IndustryIssue 01 - 2024MAGAZINE
GBO_ supply chains

Shorter supply chains, bigger challenges

Reliable data, not just anecdotal evidence, indicates that global supply chains are being rewired

Do international supply chains have an end? A cursory glance would imply not. However, times are shifting. Supply lines are getting shorter. Certain regions are experiencing a return to production, prompting businesses to reevaluate their supply chain strategies. Organisations in the US and other affluent countries are gradually straying from the low-cost labour tactics of the past, which fuelled South East Asia’s explosive industrialisation. Consider Bangladeshi fabrics or Chinese plastics. Instead, in an effort to lower their risk exposure, those same companies are looking into ‘reshoring’ and ‘nearshoring.’

Around 67% of international retailers and manufacturers have already shifted where they buy components and materials because of supply chain interruptions. According to nearly two-thirds, moving forward is still the top priority or a high priority. In the upcoming year, over three quarters do not anticipate supply chains to return to normal. The 2023 report from the Reshoring Initiative states that in 2010, reshoring produced just 6,000 new employees in the United States. There were 360,000 last year, an almost 6,000% increase.

In order to increase battery cell output and EV capacity, General Motors said last year that it would invest $7 billion into four manufacturing facilities in Michigan. Intel announced plans to construct two new state-of-the-art semiconductor facilities, representing the greatest private sector investment in Arizona history. The Pittsburgh-based US Steel has revealed plans to spend $3 billion on steel produced in Alabama. Reshoring, once a strategic theory, is a market reality.

The new norm

Why the abrupt alteration? Indeed, politics, climate change, and COVID-19 all play major roles in it. Collectively, they have repeatedly emphasised how precariously vulnerable global supply systems are to isolated disruptions. For instance, consumers in the UK were disappointed to find that there were no tomatoes in the shops because of the erratic weather on the continent. While in the US, a shortage of carbon dioxide supply brought on by COVID caused beer drinkers to go without. These seemingly insignificant examples, however, provide valuable insight into the new normal for global supply chains: one in which business as usual will frequently be disrupted by political unrest, natural disasters, and economic shocks.

“Large pandemics like COVID-19 and the Spanish flu are relatively likely,” William Pan, associate professor of global environmental health at Duke claims.

According to William Pan and other researchers, a pandemic with a similar scope to COVID-19 is probably going to occur in 59 years. 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, there has been a significant restriction on the availability of oil and gas, metals like titanium and palladium, and agricultural products like corn and wheat, all of which are costly. In the unlikely event that China invades Taiwan as many experts predict, global supply chains will be frozen. But compared to climate shocks, geopolitical unpredictability is nothing.

According to Austin Becker, a marine infrastructure resilience scholar at the University of Rhode Island, “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,” in an interview with Yale Environment 360. Extreme weather events, ranging from floods to wildfires, are severely damaging ports, roads, and factories across the world, jeopardising the stability of international supply chains.

Recently, flooding in China forced a Nissan plant to close. Nuclear power plants in France had to close due to heatwaves. Though no place is impervious to climate shocks, many businesses will be forced to relocate their operations to locations with more resilient infrastructure because this is just the beginning. It is therefore not surprising that 96% of CEOs are considering reshoring, have made the decision to reshore, or have done so already – an increase from 78% in 2022.

The realities of reshoring

The first question that comes to mind is how much will reshoring cost? “Ultimately, for private companies, the decision comes down to costs. 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,” Shay Luo, Principal at Kearney said.

The cost of conducting business in distant countries is significantly higher even in the absence of disruption due to shipping expenses and unwelcoming policies. However, it is quite costly to source locally in the US or the EU, for instance.

“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 added.

After all, politicians enjoy nothing more than to persuade their voters that there are more and better job opportunities, and corporations support laws that are conducive to business interests. Consider US President Joe Biden, who last year signed into law two bills aimed at increasing the appeal of American manufacturing. A $52.7 billion fund for US semiconductor R&D, manufacturing, and workforce development is included in his CHIPS and Science Act.

Furthermore, his Inflation Reduction Act allots a substantial $369 billion to advance clean energy, partially through the provision of substantial subsidies to US-based EV producers. Additionally, there is a 25% penalty tariff on Chinese goods, which effectively gives local suppliers a tax advantage. The same is true in the EU, where a recently implemented Carbon Border Adjustment Mechanism imposes a carbon-based trade tariff on emissions resulting from imports from non-EU countries.

“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.

However, just creating manufacturing jobs does not guarantee that labourers will materialise. Kearney reports that half of manufacturing executives find it difficult to fill positions, even for routine manufacturing duties, and that they must turn to automation and training as solutions.

More readily available daycare and pertinent education, especially in STEM fields, could help increase the pool of potential employees, according to Luo. Governments can start to close that skills gap with the right policies. However, many will pause when considering wages due to the recent and ongoing inflationary pressures.

Labour costs haven’t been a major consideration in relocation, at least not until recently. However, growing inflationary pressures are stretching the gap between the US, the EU and China once again. Wages continue to be a key factor in determining whether or not to reshore.

However, ‘Will you produce at home or abroad?’ is not the question. It’s more of a balance issue. It appears that supply is evolving in every manner possible. It’s starting to resemble a network more than a chain. The massive geopolitical, environmental, and economic challenges of our day can be mitigated by diversification.

The future

The ability of businesses to realise a competitive advantage is what ultimately determines whether or not they relocate. For instance, reshoring frequently results in tax benefits or lower shipping costs, however, businesses may be hesitant to reshore on such a large scale if the trade-offs include increased labour costs or the cost of raw materials. Clearly, it has nothing to do with being at home or away. Instead of completely moving their production, businesses will diversify it. In theory, a diversified supply chain will lessen any threat if disruption is the main concern.

Meanwhile, when it comes to reshoring, supervisors may not always be concerned about how it affects low- and middle-income nations, but there is a strong development argument in favour of diversification rather than reshoring. Concerningly, a move toward global reshoring in China and high-income nations may push 52 million more people—mostly in Sub-Saharan Africa—into extreme poverty.

Reliable data, not just anecdotal evidence, indicates that global supply chains are being rewired. It is not the right question to ask, though, whether production will move home wholesale. Rather, it is the responsibility of businesses and governments to think about what value chain benefits employers as well as the developing world at large. Reshoring is a chance for multinational corporations, policymakers, and local jobs. Additionally, it poses an existential threat to millions of people worldwide. As usual, the picture is not simple. But once more, reshoring is a reality rather than just a theory.

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