For decades, a steady decline in manufacturing costs, combined with improved efficiency in global logistics, has encouraged companies to embrace global sourcing. For the most part, it works incredibly smoothly.
However, the Covid-19 pandemic has shown it isn’t infallible. As countries entered lockdown at different stages, crucial manufacturing parts were left undelivered and goods remained unshipped. China’s early shutdown was a particular problem. Some sectors struggled to cope with massive increases in demand, while others faced the opposite problem. According to a PwC survey of financial leaders in March, 34% of CFOs said supply chain issues had moved up among their top three concerns and they were considering making changes to their operations.
Politicians are also concerned: countries including France, Japan and India have all expressed a desire for more economic self-reliance. In April, European Commission president Ursula von der Leyen called for a “shortening” of global supply chains to reduce the EU’s dependence on a few foreign suppliers.
Nearshoring: benefits and challenges
Coronavirus has now intensified the focus on a trend that was already developing pre-pandemic due to US-China trade disputes – regionalisation, or nearshoring. For Western countries, this means shifting some or all elements of a production process from low-cost locations like China to regions that are closer to home.
That could bring a number of advantages, including:
- Less risk due to reduced reliance on certain countries or regions
- Increased sustainability from shorter shipping distances
- Fewer language and cultural hurdles
- Easier communication and collaboration
However, nearshoring also presents several major financial challenges, such as:
- Investment in infrastructure
- Significantly higher labour costs
If large-scale nearshoring were to happen, the impact could be huge. According to international real estate advisor Savills, the creation of alternative manufacturing locations has the potential to shift trade flows and, in turn, the dynamics of the world’s industrial and logistics market.
Save money – shop global?
Coronavirus may have pushed the topic up the global agenda, but it could also be a significant barrier to immediate changes, says Mohan Sodhi, Professor of Operations and Supply Chain Management at Cass Business School in London. “With recessions looming, cost and efficiency are likely to be the major priorities for businesses in the near- to medium-term. And that means continuing to shop globally.”
Some industries will be better placed than others to consider changes. Complex tasks, like making cars, will be tough to shift, whereas simpler processes, such as producing clothes, may prove more viable.
Market analytics authority GlobalData says it expects an increasing number of brands and retailers in fashion and textiles to nearshore their supply chain operations over the coming years. And after the scramble for personal protective equipment, many countries will now look to produce certain medical supplies themselves, without relying on imports.
More sustainable supply chains
The slowdown caused by Covid-19 offered a brief glimpse of a greener way of life for many. Some will hope this brings long-lasting changes to encourage sustainability, like an increase in local production.
It’s an increasingly important topic for the logistics industry, although there seems to be a discrepancy between talk and action. According to a survey by Hermes Germany among logistics decision-makers, 67% said sustainability aspects are of very high or high importance for supply chain management in their company. Yet 69% still fail to record their CO2 emissions. Only a quarter consciously choose a sustainable fleet when selecting their service providers.
With the economic fallout from the pandemic likely to remain unclear for several years, large-scale nearshoring in the near future is unlikely. However, Kamala Raman, supply chain analyst at global researcher Gartner, believes we can expect some diversification, perhaps involving a “partial option, such as manufacturing in Asia and moving only the final assembly closer to the customer”. Advances in technological automation could help mitigate higher labour costs.
Passing the peak of globalisation
Stephan Schiller, CEO of Hermes International, hopes Covid-19 will spur businesses and governments to create more sustainable, robust logistics infrastructure. “The pandemic may mean we are passing the peak of globalisation. Coronavirus will definitely have long-term effects on our industry. Together with our customers and partners, we want to strongly develop in the fields of sustainability issues and supply chain risks,” he states. “As a whole, we must succeed in quickly adapting to the new ‘normal’ and view it as an opportunity.”