Tariffs, Pandemic, Supply Chains Driving Reshoring
For businesses looking for ways to prosper in these difficult times, the stage is set for OEMs and foundries to improve their lot through effective reshoring.
For one thing, the Phase I agreement the Administration signed with China in January includes tariffs of 7.5% to 25% on Chinese castings. Tariffs are also increasing overall international trade costs, as are trade barriers. Environmental initiatives are increasingly influencing supply chains.
Factory shutdowns in China because of COVID-19 are disrupting hyper-connected global supply chains, putting our heavy reliance on global suppliers further into question. A new Bank of America survey finds a “tectonic shift in global supply chains,” with more than 80% of companies in 12 global sectors in North America, the European Union and Asia-Pacific (excluding China), having “implemented or announced plans to shift at least a portion of their supply chains from current locations.”
A report by UNCTAD (United Nations Conference on Trade and Development) said, “the COVID-19 outbreak will potentially accelerate existing trends of decoupling and reshoring driven by the desire…to make supply chains more resilient.” Current conditions point to reshoring.
According to shipping giant Maersk, “there are a number of macro-economic factors that are encouraging manufacturers to shift their production centers back to Europe and the U.S.” They cite the increasing barriers to trade, meeting climate change targets and the environmental concerns of international transport as reasons. The mandated 0.5% sulfur maritime fuel oil price is forecast to be 59% more expensive than bunker fuel. Higher freight costs will be especially important for dense, relatively low labor content items such as castings.
The coronavirus has been disrupting global supply chains and threatening economies around the world. 60% of U.S. manufacturers say business has suffered because of the coronavirus according to a Thomas study. Recently, FreightWaves reported, “Chinese imports accounted for roughly 40% of the shipments entering the U.S.” in January with 7% of west coast shipments cancelled because of the outbreak. This challenges the just-in-time delivery model and emphasizes the advantage of the local for local model. 28% of companies are seeking alternative domestic sources of supply.
Quantifying the Costs and Risks
A broad range of costs and risks can be quantified using a free online Total Cost of Ownership (TCO) Estimator, such as the one offered at www.reshorenow.org. Placing a real value on more than two dozen, relevant but often ignored costs, most of which individually represent only a small percent of a product’s final total cost can tip the scales in favor of producing at home, as you will see when you plug values into the TCO Estimator.
In aggregate, savings from domestic sourcing will offset some or even all of a 15% to 30% advantage in purchase price enjoyed by low labor cost countries. TCO is a key tool in the sourcing decision process, quantifying whether the costs and risks avoided offset the often-higher U.S. manufacturing cost or price. Most of the issues are related to distance: freight, delivery, inventory, etc. Others are country-specific: rising wages, IP risk, political instability, etc.
Before tariffs and the outbreak of the virus, about 8% of imports from China were more profitably sourced here, based on Ex-Works price. The 8% rises to 32% if the decision is based on TCO. With 15% tariffs also added, the share rises to 46%. COVID-19 drives up those percentages but will eventually be history and Chinese deliveries will improve. Hopefully, U.S. companies will remember, prepare for future disruptions and reshore a large portion of what they have offshored. CS
Click here to see this story as it appears in the March/April 2020 issue of Casting Source.