The COVID-19 pandemic left almost no supply chain unscathed.
The pandemic affected 98% of global supply chains, according to a Resilience360 (now called Everstream) survey of supply chain professionals. Personal protective equipment, pharmaceuticals and semiconductors faced supply issues, and industries that invested significantly in outsourcing, offshoring and lean manufacturing to reduce costs saw dramatic increases in risk play out.
"COVID exposed those supply chain challenges," said David Simchi-Levi, director of the Masachusetts Intitue of Technology's Data Science Lab and professor of engineering systems.
Reducing the risk could involve reshoring to the U.S. and reversing at least some of the past offshoring policies. But the research on what companies intend to do varies, from a giant wave of reshoring to just a ripple.
Heartland Forward’s February survey showed that 70% of companies queried were likely or extremely likely to reshore in coming years. UBS, on the other hand, said, "With China's gross exports 3% of world GDP ... our controversial conclusion is that widescale supply chain relocation is overhyped."
Resilience360's research is somewhere in the middle, with 24.7% of survey respondents saying they planned to move some of their sourcing and manufacturing away from China, and an additional 1.8% planning to move all of it out of China.
Deciding whether to reshore involves several considerations. Risks of stocking out, the impact of pandemics, possible dock strikes, tariffs, intellectual property risks, government incentives and the value of the Made in USA label are all factors in reshoring decisions.
Commonly cited pros of reshoring and domestic supply chains
|1||Proximity to customers / market|
|3||Supply chain optimization|
|4||Skilled workforce availability|
|7||Impact on domestic economy|
|9||Automation / technology|
Source: Reshoring Initiative
"Our main mission is to get companies to do the math correctly," said Harry Moser, president of the Reshoring Initiative. The group offers a Total Cost of Ownership calculator, which incorporates factors like these.
Simchi-Levi also advised companies to look at the total landed cost, which includes manufacturing, transportation, taxation and inventory cost. The total landed cost may include buying more products to account for a longer lead time.
Companies may not have completely understood the shifting economics of operating in Asia, said Ross DeVol, president and CEO of Heartland Forward, an institute for economic renewal.
"Many U.S. multinationals underestimated the costs associated [with] being in China and Asia, which don’t necessarily show up right away," DeVol said.
For China, those shifting economics include challenges in securing agreements, ownership requirements and the regulatory framework. Tariffs instituted under the Trump administration added another element of uncertainty and risk, DeVol said.
U.S. tax reforms under the last administration reduced the corporate income tax rate, allowing companies to reassess any economic advantages to offshoring. Plus, labor-cost differentials have narrowed between China and other Asian countries, and the U.S., as wages have risen in Asia, he said.
Moving production back to the U.S. involves challenges that can affect which industries and companies decide to take the plunge.
Expertise in labor
The skilled workforce in the United States isn’t up to the workforce skill level in Germany, Switzerland, Japan and some other countries, according to Moser.
"They have better basic education and better apprenticeship and training programs, so they get more output per machine," said Moser. In Germany, 60% of the youth go into apprenticeship programs, he said, encompassing a wider range of students than the U.S. skilled workforce attracts.
The other issue involves manufacturing expertise.
"Think about the semiconductor and mobile phone. That requires expertise that we lost," said Simchi-Levi. It’s possible to recreate that industry in the U.S., but it will take time and resources, he said.
US manufacturing employment has been dropping
Pharmaceutical manufacturing moved to China and India not because of costs, said Simchi-Levi, but because the production process involved highly polluting chemicals.
"Moving manufacturing to North America is not going to be simple. That takes time and a huge investment. It’s not necessarily going to happen quickly, even with a concerted effort," he said. Europe requires clean manufacturing technology, as well.
Environmental regulations may be a barrier to some other companies interested in reshoring. China has allowed some processes that have been banned in the U.S., like certain plating chemicals, Moser said.
"Either change the regulations, which is not going to happen under Biden, or the company has to spend probably millions to control the pollution," he said. If the volume is high enough, the company can likely justify that spend. "If not, then the economics may not work out," Moser said
From another lens, though, pollution concerns favor reshoring. China's electricity production is weighted toward burning coal, Moser said. Once the product is manufactured, it’s shipped halfway across the world, which burns more fuel. So, the environmental impact is 25% to 50% higher than manufacturing it in the U.S., Moser said.
Supply chain resilience
Increasing supply chain resilience is one reason to consider reshoring, as it decreases reliance on foreign nations.
"But just moving manufacturing to North America doesn’t imply resilience," said Simchi-Levi.
He pointed to the food supply chain, where beef and pork are entirely domestic operations. During the pandemic, processing plants shutting down due to worker illness bottlenecked the supply chain. "The reason is consolidation," he said.
Industries ripe for reshoring
Some high-tech manufacturing could move back to the U.S., including computers and electronics, electrical equipment and components, and transportation equipment. From 2010 to 2019 reshoring and foreign direct investment data, these were the top three industry categories for reshoring, according to the Reshoring Initiative.
DeVol said advanced manufacturing is ripe for reshoring, as research and development are a much higher portion of sales. And given the security challenges with China, manufacturing communications equipment could be produced domestically, with at least some of the electrical components.
"In some cases, you’d reshore. In some, you’d choose not to expand in Southeast Asia or China," he said.
Companies that control their own manufacturing can more easily shift or choose where to manufacture, compared to firms using contract manufacturers, where the firms have less control over manufacturing, Simchi-Levi said.
Risk, China reliance top reasons to shift sourcing
Even if manufacturing plants are built in the U.S., "we’re never going to undo the global supply chain" for all components, said DeVol. "It’s there for a reason."
Supply chains could be reconfigured to bring some components closer to the U.S., like to Mexico or Canada. "The U.S. can benefit from nearshoring and more integrated supply chains," DeVol said.
It does not make sense to reshore labor-intensive industries. That includes furniture, as labor is a larger share of the overall cost structure, DeVol said.
Apparel is also labor-intensive, said Simchi-Levi, though infrastructure is easier to move. In the last few years, some apparel manufacturing left China, but it did not come to the U.S. From 2017-2019, California apparel imports from China decreased by 1.5%, while imports rose 16.8% from Vietnam and 12.4% from India, according to the U.S. Census Bureau.
Supply chains want to move, but not to the US
While Simchi-Levi sees interest in American companies moving manufacturing out of China, that doesn’t mean the manufacturing will be reshored. He surveyed companies in June to find out their plans. Many companies responded that they want to bring manufacturing and sourcing closer to their market, "but they didn’t say North America," he said.
Moser said that, in the past year, he’s seen about 15% of China’s exports going to the U.S. For that reason, not all manufacturing will shift to the U.S., he said. "I wouldn’t expect it all to come here, unless it was only for the U.S. market," he said.
China labor costs outpace Mexico's
The obvious alternative is nearshoring to Mexico, he said, as it’s part of the U.S.-Mexico-Canada agreement. "Mexico’s wages are now lower than Chinese wages," Moser said. "Except for violence issues, Mexico is pretty attractive."
Some industry is shifting to Vietnam and Cambodia, but "you move some in, and they get swamped," Moser said. "India, like Brazil, is always the place of the future, and it never quite gets there."
Moving manufacturing to Northern Europe may move products closer, but the labor costs are similar to the U.S.
The public sector's role
The U.S. doesn’t need 100% of American companies to reshore manufacturing to meet the varied goals.
"Our objective is to balance the trade deficit," along with increasing the number of manufacturing jobs, said Moser. To do that requires reducing imports by 20%, he said, and possibly increasing exports by 10%. "It’s not a massive tectonic change."
The country also has capacity issues. Several years ago, there were not enough manufacturing workers in the U.S., Moser said. With worker shortages from COVID-19, there may not be enough workers for a large influx of manufacturing jobs. It takes time to change the culture, build experience and skills. "It doesn’t happen instantly. It’s a long-term project," Moser said.
Companies build factories where they can get the highest return, which biased them against building factories in the U.S., he said. Until recently, Moser said, corporate tax rates were among the highest in the world. The previous administration helped level the playing field by lowering corporate tax rates.
"We’re never going to undo the global supply chain."
President and CEO of Heartland Forward
DeVol recommended that Presdient Joe Biden's administration provide funding for community colleges, internships and training programs for manufacturing. Community colleges in the Philadelphia and Ohio areas developed associate degree and workforce programs that collaborate with industry. They train students with the skills employers require, and the employers are intimately involved with curriculum updates.
"The real opportunities are in advanced manufacturing, and we need a more technically skilled and competent workforce," DeVol said. "That’s where the U.S. has an opportunity to compete."
Tariffs are not necessarily the solution to encourage reshoring, said Simchi-Levi. After implementing tariffs, "we saw companies change their supply chain but not necessarily move to this country," he said.
He recommended federal incentives instead, to offset costs that could result from moving manufacturing closer to market. "Focus on motivating companies, not penalizing companies with tariffs," Simchi-Levi said.
The coronavirus exposed flaws in relying on manufacturing abroad for critical needs. The pandemic is spurring conversation and analysis, but it’s not the only factor, or even the driving factor, in companies rethinking their manufacturing plans.
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