 120 companies - i.e., 21.1% - were found to have (in varying percentages) backshored their supplies in the last five years. Finally, a non-negligible percentage, almost 11% of the 120 companies that have relocated their supply to Italy, have opted to reconfigure it entirely on a domestic basis (Figure D). This is a first quantification of supply backshoring which, although it has recently attracted the attention of several observers, is still little known in its actual dimension.

Motivations for supply backshoring

The main motivation for responding companies to bring their supply chains back home is the availability of suitable suppliers in Italy (Figure E). This result shows that Italian expertise and know-how still represent the main added value of local supply chains. Following this, companies indicated that they relocated supply mainly due to longer than expected delivery times, higher than expected actual foreign supply and logistics costs, and the presence of a minimum purchase lot. Worryingly, however, the last place is occupied by environmental reasons (e.g. reduction of CO₂), on which, however, an increase is expected in the near future, given the push, especially in Europe, towards an acceleration of the ecological transition and a greater consideration of environmental aspects.

The drivers of supply backshoring

There were two main drivers for respondent companies to revise their supply chains, both attributable to problems encountered with foreign suppliers or the choice to shorten the supply chain. Of the initial eleven drivers identified in the survey, six remained.

The problems encountered with foreign suppliers, declined in the various coordination difficulties, increased costs and delivery times and an underestimation of the actual cost of supply from abroad, represents the driver with the highest value, well above the average. The other relevant factor relates to the need to shorten the supply chain, due to the recent management risks associated with a supply chain on a global scale (Table B).

However, it is important to emphasise that the survey was administered in the second half of 2021, the year in which several factors materialised simultaneously (China's zero Covid policy, the blockage of the Suez Canal, the difficulty of transport and logistics organisation on a global level, climatic events) which led to an unprecedented high pressure on the global supply chain, as can be seen from the Global Supply Chain Pressure Index. Almost two years after the survey was administered, however, it is important to emphasise that, although the problems that emerged during that period relating to international supply chain management have been partially resolved (elimination of the Chinese zero Covid policy, regular reactivation of global transport and logistics, albeit at higher costs), others have materialised. In fact, the Russian invasion of Ukraine, the tightening of US trade policies, legislative measures from the CHIPS and Science Act to the Biden administration's Inflation Reduction Act and, finally, an acceleration towards open strategic autonomy by the European Union are all factors pushing for a rethinking of supply chains, at least with a view to their shortening and diversification.

Box - Supply backshoring: a comparison with other surveys

Very similar results to those highlighted by the CSC&Re4It survey regarding the relocation of supply chains by manufacturing companies emerge from two subsequent surveys: in 2022, the Fondazione Nord Est for Confindustria Veneto Est and in April 2023, the Centro Studi Tagliacarne-Unioncamere.

The first survey, limited to companies in the Venice-Padua-Rovigo-Treviso metropolitan area, showed that more than 20% of the companies surveyed had changed their strategic suppliers to national companies, identifying the availability of suitable suppliers as the main reason for the return of supplies.

The evidence from the second survey, the most recent (April 2023) and nationwide survey, shows an increase in the share of companies opting for Italian suppliers (supply backshoring) between 15% (if they are local, i.e. present in the same region) and 20% (if they are Italian suppliers outside the region). Protecting oneself from possible risks resulting from geopolitical, health and environmental shocks is the main motivation behind this supply strategy, followed by the possibility of referring to suitable Italian suppliers who also allow the use of the made-in brand.

Finally, supply backshoring can be a complementary strategy to manufacturing offshoring and easier to implement. In fact, partially relocating one's suppliers is fully compatible with the possibility of continuing to produce abroad, thus maintaining offshoring without manufacturing backshoring. Finally, supply backshoring could help strengthen the made-in-Italy supply chain.

5. What are the policy indications?

Reshoring is assuming an increasingly prominent position in the scientific literature and political debate. The Covid-19 pandemic and the war between Russia and Ukraine have, in fact, laid bare certain fragilities in global production and supply chains, and not only academia and institutions, but also business and public opinion, are questioning this issue.

According to our analyses, there is a positive association between production and supply backshoring, but the adoption of a supply backshoring strategy is not necessarily opposed to the choice of locating production abroad. In fact, the choices of offshoring production and increasing the share of Italian suppliers can coexist.

The results obtained from this survey also offer insights for policy makers in defining strategies for attracting investments and promoting the competitiveness of companies. In this regard, backshoring can be conceived as a lever to increase the competitiveness of our territories and enterprises. In other words, backshoring should be incentivised not by ad hoc policies, but rather by policies for the attractiveness of the territory and the competitiveness of enterprises, exploiting synergies with already existing policies in favour of the Green Deal, digitisation and skill upgrading.

With reference to the Green Deal, the shortening and regionalisation of value chains appear to be linked to an increase in sustainability, as they enable the reduction of emissions and greater ethical-social control of production. In this perspective, it could provide two excellent opportunities for Italian companies both by increasing their market shares within EU countries and by applying alternative production paradigms. The first concerns the possibility for Italian companies to replace non-EU suppliers of member country companies in order to reconfigure their supply chain in a more regional perspective (nearshoring of supply to European partner companies). The second allows the adoption of alternative paradigms to the linear production paradigm, such as the circular economy, which is certainly more feasible in a national or regional context such as the European one, where regulations can be harmonised and where there are fewer political and economic barriers and, therefore, lower transaction costs. Such a paradigm could also make it possible to reduce dependence on supplies and raw materials from other European countries by leveraging the recycling industry to spread the use of so-called 'secondary raw materials'.

Digitalisation also undoubtedly contributes to the competitiveness of companies in several ways. Indeed, the use of Industry 4.0 makes it possible to make production processes more efficient, to increase the quality of production, to reduce costs and to stimulate the demand for skilled labour, thus facilitating both the return of companies that have relocated production abroad and the creation of 'suitable suppliers' that can be offered as an alternative to foreign ones.

Finally, policies for the enhancement of manufacturing, digital and managerial skills are indispensable to complete the picture, as the reorganisation of production activities from one country to another and the adoption of new sustainable and digital business models requires managerial and production skills that are not always immediately available and available.

At the same time, however, it has to be considered that the prospect of generalised backshoring of supply appears neither concrete, as some materials and, above all, raw materials are only located in certain areas of the world, nor desirable, insofar as it would reduce the benefits of production specialisation and participation in global value chains.

A Flourish data visualisation