After years of talk about choosing suppliers closer to home to shore up value chain weaknesses, the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine have pushed companies to take this strategy seriously. Jenny Messenger looks at how businesses in the US and the UK have adopted reshoring and nearshoring strategies to cope.
Over the past decade, retail behemoth Walmart has invested US$250bn in products made, grown or assembled in the US, and is planning to commit an additional US$350bn between 2021 and 2030, all in the name of supporting American manufacturing.
A long list of companies, including Toyota, General Motors and Siemens, have now joined Walmart in pledging to concentrate production back in the US, aiming to strengthen access to critical infrastructure, avoid delays in production and gain greater control over their value chains.
Reshoring (when a firm moves parts of its supply chain previously located offshore back to its home country) and nearshoring (transferring a business operation to a nearby country) have been topics of conversation for over a decade, after the 1990s and early 2000s heyday of offshoring production in pursuit of cheaper labour and materials.
But while the buzz around reshoring and nearshoring has been ongoing for years, evidence to suggest companies really are switching suppliers has been difficult to come by.
Management consulting firm Kearney has carried out an annual reshoring index since 2012, surveying manufacturing executives and CEOs from US companies across several sectors, including the automotive, food and beverage, and electrical equipment industries.
Back in 2014, Kearney said that despite an uptick in US manufacturing, “the impact of reshoring on this turnaround is much less than the hype would indicate”, citing anecdotal evidence and predictions from researchers.
Now, however, pressures exerted by the pandemic, Russia’s war with Ukraine and the long-simmering trade feud with China, alongside policy encouraging domestic production, seems to be turning talk into reality.
Last year’s index, the 10th iteration, claimed that reshoring had evolved “from a strategic possibility to a potent market reality”, meaning “what 10 years ago was merely a promise is now a fact”.
For those not bringing operations all the way home, European firms are looking to Eastern Europe, Turkey and North Africa, while North American companies are eyeing Mexico.
Patrick Van den Bossche, partner and Americas lead for Kearney’s manufacturing team, tells GTR that the first index was created in response to widespread reports of reshoring.
“It was in the news and politicians were talking about it. But we were working with our clients and we weren’t hearing anything about that,” Van den Bossche says. “Increasingly, the conversations are no longer just taking place in the press or in trade magazines, they’re taking place in analyst calls and shareholder updates.” Of those surveyed in 2022, 80% of US companies across almost all sectors plan to reshore at least part of their manufacturing operations in the next three years.
Some of these have been incentivised by legislation like the Inflation Reduction Act, which is pumping money into domestic manufacturing on an unprecedented scale and targeting specific purposes like increasing clean energy production and reducing carbon emissions.
The CHIPS and Science Act, meanwhile, is intended to ultimately reshore the semiconductor sector, which was hit hard by delays and shortages during the pandemic, and exposed the world’s dependence on China and Taiwan.
Kearney’s latest index shows that the number of boardroom discussions featuring nearshoring or reshoring leapt between 2021 and 2022, rising from 36% to 71%.
“Typically, when a board asks you something, it’s not just a random question. There’s an intent behind it, which is: please look into it,” Van den Bossche says.
According to Kearney’s survey, reducing the time to market has been a pivotal factor.
“This is obviously to improve service, but also, with increased interest rates, putting products on the ocean for six weeks or maybe longer is going to start to become very costly,” Van den Bossche says. “That’s a lot of working capital tied up at a pretty significant interest rate.”
Innovation is another big factor. “Operating such a long supply chain with a 12-hour time-zone delay is not exactly conducive to innovation,” he says, adding that inadequate intellectual property protection is also a worry.
In the UK, one firm that GTR spoke to says both the pandemic and the war in Ukraine prompted it to reconsider its supply chain strategy entirely. Rebo UK is a manufacturer of outdoor play equipment, designing and building toys like swings, climbing frames and playhouses from its base in Powys, Wales.
While it used to source wood from Russia and Ukraine, it has since shifted to UK suppliers, says James King, managing director at Outdoor Toys UK, the online retail arm of Rebo.
“Through Covid, obviously there were shortages across the world, and that led to our supply chain being quite broad and quite varied,” King tells GTR.
The war in Ukraine and the sanctions that followed added a further layer of complexity to sourcing inputs, he says, given Russia’s role as one of the world’s largest timber producers. A total ban on Russian wood product exports into the UK was announced in April last year and remains in force.
“With the business growth that we had through Covid, it was obvious that we couldn’t rely on this kind of sourcing. We knew we needed someone in the UK who could supply us with the product we require,” he explains. “Having it here makes it easier to manage our stock and make sure that we have enough.”
King adds that while focusing on British-only timber purchasing has removed some of the risk and complexity of sourcing from farther afield, it has come at some cost, because it tends to be more expensive.
As well as opting for a UK supplier for the time being, King says that the company is also looking to nearshore other parts of its supply chain: “We’re trying to bring some of the Far East-sourced products such as steel to countries like Turkey and elsewhere to give us a closer supplier who’s not as affected.”
Trade tensions
China’s crucial role in processing and exporting critical materials, including rare earths needed for electric vehicles and electronic equipment, has also left many countries scrambling to reduce their dependency on the Asian superpower.
Most recently, the Chinese government has introduced export license rules for gallium and germanium, metals used in computer chips and solar cells.
According to S&P Global Intelligence, in 2022 mainland China accounted for 48% of global germanium exports, including 78% of Japan’s imports and 61% of the EU’s.
Companies worldwide have steadily been reducing their dependence on China, often implementing ‘China plus one’ strategies and switching to nearby countries. Nevertheless, Kearney’s latest index shows that US domestic manufacturing output grew faster than imports from a number of low-cost countries and regions in Asia, including China, Taiwan, Vietnam, India and Indonesia.
Despite the much-publicised rise in trade protectionism, Van den Bossche says that geopolitical tensions between the US and China were not the main concern of US manufacturing executives surveyed.
Businesses may be thinking that “the sabre-rattling has been going on for a little bit, and it’ll probably be going on for a little bit longer”, he says, with the result that they don’t want to base their entire strategies on hostility between the two countries.
ESG concerns and potential reputational harm have proven to be influential factors, with companies considering their supply chains more holistically, and taking environmental and social concerns into account as they become more prominent in public discourse, Van den Bossche says.
Reshoring and nearshoring can enhance ESG scores by reducing transport times and providing better oversight over labour conditions.
“US Customs and Border Protection has regularly stopped companies importing goods from places like China or Malaysia when there was a suspicion of forced labour. Not only does it put their products on hold, it also creates a very nasty reverberation in the press. That has hurt their top line, especially if they’re in a consumer products business,” he adds.
For King, however, macroeconomic factors and the risk presented by delays have played a role in Rebo UK’s decision to move some elements of manufacturing away from China. “There’s also an element of cost there,” he adds.
“We will always have a hybrid sourcing model, because some products, such as steel brackets, we cannot buy in the UK because it would be too expensive. China’s the natural choice for that. But we are looking to shore up that nearside supply of product all the time,” he says.
“We still trade across the world; we’ve just become a lot more selective around what we do.”
Adam Stroud, chief executive of UK-based Paxton Access, a global designer and manufacturer of electronic security access control systems, echoes these sentiments.
Stroud says that while the firm had previously “developed an increasingly globalised supply chain, adopting a just-in-time manufacturing approach for maximum efficiency”, trade wars and geopolitical tensions have prompted a rethink.
“The electronic component crisis has meant that technology companies like us must invest heavily in increased stock buffers to make sure we don’t let our customers down by being unable to supply products,” Stroud says.
Both the disruption to supplies and the need to take carbon emissions into account – leading Paxton to favour shipping over air freight – have resulted in an effort by the company to nearshore suppliers.
“Together, these elements have resulted in us more than doubling our stock holding, the insourcing of more manufacturing processes such as plastic injection moulding, and an increased focus on local sourcing of materials and components,” Stroud says.
Stroud adds that the crises have impelled Paxton to seek out trade finance, which it had not previously required.
“With increased stocks, slower transportation methods, and new equipment and infrastructure required, we had a clear funding gap,” he notes, which was ultimately filled by a multi-million-pound facility provided by HSBC.
Challenges ahead
Rejigging supply chains is not an easy task, however. “Virtually everyone we’ve spoken to has had significant challenges, or is even delaying some of the things they’ve already decided on,” Van den Bossche says.
Identifying good-quality, local sellers can be an issue, with some companies struggling to find those that equal Chinese standards. “When companies are trying to locate suppliers in Mexico or the US, they’re finding that it’s a challenge to match the quality of the Chinese,” he says. And when nearby suppliers are good, they’re often overwhelmed by demand. “They’re just either ignoring them or giving people a ‘go away’ price,” he says.
Companies that are looking to reshore or nearshore in the southern states of the US or Mexico could also find space a challenge.
Competition for land and real estate has risen dramatically in northern Mexico, according to Kearney’s index. Rents shot up by 50% between 2021 and 2022 in the manufacturing cities of Juarez, Monterrey and Tijuana, while regions of the country further south face a lack of adequate transport and energy infrastructure.
“Anything within 15 to 20 miles of the Mexico border is totally full. It’s impossible to find new space or open buildings,” Van den Bossche notes. “Even in the south of the US, there are challenges now with finding buildings that are ready to go into.”
Yet these concerns have so far failed to deter those looking to reshore, and while they may have caused some delays, the intent to make changes to supply chains is still there, he says, though further action may be “a little bit slower than expected”.
Van den Bossche thinks that most North American businesses will still look first to Mexico and the US rather than aiming for a value chain “that involves China or Vietnam or anywhere else”. “We’re not seeing a lot of movement towards other Latin American countries,” he adds.
As the conversation around reshoring enters its second decade, it remains to be seen how these latest developments will shape supply chains in the years to come. It’s clear, though, that this tactic is at last having real-world consequences for businesses worldwide.
