Onshoring

Many companies have parts of their work done far away from headquarters. A German carmaker buys components in China, a US corporation has its software programmed in India. For decades, the reason was price: wages and factory costs are lower there. Onshoring is the counter-movement to this. The company brings this work back to the country where it itself is based. It builds its own factory nearby or commissions a domestic supplier, even though this is often more expensive.

Why chips have suddenly become political

The Covid pandemic showed how fragile long supply chains are. In 2021, car factories in Europe came to a standstill because small control chips from Asia were missing. A single closed port could paralyze industries on another continent. Since then, proximity has been seen as a safety advantage, not just a cost question.

On top of that comes the geopolitical situation. Almost all of the world’s most advanced computer chips are made in Taiwan, an island that China and the US have been disputing over for years. Anyone who makes all their electronics dependent on one location takes an enormous risk. Governments now treat chip manufacturing like water or electricity supply: something you need to be able to do yourself in an emergency.

But onshoring comes at a price. A chip factory in Germany or Arizona costs more than the same factory in Taiwan, because wages, electricity, and building regulations are more expensive. In the end, this difference is paid by the customer or the taxpayer through subsidies. Economists argue about how much security this money actually buys.

From contract to factory: the practical process

Onshoring is rarely a single decision, but a long transformation. First, a company examines which parts of its supply chain are truly critical. A supply chain is the sequence of all steps from raw materials to the finished product. In electronics, these are dozens of stages spread across many countries.

Then comes the difficult part: location, permits, construction, and staff. A large semiconductor factory typically takes three to five years until the first delivery and costs tens of billions of dollars. Often the new country also lacks skilled workers, because no one has operated such facilities there for thirty years. That’s why companies bring in engineers from Asia to train the local workforce.

Onshoring should be distinguished from two neighboring terms. Nearshoring means relocating work only to a nearer country, for example from China to Poland or Mexico. Friendshoring means sourcing from politically allied states. Onshoring is the strictest variant, because everything stays within one’s own country.

Where the term appears in the news

Onshoring is most often mentioned in connection with government funding programs. In 2022, the US provided around 50 billion dollars for domestic chip manufacturing with the CHIPS Act. The EU has a similar goal with the European Chips Act: a significantly larger share of global production is meant to take place in Europe. The debate surrounding the planned Intel factory in Magdeburg also belongs to this field.

In the AI industry, this also concerns data centers. Anyone operating a language model processes user data in the process, and European authorities want this data to be kept on servers in Europe. Large providers are therefore building their own locations in Frankfurt, Paris, or Stockholm. This is referred to as digital sovereignty, meaning control over one’s own technology.

For investors, onshoring is a signal for construction companies, machinery manufacturers, and energy suppliers. Anyone bringing factories back needs concrete, equipment, and a lot of electricity. At the same time, it can burden companies whose business model relies on cheap production abroad. A common misconception is that onshoring means the end of global trade. A more realistic picture is a mixed system: critical parts domestically, everything else remaining wherever it is cheapest.