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.
Even more significant is the natural process of creative destruction, meaning economies evolve from low-cost to middle class, in which middle-class people are consumers. Consumer populations want to consume, to buy things. Thus if factories in places like China are closed, the US will be far-shoring consumer products into China as the middle class of China grows. In fact, consider from the book Global Tilt by Ram Charan:
- The world is evolving from being mostly poor to mostly middle class. By year 2022, there will be more middle-class people in the world than poor.
- By year 2030, 5 billion people, nearly two-thirds of the global population will be middle class.
- Going forward, the spending by the middle class will be significantly different than today. Asians will spend the most. By 2015, the number of middle-class people in Asia, Europe and North America will be about equal.
- By 2021, there will be more than 2 billion middle-class Asians with a third of them from China, more than four times the number of Chinese middle class as compared to today.
- Smart companies from North America and Europe will continue to expand in Asia. This is where the growth of the middle class (of the consumers of products) will be the greatest going forward.
The world is evolving and will continue to evolve. Onshore or nearshore decisions need to be made in the context of two key factors: total delivered costs and future volumes of consumption. Total delivered costs encompass all costs, not just labor, fuel and inventory. This is the final costs an item after it passes through the full end-to-end supply chain and reaches the end consumer. In terms of consumption, look to the future; don’t base decisions on present levels. As the world evolves, consumption patterns shift. Companies’ manufacturing locations need not be in tune with yesterday’s consumption numbers but today’s and tomorrow’s numbers.
We will not see the “death” of global supply chains, only the failure of companies that make the wrong decisions. There is something to consider in each of these facts. Onshoring or nearshoring can be a viable option for some product categories, but the global marketplace creates a need for global supply chains. The challenge is putting all of the facts together and determining the best locations for the company and its products.
As the founder and CEO of Tompkins International (www.tompkinsinc.com) based in Raleigh, NC, Dr. James A. Tompkins focuses on supply chain strategy, specifically the implementation of end-to-end supply chains that are demand driven. He developed the Creating Supply Chain Excellence Blog and Global Supply Chain Podcast. He also shares insights on business strategy through his “Business at a Crossroads” and “Amazon Effect” presentations. Follow Dr. Tompkins’ Twitter account @jimtompkins, and connect with him on LinkedIn.