February 14, 2024 – John Salustri
The trend toward reshoring and nearshoring has taken on added significance as global conflicts escalate. Indeed, the ongoing state of world affairs is having a direct impact on the supply chain, and delivery timelines are not the only potential victims. As Bloomberg reported recently, “Fears of escalation are growing as the Houthis have vowed to continue attacking vessels until Israel pulls out of Gaza.”
Shippers are taking evasive action, but at the expense of delivery dates and customer costs. “The continued turmoil in the Middle East around the Suez Canal will force supply chain managers and container shipping companies to rethink their strategies,” says Atlanta-based Ben Harris of Cushman & Wakefield.
The senior managing director of Client Solutions & Strategy Logistics & Industrial Services, Americas, reports that the canal, “the gateway for the movement of goods between Europe and
Asia,” pushes more than 1.2 billion tons of cargo–12% of world trade–through its waterway. Short-term solutions include shifting from sea to air freight, but, as he says, this also tightens already-limited air cargo capacity and “could lead to increased costs in order to secure space.”
Other short-term solutions include avoiding the Red Sea altogether in favor of safer routes around South Africa. “That can increase the shipping time from one to three weeks,” says Harry Moser, the Sarasota, FL-based founder of the Reshoring Initiative®. It is also a much costlier solution.
“Armed conflict on the Red Sea has slowed ocean shipping in the region as carriers avoid the Suez Canal,” reports Supply Chain Dive , “forcing many shippers to find alternative routes or sources to avoid the trade lane. Ocean shipping rates have already spiked considerably amid the disruption.”
Moser further points out that, while such workarounds as rerouting and alternate shipping methods address the short-term need, they do nothing for as-yet unseen geopolitical risk in an unstable world. “They’re avoiding the problem in the Red Sea, but it does nothing for the risk should something happen in China or Taiwan,” he says.
Building on a Myth
At the core of the issue is a long-held assumption on the part of many manufacturers that producing goods overseas–especially in China–is always cheaper than stateside production. While on one hand, the raw materials might be cheaper, (“China is almost always cheaper in raw production,” Moser says) it is the total cost of ownership (TCO) that counts.(See the Reshoring Initiative’s TCO Calculator .)
“The factory price might be $10 in the US and $7 in China,” he explains. “It’s a pretty easy decision.” Until you fold in such necessities as tariffs, freight, the carry cost of inventory and even environmental, social and governance (ESG) concerns.
What’s more, the cheaper Chinese labor is no longer what it once was. “Chinese wages have gone from 50 cents an hour in 2010 to seven dollars today,” he says.
Moser also quotes Kevin Nolan, CEO of GE Appliances, which has committed to making products in the US. In fact, the firm claims “70 to 90% ” US-based product content. According to the company’s website, “this includes parts, factory operations and wages.” Concerning the myth of foreign-sourced savings, Nolan has said, “People are going to realize that the savings they thought they had aren’t real, and it’s going to be better and cheaper to make them here.”
The Rise of Reshoring
They seem to be getting the message. In its First Half 2023 report , the Reshoring Initiative broke the trend down:
• The number of CEOs planning reshoring or nearshoring is up 1,000% over pre-pandemic levels.
• The annual rate of factory construction was up 116% in 2022, as compared to a 10% gain for other commercial building projects.
• The number of companies moving production out of China, with sights set on the US or elsewhere, has hit 90%.
• Companies considering reshoring some work from anywhere in the world to the US has hit 80%.
Harris calls the reshoring trend a quiet resurgence “as widespread disruptions caused by the pandemic brought into sharper focus how critical it is to have secure, resilient, well-functioning supply chains.” Greasing the skids of that resurgence, he says, has been such legislative brainstorms as the Inflation Reduction Act and the CHIPS and Science Act.
And these all boil down to the incentives provided by law. As Forbes reports, “It does not matter if it costs more to manufacture qualifying products in the US, because the tax credits and grants offset the higher cost of domestic production.” The CHIPS Act alone earmarks $52.7 billion of investment in domestic semiconductor manufacturing, bringing production and jobs back to the US while simultaneously fueling the high-tech industrial sector.
“Two manufacturing sub-industries that will continue to grow in onshoring and nearshoring are
automotive and semiconductors,” says Harris. Of the former, he reports, electric vehicle (EV) sales in 2022 grew by 48% year-over-year. “There are currently eight EV-related projects of 200,000 square feet or more under construction in the US, and another eight sites—potentially totaling 22 million feet—are proposed or in final planning stages.”
And of the latter, the global semiconductor market is estimated for an 80% growth spurt by 2030, he says. “Two-thirds of demand growth will be driven by three industries:
automotive, computation and data storage, and wireless.”
Manufacturing in these and other sectors is expected to come closer to home–either through reshoring or nearshoring in our neighbor to the south, Mexico. In the face of what we learned during the pandemic as well as the ongoing global unrest, “The industry wants to shore up supply chains,” Harris concludes, “and governments realize the risks of being too dependent on any single country or region of the world.”