Are developed economies ready for re-shoring; The ultimate decision lies with the consumers’ will to pay the reshoring premium. But its ripple effect will be felt across the global supply chain.
The economic impact of the coronavirus pandemic has given reshoring rhetoric a tremendous boost. Will words turn to actions that bring new manufacturing jobs to developed markets, or are supply chains too deeply entrenched in East Asia? What can governments do to influence or support business decisions that repatriate jobs?
Whatever politicians say or do, sourcing and supply chain decisions are made by business leaders. Market forces, not mandarins, determine where companies manufacture. My bet is that those with large international footprints will keep around 50 per cent of their Chinese manufacturing – not least because China, with its massive, emerging middle class will remain an important market. Other low-cost countries will benefit from 25 per cent of capacity as part of a hedging strategy. The balance 25 per cent is up for grabs. In the right circumstances this could be reshored.
At present there’s little evidence that policy makers are convincing the decision makers. To make reshoring a reality, positive intervention is vital. As it stands, infrastructure, policies, incentives, and associated costs are not conducive to reshoring. So, what can governments in developed markets do to encourage reshoring? What is the role for digital technology and who pays for digitalization of SME’s? How can lost skills in home markets be replaced?
Back rhetoric with action
Governments can, and increasingly do, incentivise local production with tax breaks, subsidies and import tariffs. Some commentators, such as economist Richard Baldwin, argue that such policies may offer a momentary ‘sugar high’ but are ultimately detrimental. As they consider their post-pandemic strategies, countries must decide whether to continue with the status quo and focus on sectors where they have relative comparative advantage, or to build more entrepreneurial, research-led, innovation-based economies. In some cases, companies repurposed their manufacturing to meet COVID-19-driven demand. Tesla and General Motors built ventilators. Fashion brands made masks. Governments should consider whether such shifts can be sustained and institutionalised.
The case for reshoring and supply chain diversification must be backed with reliable, and increasingly granular, data that helps local companies build, or access, new capabilities.
Governments should consider these three factors:
Partner with industry
Offshoring took hold for sound economic reasons. Businesses have, for decades, embraced it as a modus operandi and enshrined it in their operating models. The reality is it will continue to play a role in large manufacturers’ strategy. But, its shape and scale will change and therein lies the opportunity.
However, much governments bang the drum, reshoring is by no means a certain outcome.
Those hoping to see their homegrown companies bring manufacturing back must act in support. They should actively listen to their local companies and seek ways to work with them for mutual benefit. This may include government incentives to companies that invest in the digital, domestic supply chain.
Investing in initiatives that make reshoring a sound business decision — not just a vote-grabbing sentiment — will boost chances of success.
Disclaimer: The opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of Wavteq or its employees.