Over the past ten years, however, a counter current has emerged. A growing chorus of US manufacturers have been making noises about ‘reshoring’ or ‘nearshoring’ – in other words, bringing their operations closer to home.
Long supply chains have been suspect for a while
The shock of Covid-19 to global trade and investment has turned nearshoring into something of a buzzword. However, the trend is not new.
“We have always known that very long supply chains are dangerous,” an anonymous executive from a global manufacturing company tells Investment Monitor. “For decades, the driving logic has been to build as big a plant as possible and at the lowest cost, in places such as China, but advanced manufacturing began to change this.”
Indeed, the rise of automation (or industry 4.0) over the past ten years has made nearshoring more possible since it allows goods to be cost-effectively produced in smaller, less labour-intensive factories (and therefore be less reliant on low-cost countries).
For the first time in my career, I saw a lot of executives that were not just looking at dollars and cents for the cheapest low-cost production site, but asking ‘how can we make sure there’s no interruption in our supply chain?’ Rosemary Coates, the Reshoring Institute
Although this trend will impact all industries differently, changes in the automotive industry are very much a harbinger of things to come, not least because it is arguably the most globalised section of the manufacturing world. “Over the coming decade, what we are going to see in automotives is a larger number of smaller production plants serving regional needs,” says the global manufacturing company executive. “The world is breaking up evermore into mega-regions – Asia, the Americas, etc – as companies want to produce in the region they’re selling to.”
This growing regionalisation means that it is only more attractive for US-based manufacturing companies to nearshore their operations from, say, China, if they are selling to North American consumers.
While automation sets things in motion, the arguments for regionalisation were intensified in recent years by the US-China trade war, whose disruptions highlighted the need for more resilient supply chains. It was the pandemic, however, that made the risks incontrovertible.
Covid-19 makes the case for nearshoring
A paradigm shift is under way. According to an April 2020 Thomas survey that interviewed 878 North American industrial sector professionals, manufacturing was the industry that reported the most interest in nearshoring, with 28% of respondents saying they were “extremely likely” to bring more production and sourcing back to North America following the pandemic.
“Covid-19 was really the key that exposed the risk for the first time,” says Rosemary Coates, founder and executive director of the Reshoring Institute and president and founder of Blue Silk Consulting.
“For the first time in my career, I saw a lot of executives that were not just looking at dollars and cents for the cheapest low-cost production site, but asking ‘how can we make sure there’s no interruption in our supply chain? How will it address customers’ [demand for overnight deliveries]?’”
While reshoring is a real phenomenon, a common misconception is it represents a return of previously offshored operations to US soil. Deloitte report
Coates goes on to highlight that her clients are now balancing a number of locations and strategies; in short, picking up the pace of diversification. Those companies that are actually considering nearshoring are likely to prioritise key markets that neighbour the world’s largest economies, such as Vietnam for China or Mexico for the US.
“Leaving Asia is probably not the right strategy,” says Coates. “However, building multiple plants, or having multiple manufacturing sites, is the strategy that most of my clients are going for. So they may be leaving China to go to another Asian site [and] build manufacturing capability close to the US market.”
Moving operations to Mexico and Vietnam – the key beneficiaries of the pandemic in this sense – has been a growing trend for almost a decade. This is only set to accelerate.
This would suggest that nearshoring will not be an immediate win for US jobs. A 2020 report from Deloitte states: “A lot of optimism has emerged surrounding the US manufacturing renaissance, fuelled by the concept of reshoring. While reshoring is a real phenomenon, a common misconception is that it represents a return of previously offshored operations to US soil. In practicality, reshoring may include returning operations to Mexico. This offers greater access to the US market but allows companies to maintain advantageous operating cost structures.”
Can Biden lure manufacturers back to the US?
One of Donald Trump’s key promises as president was to ‘bring factory jobs home’. The data, thus far, suggests that he failed to do so. President Joe Biden has made it clear that he would pick up this crusade, stating: “I don’t buy for one second that the vitality of American manufacturing is a thing of the past. As president, I will make bold investments in American manufacturing, industry and innovation to make sure the future is made in America – by all of America.”
Furthering his domestic manufacturing push, an executive order was published by the White House promoting the Buy America Act (which has been in place since 1933 to varying degrees of success). While Biden’s intention is clear, it is still too early in his presidency to measure the action taken.
“The administration is new and it is still setting its strategy and policy and so forth, and there aren’t a lot of details yet,” says Coates.
With regards to nearshoring, Coates expects that this executive order could make an impact. “This particular order will have a pretty big effect,” she says. “The Buy America Act hasn’t been very strongly enforced in the past.”
Coates continues: “In the past 25 years or so, when the US government procurement office was buying stuff, if it was 10% more expensive in the US, and if they could buy it cheaper overseas, they would. Biden is going to put his foot down and make that more difficult.”
Will the cost difference impact nearshoring?
This strategy begs the question of how important the cost difference will prove, not just to US consumers but to businesses considering nearshoring.
The Reshoring Institute ran a survey to check this and found that the majority of those surveyed not only preferred US products but would be willing to pay more. Just over 50% of those surveyed would be willing to pay 10% more for a US product, while 32.83% were willing to pay 20% more.
Evidently, it is not just Biden that is willing to buy American to support the country’s manufacturing industry, but will it realistically incentivise businesses to move their operations?
Coates highlights that although people may be willing to pay more, there still has to be a strong economic case for reshoring to the US for it to make good business sense.
“If you have got manufacturing in China, and you are making some widget for $2, but making it in the US would cost you $6, you can’t make that work,” she says. “What you have to do is extract the labour out of it and improve the efficiency. So, making that $2 widget in China is now $2.50 in the US – then you can make it work.
“You have to make the economics work. The way to do that is to extract as much cost out of the process as possible, and that is done through automation.”
Does the US have the right skills?
Industry 4.0 means that manufacturing is a permanently evolving industry, consistently adopting new practices to make itself more productive and cost-effective.
Automation could be an answer to alleviating the economic woes of nearshoring in the US and bringing costs down. However, if US manufacturers wish to choose this route, there is a larger elephant in the room to address – the skills gap.
We need to catch up rapidly with the need for supply chain professionals. It was acute before the pandemic; it is even more acute now. Abe Eshkenazi, the Association for Supply Chain Management
Advanced manufacturing and automation requires a skilled workforce with an evolved set of skills to handle the technology. The current skills gap within the US could make access to that level of talent difficult, especially at a low cost.
Abe Eshkenazi, CEO of the Association for Supply Chain Management in the US, explains: “There is a gap in terms of providing education or ability for individuals to access education to change their careers, or to change their job opportunities. The US Department of Labour indicated that for every six job openings, there was one qualified candidate in the supply chain. That speaks not only to education, but it speaks to the training that organisations provide for their workforce as well.”
Eshkenazi draws the parallel between tech investment and skills investment. “With the investment in technology that organisations are making, they need to match that with the investment in workforce development. That has to be equal.”
Eshkenazi goes on to highlight that this problem isn’t just felt within advanced manufacturing spaces; it ripples through the supply chain at every level. “In terms of the supply chain industry, we need to catch up rapidly with the need for supply chain professionals. It was acute before the pandemic; it is even more acute now at every level, from entry level to mid-career to late-stage career.”
If the US is to nearshore successfully, the skills gap and an advanced adoption of automation techniques need to be embraced fast, while the chips are still falling in the wake of the pandemic.
In any case, the partial nearshoring and regionalisation of manufacturing is a process that will take many years, if not decades. The US (and its neighbours, for that matter) has a huge opportunity to tap and prepare for.
Ruth Strachan is a senior reporter at Investment Monitor, focusing on manufacturing, mining and commodities.
Sebastian Shehadi is political editor and senior editor at Investment Monitor and a contributing writer for its sister publication New Statesman.