Driving Forces Behind a Tectonic Global Supply Chain Shift

Harry Moser

Current conditions are propelling a significant global supply chain shift. Studies, like a survey of analysts who cover companies from Bank of America Securities, indicate the “tectonic” shift will lead to more investment at home with increased spending on automation and manufacturing that “would have multiplier effects on the broader economy.” 

The tariffs and the COVID-19 pandemic driving this transformational impact are underpinned by growing environmental, intellectual property and sustainability concerns. Automation, a key enabler, has narrowed the labor cost differential, reducing the offshore labor cost advantage. Once attractive, far-flung supply chains are becoming less appealing and the benefits of “local for local” increasingly obvious. 

The hidden costs of globalization are becoming apparent. 

COVID-19 Crisis

Changing conditions are bringing an end to unconditional globalization. The coronavirus pandemic revealed the vulnerabilities of hyper-connected global supply chains and challenged the just-in-time manufacturing model. Our new normal post-COVID-19 “will include how we think, plan, execute, and improve our supply chains relative to a healthcare crisis,” according to a study by LeanCor Supply Chain Group. The supply chain ecosystems for essential products will be laser-focused on flexibility, shortened lead times and stability. Risky over-dependence on global supply chains is no longer a precondition to profitability.

For example, toolmaker Stanley Black & Decker recently shifted production of its Craftsman tools from China to Texas. The company reported no increase in costs and “much less impact from the coronavirus than would have been the case if it had remained in China.”

GF Linamar selected North Carolina to cast lightweight components for the automotive industry due to eco-system synergies, government incentives and the skilled workforce, creating 350 jobs. Linda Hasenfratz, Linamar CEO, said, “We’re able to cast structural components that in the past were made from stamp steel assemblies. So, these cast products are 40% to 50% lighter.” 

Intellectual Property Concerns

China remains a principal IP infringer with an estimated $600 billion annual cost to the U.S. economy. Cases of IP theft by Chinese employees of U.S. firms have involved large companies like Apple, IBM and GE. A recent CNBC CFO survey found one in five corporations say China has stolen their intellectual property within the last year. Nearly one-third of CFOs of North American-based companies say Chinese companies have stolen from them during the past decade. 

Environmental Concerns

Production shifted offshore is negatively impacting the environment. A study, “Targeted opportunities to address the climate–trade dilemma in China” by Harvard’s Dr. Zhu Liu, et al., is one of the many studies that have reached this conclusion. According to the study, “International trade has become the fastest growing driver of global carbon emissions, with large quantities of emissions embodied in exports from emerging economies.” For example, according to the head of the U.S. Environmental Protection Agency, about 77% of Apple’s total carbon dioxide emissions comes from the company’s global supply chain, including mainly companies and manufacturing sites that Apple neither owns nor directly operates. A Reshoring Initiative study showed a 25+% reduction in emissions by shifting sourcing of a 2-lb. die casting from China to the U.S.

Sustainability Concerns

It’s harder to make money in China. Members of the American Chamber of Commerce in China say that they are earning less and market access is an issue in some industries. A recent study found that 50% of American technology sector companies feel they are treated unfairly. Only 61% of companies described their financial performance in China as “profitable,” the lowest in about 20 years. 

Shipping giant Maersk says “there are a number of macro-economic factors that are encouraging manufacturers to shift their production centers back to Europe and the U.S.” Increasing costs include the inability to balance cost efficiency offshore with trade barriers, meeting climate targets and the environmental impact of international transport.

Dazor Manufacturing, a global manufacturer of professional-grade task lights, desk lamps, lighted magnifiers and digital microscopes reshored 90% of parts from China to Missouri.

Stan Hogrebe, president, found there were hidden costs associated with larger inventories, travel, freight and noncompliant parts. He said,

“After we took a hard look at all the cost variables involved, not just the quoted unit price, it made business sense to bring back a number of component parts—including our die casts, metal bending and extrusions.” Using automation and sourcing locally with Production Castings, an aluminum and zinc die caster, made economic sense. 

Using TCO for Sourcing and Siting

Now is an especially good time for companies to reevaluate the choice of domestic versus offshore production. To help quantify those costs, the Reshoring Initiative website provides tools to help companies decide objectively whether their overhead will come down more than their manufacturing cost goes up when sourcing locally. The free online Total Cost of Ownership Estimator will more accurately determine the real profit and loss impact of reshoring or offshoring. After doing the math, most companies will decide to bring some work back. 

The Reshoring Initiative’s resources can be found at www.ReshoreNow.org, including 20 recent related webinars.   CS

Click here to see this story as it appears in the July/August 2020 issue of Casting Source.