Reshoring: not as easy as it seems
When a worker at a Thuan Phuong Group factory in Ho Chi Minh City became a suspected coronavirus case in early June this year, the company didn’t send most of the facility’s workers home. Instead, around 1,000 spent the next two weeks quarantining – at work.
Trucks were dispatched to collect hundreds of toothbrushes, shampoo and eating utensils, while part of the factory floor was hastily transformed into living quarters, according to an account in the VN Express newspaper.
The company – which supplies the likes of Levi’s, Walmart and Nike – is not alone in crafting ways to keep production lines rolling during the turbulence of the pandemic.
Ever-growing labour costs in China and Beijing’s increasingly tense trading relationships are pushing overseas businesses to reconsider the country’s position at the crux of many global supply chains, accelerating a pre-pandemic trend, according to surveys and consultants.
Vietnam and others in the neighbourhood, such as Thailand, Malaysia, Indonesia and Taiwan, are clamouring to pick up the contracts of those eyeing supply chain relocations.
Supply chain weaknesses exposed by the pandemic, and further strained by ongoing supply crunches, have also pushed supply resilience up the agenda of trade-focused firms and their governments. The disruptions rippling through supply chains have underscored how dependent so many businesses, and nations, are on Chinese production.
A reshoring index created by consulting firm Kearney, which tracks how much US businesses are sourcing domestically versus through imports, plummeted to an all-time low in 2020 after soaring to a record high the previous year. A high number indicates net reshoring, while a lower number points to increased offshoring.
But in Kearney’s accompanying survey of 120 US manufacturing executives, conducted in March this year, 41% said their firms had reshored at least some manufacturing to the US during the last three years, and around a quarter said they planned to do so.
Almost half said their firm will “strive to diversify its supply chain over the next three years to reduce dependence on a single country source or manufacturing location”, with 41% specifying a desire to reduce dependence on China.
Similarly, almost three quarters of Asia Pacific business executives surveyed by law firm Baker McKenzie earlier this year said they were diversifying the geography of their supply chains.
Recent high-profile examples of supply chain shifts include Nike and Adidas’s relocation of most manufacturing from China to Vietnam. Samsung and Hasbro also shifted part of their production away from China and into Vietnam and India in 2019.
But executives in North America and Europe are finding that while the logic of reshoring – or nearshoring, for example to Mexico or Canada – stacks up, the practicalities of shifting production can be a nightmare and the best of intentions are sometimes on a collision course with the bottom line.
“What was once largely a binary choice – the logistical convenience of manufacturing domestically versus the cost savings to be gained by offshoring – has evolved into a more complex and nuanced set of decisions,” says Kearney’s 2020 reshoring index, published in April this year.
“Since we first published our annual reshoring index report in 2013, these statements from businesses regarding considering reshoring didn’t translate very often into meaningful shifts, as our index proved year after year,” Patrick van den Bossche, a Kearney partner, tells GTR.
But the US-China trade war and outbreak of the pandemic in early 2020 have this time pushed businesses into gear, he says.
While some firms that are reliant on China and other low-cost Asian manufacturing hubs have shifted some production to, or at least nearby, the US, the overall picture is more complicated.
“We’re also seeing clients that were already primarily manufacturing in the US, now pursuing options in Asia or Mexico, to spread the risk and overcome labour and raw material shortages that have been plaguing US manufacturing,” he tells GTR.
“So what we’re seeing is a push towards regional diversification that results in ‘and’ versus ‘either/or’ decisions regarding where to manufacture or source products.”
China’s share of low-cost manufacturing imports into the US has dropped from around two thirds in 2016 to 56% today. Van den Bossche expects that decline to continue but doesn’t see it falling below 50% due to China’s ongoing advantages and scale that cannot be matched by any single competitor.
“Given the scale of the concentration of manufacturing in China, it is extremely challenging for firms to unwind their entire supply chains due to the established reliance on the region,” says Oliver Chapman, chief executive of London-based OCI, a supply chain procurement advisor with a focus on Asia.
The ease of supply chain shifts also depends partly on the specifics of each industry. China has built deep reservoirs of knowledge in high-tech manufacturing, for example, that are yet to be matched in competitors such as Vietnam.
Relocation within China is also an option for those motivated mainly by cost rather than fear of reliance on the world’s second largest economy. Costs are lower in the industrialised northwest of the country than in the southeast, which remains a manufacturing powerhouse but where incomes are rising more sharply.
“I don’t think I’ve had one supply chain relocation type matter yet where you’ve been able to lift all the operations out of one jurisdiction and set up in another,” says Anne Petterd, Asia Pacific head of international commercial and trade for Baker McKenzie.
“There are always things that need to be done in different ways, particularly when you’ve got a complex supply chain,” she tells GTR.
Executives may also be prepared to put up with anxiety over supply chain risks when presented with the costs involved in moving production or sourcing domestically.
“It’s one thing to say ‘I’m going to put a manufacturing plant next to my distribution centre, which is really close to my customers’, but that doesn’t necessarily always work – because you still need to be profitable,” says Olaf Schatteman, a supply chain expert with consultants Bain & Company.
It also doesn’t totally foreclose supply chain risks. An Australian company with a factory in Sydney is still at risk of a pandemic-related shutdown as one with a factory in Shanghai, he points out.
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