Reshoring: Reality or pipe dream?

By Kavan Bhandary

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:

  • Technology: Build supply chain capacity
    The technologies that drive Industry 4.0 – AI, automation, robotics, additive printing – must be part of any reshoring solution. WEF research shows the positive association between automation and reshoring. Developed economies with deep capital markets and mature funding ecosystems have an advantage. Investments in new technology are prohibitive for many companies, particularly in the lower tiers of the supply chain populated by SMEs. Governments may consider incentivising OEMs in developed markets to build relevant technology capability through the supply chain. Investment promotion agencies, seeking to attract companies and jobs, can implement enabler strategies that match knowledge and need. Giving local firms access to smart factory know-how should help them boost productivity. Such a strategy will encourage clusters to form and they tend to have a multiplier effect attracting others in the same sector in a virtuous cycle. The success of Cambridge, England as a hub for tech start-ups in sectors such as life sciences, education and research is instructive. But remember that achievement is the result of a long-term strategy not ad-hoc implementation.

  • Talent: Reskill communities
    Much 21st century manufacturing is hi-tech and requires highly skilled workers. Many skills were lost as jobs went overseas and local industry did away with apprenticeships and other workplace investment policies. Businesses want talent on tap. Ensuring rich pools of people with cutting edge skills and know-how is a task government can achieve by building partnerships with industry. It’s not just technical skills that are needed. In a world driven by remote work and multinational supply chains, soft skills are also a vital part of the puzzle. Germany’s dual education system which blends vocational and classroom training has been a lynchpin of the country’s continued leadership in engineering and manufacturing.

    In the past skilling incentives were directed at companies. Governments may achieve more if they rethink that model and incentivise individuals by reimbursing them directly.

  • Transparency: Focus on safety, traceability and localism
    In a COVID-19 world, there will be greater emphasis on safety and provenance. Consumers want to know where and how products have been made and will favour shorter supply chains. One of the effects of the pandemic has been a revival of localism. A survey by Accenture says 80 per cent of people feel more connected to their communities and notes this is a driver of new consumer habits. Conscious consumerism is a demand-side trend that will favour companies making locally sourced Policymakers should nurture this newfound built-in-the-neighbourhood sentiment.

    Governments and local authorities can put systems in place that address those concerns. Blockchain and other secure tracking and storage systems enable this kind of assurance. It requires digital infrastructure and government should take the lead.

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.

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