Fact Versus Fiction for Nearshoring and Onshoring: Global Supply Chains Are Here to Stay
The death of the global supply chain is premature. Some media report that US labor costs are lower than China labor costs. Others contend that fuel costs are so high that global trade is no longer cost effective. And then we have those that only look at how shipping times from Asia to the US have become longer, creating issues from an agility perspective. While each of these perspectives is true, they are not valid augments for relinquishing global supply chains and bringing manufacturing closer to home with onshoring and nearshoring.
June 12 2013 by James A. Tompkins
Adding to the debate, the onshore alternative is presented as the way to cut costs, increase adaptability and create highly responsive supply chains. The nearshoring alternatives are presented with the same benefits as onshoring but also reducing labor costs by outsourcing from the US to Mexico, Europe to Turkey, China to Vietnam, and other nearby locations, depending on a products final destination.
It is true: Labor costs have gone up in China. Fuel costs are higher, and slow steaming has slowed down the speed at which ships travel from Asia to the US and Asia to Europe. But, here are some facts on the other side of the debate:
- Onshoring from China: In 2001, China’s labor costs were 4% of US labor costs. With increases in China labor costs, now it is only 15% of the costs in the US. However, companies can’t look at the labor costs in a vacuum. Productivity has also increased. So, onshoring is really not viable for most product categories in the US. Similar numbers are relevant for Europe.
- Nearshoring to Mexico: While it is true that in 2001 China labor costs were 20% of the Mexico costs, the increase in China labor costs has resulted today in Chinese labor costs being 75% of costs in Mexico. At the same time, productivity has increased (similar numbers apply to Turkey with respect to Europe). But at 75%, there are many product categories (particularly large, heavy products) in which nearshoring is a viable option to consider.
- Local Facilities and Labor: While it is true that in some industries it may be practical to “bring back manufacturing to the US,” there are two huge factors that constrain the onshoring alternative: availability of facilities and labor. Many facilities that were manufacturing facilities have been torn down or repurposed for uses other than manufacturing. Likewise, there have been significant changes in the workforce over the years, and many people do not want to work in manufacturing.
Do not believe the hype that global supply chains are dead. There are many facts to the contrary. For example, global trade has increased from 30% of global GDP in 1993 to 50% of global GDP in 2012. Similarly, China and other low-cost countries (northern Africa and Latin America) are expanding their manufacturing capabilities. While China may lose the label of “factory of the world,” it will continue to evolve as a manufacturing economy. And finally, exports from the US (agriculture) and Europe (industrial equipment) will uphold these countries as global innovation/productivity leaders.