Reshoring might sound like the solution to the United States’ supply chain woes, but here’s why it is not a cure-all for current and future disruptions.
Many companies are on a path to reshore manufacturing and supply back to the United States for several reasons, including capricious actions such as the Shanghai lockdown; future pandemics; retaliatory actions that deliberately choke supply as a response to sanctions; rising cost of transport lift from the East; rising labor costs in China; monetary manipulation; intellectual property risks; squeezing container supply; saber-rattling and outright war. Some supplies, such as lithium for batteries and microchips for everything, have only a few supply points, making reshoring efforts impractical in the short term.
To support companies looking to reshore manufacturing and supply to keep business from cratering, the U.S. Administration floated initiatives in February 2022 aimed at encouraging the reshoring trend. Mandating where private companies source and manufacture products is difficult even with a mix of incentives—subsidies, tax breaks, loan-guarantees and funding for R&D—to encourage them to bolster domestic supply chains.
But government efforts to spur reshoring are exactly wrong, say some global trade deep thinkers, especially considering that national policy created more headwinds in the past two years despite the incentives. For starters, there’s an anti-transportation and manufacturing energy policy. Add overall inflation and dramatically rising domestic costs for manufacturing. Tax rates are not going down, either. Is an activist U.S. government intent on more regulations? Ya think? How about green policy costs? High over here, very low, if at all, over there. Then there’s the labor issue, if you can get enough skilled workers.
The World Bank and the International Monetary Fund (IMF) are convinced that reshoring is not at all the answer to current and future supply chain disruptions. “Supply chain disruption will not be solved by reshoring,” says the IMF report on reshoring. Global management consultant McKinsey & Company agrees, and combines reshoring with today’s buzzword, “friendshoring” supply chains. Wait what?
“We could not get labor, we could not get raw material on time, and we decided, ‘Let’s go to Mexico,'” says Isaac Larian, CEO of MGA Entertainment, the maker of Little Tikes. MGA is keeping factories in the United States and in China but it recently opened two factories in Mexico and has another on tap.
Then there is the friendlier Mexico-U.S. relationship, significantly lower transportation costs, lower intellectual property theft risks, and easier border crossings. Some observers call the move to friendlier Mexico a “tidal wave.”
Reshoring is not as attractive an option as it was two years ago. Unless U.S. policies and trade relationships change in the next few years, enterprise planners will slow-walk reshoring and fast-track friendshoring.