Brush Up On Geopolitics To Make Right Reshoring Decisions

The stunning news this week about the struggling Chinese economy and the first annual decline in China’s population in half a century underscored the accelerating dynamics behind the ongoing shift in economic momentum to the Western Hemisphere, particularly in manufacturing.

This means that, while “reshoring” and “nearshoring” by U.S.-based manufacturers are continuing apace, CEOs must understand and react to the telescoping of time horizons and the quickly shifting geopolitical backdrop in making their decisions about siting production.

They don’t have to be Davos aficionados or international economists to do so. But in addition to the obvious factors such as the costs of production, the availability of labor and the challenges to their supply chains, manufacturing chiefs should consider some of these geopolitical factors and pieces of advice compiled by Chief Executive from recent conversations with manufacturing chiefs and other experts:

• Keep betting against China. Geopolitics consultant Peter Zeihan is among thinkers who believe the world’s most populous nation will become an increasingly problematic location for export manufacturing and as a consumer market.

“This is a country degrading into national oblivion befgore our eyes,” Zeihan told a recent Chief Executive conference. “There’s not an economic model on the planet that [could] function with the Chinese demography” of the future.

 • Reckon with Taiwan. Chinese saber-rattling toward Taiwan could accelerate the reshoring plans of U.S. manufacturers. “Boards at least should be thinking about what you can bring back profitably now, with your own factories and supplier base, so that if it hits the fan, you can say, ‘I brought work to you a year or two ago, and now it’s bad,’” says Harry Moser, CEO of the Reshoring Initiative. “’Is there any way for you to find a way to get more more stuff now?’”

A majority of company leaders, 54%, said they were considering reshoring portions of their production that is currently in Taiwan, in a joint study by Chief Executive and the Indiana Economic Development Corporation under the Reshoring America Project.

But Zeihan doesn’t think a Chinese invasion of its island neighbor will happen. “The Chinese have always seen a parallel in Taiwan” with the situation that led to Russia’s invasion of Ukraine, he said. “Their assumption was that [invading Taiwan] would be an even harder war. You have to swim to Taipei [the capital of China], and the Taiwanese have been preparing [for an invasion] for 45 years.”

• Consider the rest of Asia. India, for instance. But while India is a low-cost producer with lots of people and English as its primary language, and it has become a hub of the world’s information economy, India may not be great as a manufacturing alternative to China. The nation has been falling behind China year by year in terms of relative manufacturing output as Indian economic leaders fight problems such as complicated labor and land laws.

“The infrastructure isn’t very good there, nor is the bureaucracy,” said Rosemary Coates, head of the Reshoring Institute. “And if you’re shipping back via the ocean, it takes you two weeks longer in transit time than from China.”

Yet other countries including Vietnam, Thailand and Indonesia, which is the tenth-largest manufacturer in the world. “You don’t want to shoot yourself in the foot if you get completely out of Asia and the market there is growing by 15%,” Coates said.

“You might consider keeping production in more than one region, such as Asia to serve the Asian market; another low-cost country to take advantage of low-cost fabrication; and bringing some manufacturing back to the U.S. to serve the U.S. market.

• Survey the Western Hemisphere. Mexico is a great place to consider reshoring of production to North America. But Canada also is good for some nearshoring initiatives, as are some Central American countries, such as El Salvador, where the new president’s anti-crime initiatives have made things more attractive for foreign companies.