Why aren’t companies reshoring from China?

In the first days of the pandemic, many businesses considered moving out of China in a bid for supply security, but almost a year on little has changed. Why?

2020 saw China’s economy grow by 1.8% in contrast with a global shrinkage of 4.2%, according to OECD figures. The potential pitfalls of doing business in China were starkly illustrated when reports emerged of buyers arriving in the country to seal a deal, only to be outbid while still on the airport tarmac by a rival jumping out of a private jet carrying a suitcase full of cash.

Questions have long been asked about the wisdom of having all your eggs in one Chinese basket, triggered by a number of factors including the US-China trade war and rising labour costs in “the world’s factory”. But what the pandemic has done is bring these issues into stark relief. Research by Supply Management and CIPS in March 2020 showed almost nine in 10 (86%) supply chains had been disrupted by the pandemic, while three-quarters of procurement and supply chain professionals said products made in China were integral to their supply chain.

Antony Lovell, vice president of applications at Vuealta, tells SM: “The disruption wrought firstly by the US-China trade war and then, more drastically, by the pandemic has caused many businesses to relook at their supply chains. In particular, they are reconsidering how resilient their supply networks actually are and asking whether they are truly fit for purpose.”

Such a questioning of the status quo was borne out by a Gartner survey of 260 global supply chain leaders in February and March 2020. This found a third (33%) had moved sourcing and manufacturing activities out of China, or planned to do so in the next two to three years.

Gartner found tariffs imposed by US and Chinese governments had increased supply chain costs for firms by up to 10%, for more than 40% of organisations. For just over a quarter of respondents the impact had been even higher.

Perhaps this is the time when rather than just talking about the wisdom of sourcing vital supplies from a handful of suppliers in the same part of China, companies will move beyond words and take action.

Verisk Maplecroft said “The growing need for a de-risking strategy, namely geographical diversification and vertical integration, has become one of the main lessons of the pandemic crisis.”

In June a campaign was launched – UK Manufacturing Unite – to encourage firms to reshore operations to the UK. In 2015 consultancy firm EY put the potential value of reshoring manufacturing to the UK economy at £15.3bn.

Reshoring also keys into themes popular with consumers such as fewer air miles and supporting local suppliers.

In September 2020, research by Barclays Corporate Banking found that 27% of retailers were planning to switch to local suppliers, while carbon and environmental reasons were also cited. And in November, professional services firm Alvarez & Marsal said retail goods worth around $31.5bn would be onshored over the following 12 months across the UK, Germany, France, Switzerland, Spain and Italy – with 42% of the largest European retailers planning to onshore.

Changes to manufacturing strategies

Of course, it’s not easy to say whether these are knee-jerk reactions or part of a long-term trend. But this stat should give pause for thought: Bank of America calculated it would cost $1tn to relocate all manufacturing not intended for the domestic market out of China over the next five years. The bank described this figure as “significant but not prohibitive”.

“Leadership teams are wrestling with the need to cut costs in order to protect what margin they can,” says Lovell. “Bringing different parts of the supply chain closer to home, and therefore siting them in economically developed countries, may at first glance seem at odds with a money-saving goal, but if it reduces risk and improves the likelihood of goods arriving where they need to be, when they need to be there, then it may actually contribute to improved performance across the business.”

There is another option: hedging your bets. Hugo Brennan, principal Asia analyst at Verisk Maplecroft, says many firms are preparing a “China plus one” strategy to spread risk. Countries expecting to benefit include India, Vietnam, Thailand and Mexico due to lower costs. Larger corporates may opt to vertically integrate value chains outside China to secure more control over raw material prices, quality and supply.

Covid recovery potential

“But China will continue to play a central role in global supply chains for the foreseeable future,” Brennan tells SM. “Reshoring doesn’t always make sense. Many firms manufacture goods in China that are destined for its domestic market – the world’s largest. The economic costs associated with reshoring production can also be a major disincentive.”

This is particularly true of Australia, where its domestic manufacturing dropped 10.3% over 2008-2019 in favour of Chinese production. With low-cost materials and labour an average US$10.50 per hour cheaper in China, experts are warning Australia not only lacks the facilities to reshore, but consumers are unlikely to pay the resulting higher prices. As such, its manufacturers have been looking for alternatives, such as India.

Despite the surveys showing firms intending to move away from China, the importance of the country as a marketplace cannot be overlooked. Polls conducted by the EU Chamber of Commerce in China and the American Chamber of Commerce organisations AmCham China and AmCham Shanghai show strong commitment to the country, despite misgivings. The US bodies found 72% of firms had no plans to relocate sourcing.

Brennan says when it comes to considering the place of China in your supply chain, “It’s vital to have a plan B to prevent disruption caused by grey swan events, such as natural disaster, global pandemic or geopolitical spat”.

So if you find yourself on the runway in Hong Kong watching your deal dissolve in front of you, perhaps be prepared with a ticket to Vietnam in your back pocket.

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