Calls for the reshoring of manufacturing have grown louder amid the huge trade disruption caused by coronavirus, yet the costs and logistical challenges may be prohibitive for many firms, with some experts arguing that building greater supply chain resilience should be at the top of corporate agendas.
Lockdown-related supply chain breakdowns, particularly the acute shortages of China-sourced medical equipment, have led to politicians in the west, protectionists and free-traders, to advocate greater localisation of production as a hedge against future logistical crises.
President Trump has been at the forefront of the reshoring debate, but European Union leaders too have proposed the building of domestic capacity in crucial sectors including pharmaceuticals, and Japan has set aside over $2bn to help its companies repatriate manufacturing plants or expand output into Southeast Asia.
For some time, multinational firms have been moving part of their production capacity from China to southeast Asia and other locations in large part because of rising Chinese labour costs and, more recently, in order to limit exposure to tariffs linked to the US-China trade war.
The pandemic seems set not only to expedite the trend but also to prompt many corporates into undertaking reviews of their supply chain vulnerabilities, likely giving some consideration to reshoring or nearshoring, the movement of a company’s offshore production to a proximal country, such as Mexico for the US and eastern European countries for the EU.
While US policymakers have discussed government-backed loans specifically for companies to move production back home, along with tax breaks as a reward for doing so, such provisions overlook the difficulties firms face in unravelling their supply chains.
Writing in Yale Global Online, Stephen Roach of Yale University, a former Chairman of Morgan Stanley Asia, argued that in “their rush to embrace nationalistic, anti-China clamouring for supply-chain liberation, politicians are all but ignoring the complexity of these networks and the considerable amount of time and effort required to construct them”.
While at least some reshoring is probable due to the pandemic, a broader geographic shift in production seems likely to be limited by the associated costs and logistical issues. Some experts suggest that it makes sense for companies planning for disruptive events to build greater resilience into their supply chains.
Roach pointed out that “under the guise of efficiency, managers may have taken too much slack, or redundancy, out of the system – leaving them vulnerable to bottlenecks”.
In an opinion piece in the FT, chief economist at the European Bank for Reconstruction and Development, Beata Javorcik, said in future firms will give more thought to diversifying their supplier base “to hedge against disruptions to a particular producer, geographic region or changes in trade policy.
“This means building in redundancy and perhaps even moving away from the practice of holding near-zero inventories. Costs will certainly rise, but, in the post-Covid world, concerns about supply chain fragility will come right after those over cost.”
Caroline Freund, global director of trade, investment, and competitiveness at the World Bank, said in a commentary in Barron’s that in the face of a deadly pandemic, nationalist policies may appear rational, but they are not built on economic fundamentals.
“It’s far more effective to leverage global supply chains to ramp up production quickly and efficiently,” she said. “It’s much smarter to increase international cooperation to stockpile essential goods and build resilience to future shocks – especially in developing countries.”
As lockdowns ease, supply chains will likely begin returning to some degree of normality. At the same time, corporates will no doubt review their configuration and resilience to guard against future disruption. While assessing the costs and benefits of logistical change will be challenging, the current state of play seems unsustainable.
Yigal Chazan is the head of content at Alaco, a London-based business intelligence consultancy.