Supply Chain Nearshoring, Reshoring and Friendshoring Are the Future
Economists, politicians and pundits say the world is shifting away from globalization. As evidence, they cite China’s economic slowdown and steep decline in exports.
Well, they’re right. But they’re also wrong.
Supply chains that shift away from China just don’t come home. Instead, supply chain pros look for alternative sources of production, manufacturing and transportation. The more optionality they can find in those areas, the better.
Even countries like the United States cannot produce everything its population needs. Nations do not have domestic access to all the needed raw materials and manufacturing capacity.
If the U.S., the world’s largest economy and fourth largest by size (3.7 million square miles), cannot produce everything, what chance does Monaco have? That country is less than one square mile.
Yes, some production can and will return home. But the shift from China (deglobalization) opens opportunities elsewhere for supply chain nearshoring, supply chain reshoring and moving production to friendly countries.
In other words, your supply chains will become more integrated with other regions and nations – globalization.
One note of caution: Just moving final assembly away from China does not mean you have redesigned your entire supply chain. It certainly isn’t deglobalization. Redesigning your supply chain involves alternatives for your entire global network. You need optionality for sourcing, production, suppliers and distribution.
Globalization vs. Deglobalization
The complex, fascinating phenomenon of simultaneous globalization and deglobalization will play out for quite some time.
But what exactly are we talking about?
What is globalization? Globalization refers to the interdependence of economies, cultures and populations.
What is deglobalization? Deglobalization is the movement toward a less-integrated world, characterized by local solutions, onshoring, tariffs and border control.
Despite the rhetoric, the politics and the headlines, supply chains are not really decoupling from China. Like I’ve mentioned before, moving final assembly leaves about 90% of your supply chain still reliant on the Asian giant.
This Business Insider article details how some final assembly has shifted to Vietnam, Bangladesh and other Asian countries. And some manufacturing processes have moved to North America.
But U.S. companies are asking Chinese companies to build factories outside China. And China’s trade with other Southeast Asian countries has increased while direct trade with the U.S. has dropped.
But as mentioned above, supply chains are an ecosystem that includes raw materials, sourcing, production, suppliers and distribution. As a report from the Carnegie Endowment put it, “China may be exporting less to the United States directly, but it is now indirectly exporting more.”
Nearshoring and Reshoring for the Long Term
As you redesign your supply chains, you will find options for nearshoring. You will find options for reshoring. You will find options for friendshoring. All require deep integration (globalization) into whatever regions or nations you choose.
True supply chain decoupling, if it happens, will take years. Think about the decades it took to build the complex supply chains that link Asia to the rest of the world. No nation of company can reorient the entire global economy in a span of weeks, months or just a few years.
Technically, nearshoring technically means moving production and supply chains closer to home. The benefits can be many: better cultural fit, shorter supply chains, quicker lead times, ability to synchronize operations with companies and personnel in similar time zones.
Complete nearshoring is unlikely for supply chains that produce products for Europe and North America. Something – raw materials, parts, production – will come from somewhere in Asia.
Complete reshoring, with everything produced at home, is even more unlikely.
However, you can find such supply chain models. Bath & Body Works is a great example of reshoring. Re-engineering the entire Bath & Body Works ecosystem took years. Few have the drive, ability and capital to entice every supplier to move to Ohio.
Their move has paid off. The company can head off supply chain disruptions quickly. During the COVID-19 pandemic, competitors struggled with shortages. Bath & Body works quickly transformed to make more hand sanitizer and other goods.
Even now, Bath & Body Works can devise and deliver new products quickly, a core competitive advantage in markets that involve soaps, lotions, fragrances and candles. For them, everything is not closer to home – they are home.
And face it, it’s hard to smell a new soap over a video chat from another country or region.
The Third Supply Chain Option: Friendshoring
Redesigning your supply chains to include countries deemed more friendly adds even more optionality.
While China dominates Asia, other countries are moving up the manufacturing value chain. Vietnam, Malaysia, Indonesia, Thailand, the Philippines and others have strong manufacturing sectors.
None of those countries are exactly close to the U.S. and Europe. However, relations between those nations, the U.S. and Europe seem less abrasive right now.
I and many others think India has the population, the education and the natural resources to become an economic powerhouse. The subcontinent will become an even bigger player in global markets.
Beyond Asia, opportunities exist for raw materials and production in South and Central America, the Caribbean, Africa, even North America and Europe. Your supply chains will likely have alternatives in multiple regions. And most of those countries are unlikely to threaten invasions of their neighbors.
Where and How You Globalize Will Matter
Optionality is the only way to supply chain resilience. International trade is vital for economic growth. Closing every border will lead to the collapse of global supply chains and economic chaos.
Political pressure and economic realities are forcing you to revisit your supply chains. You are going to need your best and brightest personnel on the job. The choices you make in the near future could make the difference between competitive advantage, agility, resilience, optionality or doom.
This will be an ongoing exercise, not a finished product. I have a major white paper about the deglobalization/globalization phenomenon that will be released soon – stay tuned.
Meanwhile, I would love to discuss how you view your organization’s supply chain future.
Jim Tompkins, Chairman of Tompkins Ventures, is an international authority on designing and implementing end-to-end supply chains. Over five decades, he has designed countless industrial facilities and supply chain solutions, enhancing the growth of numerous companies. He previously built Tompkins International from a backyard startup into an international consulting and implementation firm. Jim earned his B.S., M.S. and Ph.D. in Industrial Engineering from Purdue University.
Why don’t we call it what it is. The opposite of Globalization is Nationalization or Regionalization. And proponents of Nationalization are Nationalists. Sound familiar?
You’re thinking on the opposite of Globalization is Nationalization or Regionalization is on target. But I am not talking about the opposite of Globalization, I am talking about the Yin and Yang, the interconnected duality of two opposing interrelated forces. As you increase globalization you decrease deglobalization and vice versa. Globalization refers to the interdependence of economies, cultures and populations. Globalization is applying the theory of comparative advantage (specialization) around the world without constraint on a level playing field. Whereas deglobalization is the movement toward a less-integrated world, characterized by legal solutions, onshoring, tariffs and border control. But hang on, I publish a definitive white paper on this topic next week.