Depending on which survey you cite, between 6% and 64% of North American companies have active plans to move a significant amount of their sourcing or manufacturing out of China and in many cases back to—or at least closer to—North America. This wide range in poll results may be due to variations in the way questions were asked, the types of industries surveyed or a shift in attitudes from April, when 64% of manufacturing executives responding to a Thomas survey said their firms would “likely” bring production back home, to June when a Deloitte poll of private companies found only 6% planned to localize sourcing or manufacturing.
The bigger message is that reshoring, nearshoring and moving sourcing out of China is a long-term trend that picked up significantly in 2019—well before pandemic. As reported by Kearney in its 2020 Reshoring Index, which analyzes U.S. International Trade Commission data, 2019 saw a “dramatic” decline in the value of manufactured imports from all 14 of the Asian countries that trade with the United States. For China, the drop was most significant—declining 17% year-on-year.
Kearney and other commentators attribute this mostly to the U.S.-China trade war, which has sharply escalated tariffs on both sides. Our team at Resilinc agrees, noting that the tariffs and the uncertainty surrounding a future U.S.-China trade deal have been layered on top of long-simmering issues with China, especially rising labor costs and human rights concerns.
So, while COVID-19 and its impacts on U.S. healthcare supply chains have raised the terms “reshoring” and “nearshoring” to prominence in business media and google searches, these are not new issues for supply chain professionals.
Decisions around reshoring or nearshoring can have enormous consequences. While a closer and less Asia-centric supply chain can bring benefits in costs, resiliency and shorter lead times, hasty decisions can incur greater costs without reducing risks. Here are three key areas to evaluate:
- What are the real costs?
Even in a low-cost country like Mexico or Vietnam, setting up a new factory can cost several billion dollars and take years. If a supplier or contract manufacturer is making that investment, cost increases are almost certain to follow. A clear-eyed analysis of likely cost increases and their impacts on product pricing and demand is required.
- Near isn’t necessarily better
Many perceive Mexico as an ideal location for nearshoring supply chains, especially with the tariff benefits of the USMCA. But in general, Mexico is more expensive to operate in than many Asian countries. And it’s important to remember that USMCA labor provisions can raise wage costs significantly, depending on the industry.
- Before reshoring production, take a hard look at labor markets
With record unemployment in the wake of the pandemic, firms are weighing whether to invest in domestic manufacturing capacity. But while it’s true that there will be more workers looking for jobs than there was a year ago, few U.S. workers have experience outside service industries; most would need significant training for today’s manufacturing processes. As Kearney points out, “the supply of skilled labor to operate newly automated production lines is … stubbornly scarce.”
Firms can indeed reap major benefits by re/nearshoring parts of a supply chain. But the core strategic principles of building resilient supply chains—mapping to the sub-tiers; monitoring events in real time; proactively mitigating risks at vulnerable suppliers making high-impact parts; etc.—must be applied to assure that the results achieved are the ones you want. As Kearney’s experts summed up at the end of their 2020 Reshoring Index: Companies need to place more value on resilience by building supply chains that can nimbly sense and pivot in response to unexpected demands and disruptions. This is the key to operating profitably in the face of ongoing disruptions.”