Shifting Global Supply Chains
Manufacturing in a New Era - Reshoring + Nearshoring
Defining this New Era in Manufacturing
Offshoring has been practiced for decades to take advantage of cost differences and to seek better access to labor with particular skillsets to reduce the time to market for products. Offshoring has also been enabled by free-trade agreements and international economic cooperation.
Many impacts can affect offshoring decisions over time, including increased competition, the development of critical skillsets in previously overlooked labor markets, the development new materials sources and associated supply chains, and increased attractiveness of onshore options. Other impacts may be political, social, or economic in nature and could mean that operations in the offshore location may be less viable than before.
In response to these impacts, offshoring may be supplanted or replaced with reshoring, nearshoring, or nextshoring.
Reshoring is the process of relocating offshored operations to the home country of the company. Over time, offshore locations may become less competitive from a talent and cost perspective and reshoring may improve operational performance. Examples include call centers where onshore locations are more compatible for workers from a time zone perspective and where companies feel an onshore workforce improves customer satisfaction.
Nearshoring is relocating offshored operations to a closer location to balance access to talent and lower costs with more time zone compatibility for workers in the home country and the offshore country. Additional benefits of nearshoring are reduced time and distance to market for manufactured goods and stronger cultural and economic ties of close nations.
Nextshoring is relocating and expanding operations to a consumer market. This can mean reshoring operations to the home country, but also offshoring and expanding operations in a different country that is also a major consumer market. By developing operations in foreign consumer markets, companies have the opportunity to reduce time to market for products and to better serve and understand the local consumer market.
Is COVID-19 driving a global shift in supply chains?
Without question, the COVID-19 pandemic has changed the way businesses look at their global supply chains. From the initial discovery of the virus in Asia, global supply chains were drastically impacted, particularly for shipping lanes for Chinese ports (which makes up the majority of global TEU traffic).
Nevertheless, manufacturing companies were already evaluating an increased focus on reshoring and nearshoring their supply chain footprint. From there, the pandemic has further reinforced the need for shifting their logistics strategies, according to recent industry sentiment.
According to a Thomas survey, a North American industrial sourcing platform, a majority of American manufacturers in February 2020 were ‘likely to extremely likely’ to bring production to the continent, while also increasing their utilization of domestic sourcing. Already, per the survey of 1,000 executives, 47 percent of respondents were already procuring domestic supply sources before the pandemic.
Once the pandemic truly reached U.S. shores, the focus on bringing supply chains to North America heightened. When the survey was conducted again in May 2020, more than 64 percent of American manufacturers said they were likely to move production operations and sourcing to the region. Within months the shift went from half to roughly two-thirds of manufacturers changing the way they approach their supply chain.
As more American manufacturers make shifts in their reshoring and nearshoring strategies, they are likely to influence others to do the same. According to an analysis conducted by Kearney, a management consulting firm, 81 percent of manufacturing executives responded that they very well might be influenced by seeing their peers successfully reshore and nearshore. We fully expect this trend to continue into the immediate future and beyond.
Are we actually seeing companies reshore and nearshore?
Since the outset of the pandemic, North American and European nations have had a record influx of investment in economic activities which in recent decades would have gone to Asia, especially in the dynamic, rapidly-growing semiconductor and electric vehicle production sectors.
Looking towards the United States, several global semiconductor manufacturing companies have announced monumental investments over the past two years. Industry stalwarts like Micron, which announced a significant portion of an estimated $150 billion in new production will be in America, while Intel has committed over $30 billion in fabrication plants in Arizona and Ohio alone.
The Intel announcement in Ohio for two fabrication plants costing $20 billion also highlights the public support for these reshored activities. With the largest economic incentives offer to date in Ohio, the state is offering over $2 billion incentives if the company hits capital investment targets and hires 3,000 workers at an average annual wage level of $135,000.
Core to that incentives package is a post-performance, discretionary grant of $600 million. Referred to as an “on-shoring” grant, the cash incentive is meant to help with the cost delta of building these types of facilities in the United States, as opposed to traditional locations in the APAC region.
Along with semiconductors, the race for electric vehicles and their battery supply chain is heating up. Perhaps a decade ago, the capital investment would have likely targeted lower-cost markets for production. However, much to the mission of reshoring and nearshoring, the North American region has seen massive investments in recent months.
Among those major investments include General Motors committing to $4 billion in Michigan, Toyota creating 1,750 jobs and investing $1.3 billion in North Carolina, Rivian putting $5 billion in Georgia, Ford reportedly investing $11.4 billion across Kentucky and Tennessee. These investments, which are also supported by significant economic incentive packages respectively, are all tied to the reshoring and nearshoring of key production and sourcing activities in the North American region.
Core to that incentives package is a post-performance, discretionary grant of $600 million. Referred to as an “on-shoring” grant, the cash incentive is meant to help with the cost delta of building these types of facilities in the United States, as opposed to traditional locations in the APAC region.
With more prevalence of reshoring, are we seeing a boom in manufacturing?
As more manufacturing businesses turn their operations to the United States, the overall industry has seen overall growth since the onset of the pandemic, even surpassing levels from before February 2020. Meanwhile, we have also seen a reduced reliance on manufactured imports from several core production nations, including China - which is also a trend that commenced ahead of the pandemic.
When we look at industry production and the state of American manufacturing, we look at overall employment in the industry and productivity levels, or the total output of industry workers.
In what some thought would be insurmmountable for years to come, the manufacturing sector has almost returned to pre-pandemic employment levels. As of the April 2022 Jobs Report (UPDATED), a monthly survey for the U.S. Bureau of Labor Statistics, the industry is within 0.4 percent, or 56,000 workers from February 2020.
As we consider industry productivity, we can assess data released by the Federal Reserve and Bureau of Labor Statistics on total output of industry employment. Indexing at just under 104, total industry output in Q1 2022 was at the highest levels seen since before the Great Recession (See figure 1).
Figure 1 - Manufacturing Sector: Output for All Employed Persons Source: U.S. Bureau of Labor Statistics
When we look at other key data sets for reshoring trends, analysts evaluate the annual shifts of imported manufactured goods into the United States. While we have seen the import value of certain manufactured goods into American ports actually increase since 2018, we have seen greater diversification from dependence on certain markets. Case in point is China: in 2021, America reduced their proportion of manufactured goods imports by more than 4 percent compared to 2018 (more on diversification driving reshoring + nearshoring later).
What will keep these supply chain trends moving forward?
Supply chain resilience
One of the largest challenges to reshoring and nearshoring for manufacturing is the supply chain resilience. As Asia, and China in particular, have perfected the offshore manufacturing process, material supply, the supply chain, and logistics are all well refined. Even with reshoring and nearshoring of manufacturing, many raw materials and components are still sourced offshore. Developing the supply chain closer to home requires investment in both infrastructure and workforce to ensure that manufacturing plants can be supplied with materials.
Energy costs
A significant contributor to the offshoring model is low energy costs, which allow goods to travel long distances to consumers at low rates. Energy costs are volatile and subject to not only market pressures, but also social and political ones. Onshoring and nearshoring provides the opportunity to reduce energy cost and usage, and reduces the volatility in total costs to the company.
Additionally, the development and use of renewable sources of energy help to reduce the cost differences in operations in offshore and onshore locations. Reducing energy consumption helps to lower costs and gives companies more claim to environmental stewardship.
Diversification
A combination of factors have created a climate for China to be a core location in the offshoring model, including a very large labor force, relatively low labor and operational costs, and government understanding of the need for a unified strategy to develop infrastructure and the supply chain. These factors have changed as China’s economy has continued to develop. While the labor force is still large, the economy is transitioning to the service sector, creating competition for workers. Costs, especially those for labor, have also increased as the labor supply has decreased.
Government actions in China, particularly the Covid-19 strategy, have created significant supply chain issues from limitations on shipping to temporary workplace closures. China is still an optimal place for operation; many of the factors that initially supported offshoring are still present. Changes that the country has faced, along with other countries adopting the offshoring model, create the space for companies to diversify operations for increased resiliency and to insulate from impacts in any single place.
Labor
Labor costs are likely to continue to increase in established offshore locations, emerging offshore locations, and onshore. In countries like China, efficiencies in the supply chain currently outweigh increases in labor costs, whereas in lower cost countries, labor costs offset a less efficient supply chain. Higher labor costs of onshore locations could be mitigated by the development of localized supply chains, automation, and quicker access to market.
A significant attraction of the offshoring model is that there are abundant labor forces located across the globe. Many offshore countries still have significant labor supply, although the continued economic development of offshore locations have led to workers transitioning to the service sector. Some offshore locations have also had workforce growth peak or decline, which is a general trend expected to continue into the future. Birth rates of many countries are low, and many developed countries are already below replacement levels. Covid-19 exasperated this trend, and it is likely that this will have long-term effects on the future workforce.
Onshoring manufacturing operations may have lower concerns about attracting labor, even with workforce shortages caused by strong economic performance in the past decade and lingering effects of Covid-19. Generally, manufacturing work has a higher pay than sales, accommodation, and warehousing work, and in combination with training opportunities, those workers would provide a strong pool of talent.
Lastly, labor will increasingly be assisted by automation. Automation will help to allow the reshoring of lower-value manufacturing, by reducing total wage costs. Additionally, automation will help all manufacturing by supplanting the need for labor if and when the labor force reduces in size.
Customer proximity
Onshoring’s largest benefit is in proximity to the customer, which allows for products to be delivered fast to the market. Companies that can deliver goods faster will be able to attract customers that value speed. The combination of lower energy and transportation costs and higher onshore labor costs could mean that products could be provided to consumers at similar or slightly higher costs instead of magnitude higher costs. The largest challenges to establishing operations in proximity to customer are highly dependent on the ability to develop a supply chain for raw materials and components, a labor force to support those activities, and investments in infrastructure.
Want to learn more about shifting supply chains and how companies are addressing their global locaiton strategies? Reach out to hear from a leader of the Hickey Location Analytics + Incentives team today!