Have global supply chains had their day? A quick scan would suggest not. But times are changing. Supply chains are shrinking. Production in some areas is coming home and firms are seriously rethinking how they build a supply chain for the future. Increasingly, organisations in the US and other developed nations are moving away from the cheap-labour strategies of yore – the kind that have fuelled rapid industrialisation in South East Asia. Think textiles in Bangladesh or plastics in China. Instead, those same firms are exploring so-called ‘reshoring’ or ‘nearshoring’ to reduce their risk exposure.
Already 67 percent of global retailers and manufacturers have changed where they source materials and components due to supply chain disruptions. Almost two thirds say that further relocation remains a high priority, or the top priority. More than three quarters do not expect supply chains to normalise in the next 12 months. The numbers tell a clear story. In 2010 there were just 6,000 American jobs created by reshoring, according to the Reshoring Intiative’s 2023 report. Last year there were 360,000, an increase of almost 6,000 percent (see Fig 1).
Last year General Motors announced plans to pump $7bn into four Michigan manufacturing sites to boost battery cell production and EV capacity. Intel announced the largest private-sector investment in Arizona history with plans to build two new leading-edge chip factories. And Pittsburgh-based US Steel unveiled plans to invest $3bn in Alabama-made steel. Reshoring, once a strategic theory, is a market reality.
A new normal
Why the sudden change? Well, the triple threat of Covid, politics and climate change have a lot to do with it. Together they’ve stressed time and again just how dangerously exposed global supply chains are to pockets of disruption. In the UK, for example, shoppers were left wanting when, thanks to unpredictable weather on the continent, there were no tomatoes on the shelves. While in the US, beer drinkers were hard up thanks to a Covid-induced shortage of carbon dioxide supplies. These may seem like trivial examples, but they’re instructive of a new normal for supply chains that span the globe – one where economic shocks, political instability, and climate-induced catastrophe will regularly hit business as usual.
“Large pandemics like Covid-19 and the Spanish flu are relatively likely,” claims one William Pan, associate professor of global environmental health at Duke. He and other researchers estimate that a pandemic similar in scale to Covid-19 is likely to come within 59 years. Food for thought. Or consider Russia’s decision to invade Ukraine, which was, among many things, a useful reminder to bosses that authoritarian leaders rarely act with shareholders’ best interests in mind.
Since then, access to oil and gas, metals, such as titanium and palladium, and agricultural crops, including wheat and corn, have been severely limited – and expensive. Should a Chinese invasion of Taiwan follow, as many experts suspect, it will have a freezing effect on global supply chains. Yet the unpredictability of geopolitics pales in comparison to climate shocks. “Climate change is a slow-moving crisis that is going to last a very, very long time, and it’s going to require some fundamental changes,” says Austin Becker, a maritime infrastructure resilience scholar at the University of Rhode Island, speaking to Yale Environment 360. From floods to wildfires, extreme weather is bashing ports, roads and factories worldwide, seriously compromising the integrity of global supply chains.
Flooding in China recently forced the closure of a Nissan plant. Heatwaves in France forced the closure of nuclear power stations. This is only the beginning, and while no area is immune to climate shocks, many companies will have no choice but to rehome production in areas where infrastructure is more resilient. Little wonder then that 96 percent of CEOs are thinking about reshoring, have decided to reshore, or have reshored already – up on 78 percent in 2022.
The practicalities of reshoring
The first question, naturally, is how much will it cost? “Ultimately, for private companies the decision comes down to costs,” says Shay Luo, Principal at Kearney. “Sometimes the end-to-end costs, including production, tariffs and logistics, are too much. Which explains why most American companies move from China to Altasia countries and Mexico, rather than return to the US directly.”
Even without disruption, shipping costs and unfriendly policy add a fair chunk to the price tag of doing business in far-flung nations. But homing production locally in the US or in the EU, for example, is, frankly, expensive. “It’s important for governments to offer policy and economic support that incentivises private companies to align their for-profit interests with any motivations the government may have,” Luo says.
After all, politicians like nothing more than to sell their constituents on better and more abundant job prospects, while businesses like business-friendly policies. Take US President Joe Biden, who signed two bills last year to make American manufacturing more attractive. His CHIPS and Science Act includes a pot of $52.7bn for American semiconductor research, development, manufacturing and workforce development.
Moreover, his Inflation Reduction Act sets aside a tidy $369bn to promote clean energy, in part by giving generous incentives to EV manufacturers based in the US. Goods from China are also subject to a 25 percent penalty tariff, meaning locally sourced goods enjoy an effective tax advantage. The same applies in the EU, where a new Carbon Border Adjustment Mechanism adds a kind of trade tariff on emissions generated by imports from outside the EU. “The wind has changed from one which was blowing globalisation along at an ever-faster rate, to a headwind, making short-term costs a big part of sourcing decisions,” according to a recent ING report on the matter.
Though simply creating manufacturing jobs does not mean that workers will automatically show up. According to Kearney, half of manufacturing executives struggle to fill vacancies, even for basic manufacturing tasks, and look to automation and training to address the challenge.
Luo suggests that more accessible childcare and relevant education, particularly in STEM subjects, could help expand the pool for employers. With the right policy, governments can begin to close that skills gap. Though recent and persistent inflationary pressures mean that wages will give many pause.
At least until recently, labour costs have not been a huge factor for relocation. However, growing inflationary pressures are stretching the gap between the US, the EU and China once again. Today as before, wages are a major consideration in deciding whether or not to reshore.
The question though is not ‘will you produce at home or abroad?’ Rather, it’s a question of balance. The shape of supply seems to be changing in every conceivable way. It’s becoming less chain-like and more network-based. Diversification can protect against the immense geopolitcal, environmental and economic challenges we’re seeing.
Ultimately, the decision to relocate boils down to whether or not companies can realise some sort of competitive advantage. It will often be the case, for example, that reshoring will bring tax advantages or reduce shipping costs, but if the trade-offs in terms of wage rises or raw materials are too great, companies will be reluctant to reshore on such a large scale. It’s not a question of home or away, obviously. Companies will diversify their production rather than uproot it entirely. If the primary concern is around disruption, a diversified supply chain will, in theory, mitigate any threat.
The shape of supply seems to be changing in every conceivable way
This is a sentiment shared by the World Bank, who warn that stronger value chains, not reshoring, are needed after the Covid-19 shock. “Value chains – which split the production of goods and services into discrete activities that can be spread across the globe – have helped generate remarkable gains in prosperity,” they write. “Between 1990 and 2017, low- and middle-income countries almost doubled their share in global exports, from 16 percent to 30 percent, as they joined value chains. During the same period, access to new markets and investment opportunities reduced the proportion of people living in extreme poverty from 36 percent to nine percent.”
The impact of reshoring on low- and middle-income countries may not necessarily be front of mind for bosses, but there is a compelling development case for diversification over reshoring. Worryingly, a shift toward global reshoring in high-income countries and China could drive an additional 52 million people into extreme poverty, with the majority in Sub-Saharan Africa.
There isn’t just anecdotal evidence but reliable data to show that we’re seeing a rewiring of global supply chains. Whether production will move home wholesale, however, is the wrong question. Instead it falls on companies and governments to consider what value chain works not just for bosses but for the developing world as a whole. Reshoring represents an opportunity for global companies, for politicians and for local employment. It also presents an existential threat to millions of people across the world. The picture, as always, is complicated. But again, reshoring is no longer a theory, it’s a reality.