COVID-19: The Great Accelerator of Onshoring (Part 1)

by | 28 July 2020

This is the first piece within a five-part series on the accelerating trend of onshoring manufacturing due to COVID-19. Below we explore the inherent challenges within the global supply chain sector while examining the actions of some of the world’s largest supply chains, COVID-19’s impact, as well as the costs and benefits of manufacturing in China. Future topics will include the case for manufacturing in Mexico and in the U.S., the role of automation in the changing landscape of manufacturing and a process for addressing the challenges organizations face when selecting where to locate manufacturing operations. Each piece will provide insights into recent trends, challenges and strategies for organizations reevaluating their global footprint.

According to a Thomas Industrial Survey, more than 60% of over 1,000 manufacturers and suppliers surveyed said they are likely to bring operations back to North American soil.

Over the last 40 years, pressure to reduce manufacturing costs has been the pre-dominant factor driving supply chains overseas. As global markets have opened, there has been a rush for manufacturers to relocate to the lowest cost country. Markets such as China, South Korea, Vietnam and Thailand have been the primary beneficiaries of this trend. Even as global supply chain management has matured, the global pandemic of COVID-19 has served as the latest reminder of the fragility inherent in thinly stretched global supply chains. The pandemic’s impact is sparking a new dialogue on how to source goods from a global market that minimizes both time and cost, while also being less susceptible to interruption. COVID-19 is accelerating the paradigm shift from exclusively return (low cost/efficiency) focused decision making to a greater emphasis on risk mitigation (resiliency). This shift will result in a greater need for excess capacity and diversification in sourcing while intensifying the onshoring and nearshoring trends that were underway prior to the pandemic.

THE LAST DECADE: RIDDLED WITH SUPPLY CHAIN DISRUPTIONS

COVID-19 is just the latest in several black swan events over the last decade that have exposed the risk inherent in global supply chains. April marked the 10-year anniversary of Iceland’s Eyjafjallajokull volcano eruption. The week-long shutdown of most European air traffic was the largest disruption since World War II, bringing jewelry and automobile supply chains, among others, to a halt. In 2011, the 1-2 punch of the Great East Japan Earthquake and Tsunami and the Thailand floods crippled the auto and electronics manufacturing sectors.

However, mother nature has not been the cause of all the supply chain disruption over the past decade. Most recently, the tariffs resulting from the U.S.-China trade war had tech giants and hardware manufacturers such as Google, Amazon, Microsoft, Apple, HP and Dell looking to move as much as 30% of production outside of China. Items such as smart speakers, cell phones, computers and gaming consoles were among those earmarked for relocation to new manufacturing markets. While tariffs created sudden increases in input costs forcing many firms to begin rethinking their global value chains, they were just a harbinger for what was to come.

COVID-19’s EXPOSURE OF WEAK LINKS IN SUPPLY CHAIN

The COVID-19 pandemic has exemplified the risks brought about by sourcing from halfway around the world. Dense, labor intensive manufacturing facilities were initial hotbeds for the spread of COVID, forcing plant closures. Those companies who were able to maintain some level of production saw shipping costs increase as much as four times, due to logistical constrains, as global port productivity ground to a halt. Many goods that finally made it to shore were forced into temporary warehouses as the retail stores, for which they were destined, remained closed.

Although the COVID-19 pandemic is still unfolding, there has already been a marked acceleration in the trend of revisiting global supply chains to improve resilience. Governmental entities are keenly concerned about reshoring the production of components critical to national security including personal protective equipment, medical devices, pharmaceuticals and products relied upon for national defense. As such, pressure is mounting in Congress to pass legislation incentivizing the targeted reshoring of certain manufacturing processes for the sake of national interest. In doing so, the U.S. would be joining the EU and Japan among others who have enacted such a bill.

Long before the COVID-19 pandemic, and the trade war, China has been fraught with the risks that come with operating in a communist country on the opposite end of the ideological spectrum from the U.S., some of which include the risk of asset nationalization, labor contract exposure and lack of IP protection. The latter of these is increasingly relevant as we enter the fourth industrial revolution and automation and the internet of things play a larger role in manufacturing processes.

CHINA PLAYS A ROLE – FIRMS LOOKING WEST

Risks aside, China is still the world’s second largest economy with a growing middle class and more than 100 cities with a population of more than one million people. Its robust infrastructure, deep expertise in manufacturing, low labor costs and limited environmental regulations still make it an attractive market for global production of many consumer products. China is home to seven of the world’s 10 largest ports. It boasts the world’s largest manufacturing economy and has developed a deep skill set, specifically in electronics and other types of complex manufacturing. It is also incredibly cheap. Recent data from Reshoring Initiative suggests the average hourly pay, plus benefits of a machine tool operator, is around $5 per hour in China compared to nearly $32 per hour in the EU and $26 per hour in the U.S. So, what is an organization to do if they are looking to reduce their exposure to the plethora of risks that have been exposed from such heavy reliance on Chinese manufacturing? Many firms are looking to Mexico, and increased automation here in the U.S., to help offset higher wage costs.

In the second part of our onshoring series, we will focus on the nearshoring of manufacturing to Mexico and we will investigate which industries are top candidates for this move, key considerations they are evaluating and which pockets of the country are best positioned to benefit from this trend.

About the Authors:

This article was written by the Colliers’ Workforce Analytics team, within Occupier Services, whose mission is to enable people strategy to advise and transform businesses. This consulting service offering leverages agile technology and advanced analytics to equip businesses with workforce-related insights to make fact-based, quantitatively justified location-related decision in labor markets around the world.

GREGORY HEALY

Head of Location Strategy Consulting, Gregory Healy, a senior vice president, leads the Supply Chain Solutions team in the U.S. for Occupier Services, as well as Workforce (Labor) Analytics Consulting practice. With over 20 years of global manufacturing and supply chain experience as both a senior executive in the corporate world, as well as owning a supply chain consulting practice and a third-party logistics business, Gregory has real world experience that brings a unique perspective to the Colliers team.

BRET SWANGO, CFA

As Vice President of Workforce Analytics, Bret Swango, leads the day-to-day, consulting operations of this service offering. An industry expert in labor and related data analytics, he provides clients with insights on markets around the world to help them navigate and understand the implications of workforce data and enable occupiers to make informed business decisions. Prior to this role, Bret served as a director on the Corporate Solutions team in Chicago working with clients to develop business intelligence platforms and analytical tools to align their real estate strategy with their operational objectives.