Reshoring supply chains: The race to build locally

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Reshoring supply chains: The race to build locally

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Reshoring supply chains: The race to build locally

Subheading text
The COVID-19 pandemic squeezed an already troubled global supply chain, making companies realize they need a new production strategy.
    • Author:
    • Author name
      Quantumrun Foresight
    • May 16, 2023

    Long considered a vast, interconnected sector, the global supply chain experienced disruptions and bottlenecks during the COVID-19 pandemic. This development made firms reconsider if relying on just a few suppliers and supply chains was a good investment moving forward.

    Reshoring supply chains context

    The World Trade Organization stated that global merchandise trade volume exceeded $22 trillion USD in 2021, more than ten times the amount from 1980. The expansion of global supply chains and significant geopolitical developments influenced companies to re-engineer their supply chains by adding production sites and suppliers in Mexico, Romania, China, and Vietnam, among other cost-effective countries.

    However, due to the 2020 COVID-19 pandemic, not only do industrial leaders have to reimagine their supply chains, but they must also make them more agile and sustainable. With the near-shoring of business operations and new regulatory measures, such as the European Union’s (EU) carbon border tax, it is clear that established global supply chain models will have to change.

    According to the 2022 Ernst & Young (EY) Industrial Supply Chain Survey, 45 percent of respondents said they experienced disruptions due to logistics-related delays, and 48 percent had disruptions from production input shortages or delays. Most respondents (56 percent) also saw a production input price increase.

    Aside from the pandemic-related challenges, there is a need to restructure supply chains because of world events, such as the 2022 Russian invasion of Ukraine and inflation in other countries. Most companies are taking steps to change their supply management, such as breaking ties with current vendors and production facilities and moving production closer to where their customers are.

    Disruptive impact

    Based on EY’s industrial survey, massive supply chain restructuring is already underway. About 53 percent of respondents said they have near-shored or re-shored some operations since 2020, and 44 percent plan to do so by 2024. Whereas 57 percent have established new operations in another country since 2020, and 53 percent are planning to do so by 2024.

    Each region is implementing its decoupling strategies. Companies in North America have started moving production and suppliers closer to home to reduce complications and eliminate delays. In particular, the US government has been increasing its domestic support for manufacturing and sourcing. Meanwhile, automakers across the globe have started to invest in domestic electric vehicle (EV) battery manufacturing plants; these factory investments have been driven by market data suggesting that future demands for EVs will be high and that supply chains need less exposure to trading disruptions, particularly those involving China and Russia.

    European companies are also re-shoring their production lines and have changed supplier bases. However, the full extent of this strategy is still hard to measure, considering the war between Russia and Ukraine as of 2022. Ukrainian supplier issues with components and logistics challenges and Russian airspace closure disrupting Asia-Europe cargo routes have pressured European companies to further adapt their supply chain tactics.

    Implications of Reshoring supply chains

    Wider implications of reshoring supply chains may include: 

    • Companies investing in 3D-printing technologies to transition production in-house.
    • Automotive companies choosing to source from local suppliers and build battery plants closer to where their market is located. In addition, they might also shift some production out of China in favor of North America, Europe, and other parts of Asia.
    • Chemical firms expanding their supply chain capacity in the US, India, and other Asian countries.
    • China building its local manufacturing hubs to become even more self-sufficient, including competing globally to become a significant EV supplier.
    • Developed nations heavily investing in establishing their computer chip manufacturing hubs domestically, which has applications across all industries, including the military.

    Questions to comment on

    • If you work in the supply chain sector, what are the other decoupling strategies?
    • Could decoupling affect international relations? If so, how?
    • How do you think this decoupling trend will affect the revenues of developing countries?

    Insight references

    The following popular and institutional links were referenced for this insight: