North America Supply Chain: Reshoring; it has been happening, but not the way you think.
As we enter the third quarter of 2021, there has been much discussion and questioning of the feasibility of near-shoring North-American demand, that everyone in their own way has discussed lately due to the recent disruptions provoked by the recent economic downturn caused by the COVID-19 pandemic effect, the global ocean container capacity shortage and among others, and how these disruptions have compelled companies to rethink and reorganize in order to mitigate the effects, especially by relocating their supply lines to a country close to their demand base, specifically a country within the Latin America region, in most cases Mexico being the most popular sounding option due to it’s near location and other factors such as experience in the manufacturing sector with North-America, infrastructure, specialized labor and the recent signing of the USMCA trade deal.
However the recent speculations, shared by international news agencies and private intelligence firms, seem to be very high level and more oriented towards politics, ignoring relevant factors and disregarding obvious economic data rather than putting out there important information that truly describes the realities happening lately, how supply chains really work, and historical trends and events.
Truth of the matter is that a complete reshoring is something that will be nearly impossible in the short-medium term, it’s unrealistic for companies, investors, consumers and media to consider that as an option in the recent defiant conditions of global trade. The implications of the occurrence of such event are immensely challenging. But first in order to understand, the impact, the situation and the possibilities of a more realistic future it’s crucial to define what a complete reshoring means.
Complete reshoring can be defined as the closing of factories and transferring entire production lines, infrastructure & work force to a complete different country or region, in other words reshoring is “China’s Industrial Revolution Effect” that the world starting experimenting years ago, but placed in modern world.
No major economic power could afford such an aggressive shift of overseas manufacturing infrastructure, at least not at the time, not during the Covid-19 pandemic era, however surprisingly for non-practitioners, reshoring it’s an effect that has been happening even during the pre-covid era, but not in the way everyone visualizes, specially not how the way media paints it.
So, what exactly has been happing?, well long story short companies have been re-shoring in a very small and strategic way, how? Well primarily by:
- Allocating critical or strategic production lines to a site close to a customer’s main demand, so instead of moving entire factories, companies would source raw materials, substitute suppliers, and relocate machinery & equipment to an area close to a customer’s main demand.
- Overstocking | Overproduction: shifting from a “just in time” to a “just in case” supply chain. Either by storing more raw materials of finished goods in their current sites, factories & warehouses or expanding current infrastructure for more storing capabilities, leasing additional space with a third party warehouse, exploring the usage of FTZ (Free Trade Zone) zones or opting for a more strategic choice of materials sourcing by adopting a VMI (Vendor Managed Inventory) model.
- Opening Of New Factories: plain and simple, the opening of new & modern factories without shutting down it’s original one. This is something companies have been doing as a better alternative for overstocking, given them more production capabilities not just to satisfy current market demand, but also to fully exploit a market and their R&D capabilities by boosting the development of new products and modernizing their infrastructure in order to innovate, improve their competitive advantage and gain market share.
Now that we understand how reshoring has been happening, let’s begin with the clarification of the why and how is a complete reshoring an unrealistic scenario to visualize in the short-medium term, also why Latin America should be not compared to the emerging China from 35 years ago and how countries and companies are benefitting from this.
First let’s start by clarifying the first point, Why is complete reshoring unrealistic and Why countries in LATAM should not be seen as the next China:
1- Circumstances Under How China Became A Manufacturing Superpower.
Let’s recall how China 35 years ago was an overpopulated country with extreme poverty, their government was extremely focused on attracting investment, people worked 23 hours per day non-stop and slept in factories, China’s culture was difficult to understand which made it harder for organizations like the UN in those times to have a meaningful saying with labour conditions in international summits, the government had open field to operate freely and with few media scandals, all of this gave China an unfair advantage in the race for economic growth explaining China’s aggressive growth rate at the time. In modern days no LATAM country matches any those advantages (not even the whole region itself).
2- China Has become An Attractive Market.
Now let’s look at the present, due to it’s economic success, China has become an economy with a lot power, their population are now people with a high economic earnings per capita. It’s technology advances have turned China a protagonist in innovation in so many fields, many companies have emerged and transform themselves into world renamed brands, turning China a country with a lot if necessities causing that most of the production happening within it’s own soil will also serve to satisfy it’s own market in the future. At some point in the supply chain goods are exported out of China returned back as a finished goods or the final product will be finalized in Chinese soil and distributed there as well.
3- North America Supply Chain Strategy.
Now let’s look at this from the sellers perspective, China along with the rest of Asia are still a strategic location for manufacturing, therefore China’s supply chain will get stronger and stronger in the east, so the geopolitical effect is a reality.
Asia’s share of global exports will continue to rise in 2021–25, reflecting the sustained importance of the region in global supply chain networks, while North America’s share will remain unchanged according to Bloomberg’s economic indicators forecast.
Bonus: Supply Chain Reshoring: Key areas to keep an eye on.
Now the following is a preamble to provide the reader the tools for visualizing a future state in global competition based on the current economic & geopolitical effects as well as supply chain reshoring as an alternative:
De-Globalization: Globalization vs. Regionalization.
The covid-19 pandemic has accelerated de-globalization, meaning that now companies and countries will not compete just at global level but more on a regional level instead, causing countries to reinforce their alliances with key states, a recent clear example is the USMCA and the RCEP which in late 2020 became the largest trade deal in the world by integrating 15 countries along with China, de-globalization is also driven by the political circumstances among economic superpowers in the race for world leadership.
Most Competitive Regions In The World.
LATAM As New Innovation HUB.
LATAM, has become a new innovation HUB for the next wave of startups, in recent years new companies have emerged to drive this transformation. Since 2018 LATAM has been seen as a promising tech hub for the future to come, market conditions such as internet and mobile internet user growth outpace the U.S. at the time and a GDP of 9.5T was bigger than India and almost the same as China at that time. Why is this important ?, well it certainly will increase the region’s competitive landscape, allowing investments not just being attractive for the manufacturing sector but also for companies within LATAM will have the possibility to leverage from all sort of opportunities, something completely different from China’s situation years ago with no question about it, so is important to keep that in mind.
Innovation Index
The Future Of NAM As A New Competitive Sector.
Modernization of the North America Free Trade Agreement has provided broad opportunities for the manufacturers, local farmers, services providers, and small & medium businesses, it has however provided these opportunities for a long time now since it’s implementation in the 90’s. Now this modernization brings digital trade rules, intellectual property protections, and other updates for businesses, while still maintaining the market access needed for companies to prosper and provide jobs for the NAM region.
The future of NAM as a competitive sector, will be defined by the discipline of keeping a strict agenda in the trilateral collaboration among the 3 countries, and anti-fragile supply chains for the future to come. NAM has unveiled huge opportunity areas, the region trilateral cooperation will be key to streghten the region competitiveness.
World competitiveness ranking 2021
Global Competition, Political Landscape & The Next Disruption.
Politics & the international landscape, trade wars, tax reforms, the race for global leadership & the next unforeseen supply chain disruption will also have important implications on reshoring and regionalization, predictions are hard and still uncertain, but such factors can aggressively shift, accelerate or transform the path going forward on a global basis, however the reading of the recent circumstances tell us top economies will most-likely compete in a regional level instead, and will reinforce their alliances to remain strong in the global landscape and with continuous growth on the recovery from the pandemic.
Conclusions.
Reshoring has been happening but in a small scale, companies are maneuvering with their demand the best way to avoid their production getting stranded or interrupted in order to keep satisfying their customer base and continue growing. We are in the midst of the recovery from the pandemic, a complete reshoring will be challenging in the short term considering all major implications at a global scale. It will be important to visualize other factors besides politics and trending news to have a broader reading of the future to come, as any of the other factors can be as deterministic with the acceleration of reshoring and the consolidation of regionalization, however predictions are still hard to make. The recent path tell us that countries are aiming to reinforce their alliances and increase their competitiveness in their own regions to broaden their global presence, so the reshoring phenomenon can be key for countries specially for NAM to keep it’s economy in steady recovery and growing through uninterrupted supply chains.
