Reshoring Calculations: What’s Conveniently Overlooked
A follow-up from Cameron Johnson on our recent podcast conversation
Editor’s Note: Cameron Johnson wrote this piece after our conversation about supply chains as an addendum to what we covered during our hour-long chat on the podcast.
On the Sinica Podcast “Decoupling, Derisking, and the Great Disconnect, “ we discussed de-risking, decoupling, supply chains, and reshoring. This follow-up examines overlooked factors when trying to re-shore, friend-shore, or nearshore products and a view on decoupling.
When looking at possible decoupling between China and the United States, I use a “SPREAD group” to gauge the level of connectedness or decoupling between the two countries. As long as the “SPREAD group” continues connecting the U.S. and China, I remain optimistic about the relationship.
Starbucks: Thousands of stores in China driving US soft power via coffee culture.
Pandas: A symbol of goodwill of Chinese diplomacy present in US zoos.
Raytheon: Their CEO made it clear last year that there are “…several thousand suppliers in China and decoupling . . . is impossible,” and “We can de-risk but not decouple”
ExxonMobil: Over 130 years in China, still relevant in the energy and chemical industries.
Apple: 20% of its sales are from China, and its critical supply chains are in the country.
Disney: Movies, IP, and theme parks — all in China — are another symbol of U.S. soft power.
The Inflation Reduction Act, the CHIPS Act, the construction of factories, and much more are all discussed in reshoring and building local supply chains in the U.S. What is the motivation behind this? Resiliency is a word thrown around often, but what does it all mean?
Resiliency focuses on access to the product, the lead time to obtain it, and getting it from “friendly actors.” No more waiting for the shipment to arrive; we can get the product now (or sooner than from overseas. Other factors are local know-how of the product build-out and design and products being in the hands of “friendly actors,” meaning controlled by non-Chinese suppliers who cannot negatively affect the U.S.
However, what often goes undiscussed are the factors affecting how these areas evolve and whether they can achieve what policymakers want. Namely costs, talent, demand, political changes, and time.
Costs are a significant factor in producing products overseas and a challenge for any reshoring. Supply chains don’t lie. If the product were expected to be profitable, it would be built in the U.S. or North America. Add to this the 30% plus inflation over the last several years, as well as higher financing costs because of rising interest rates, and the challenges for companies to turn a profit in newly developed domestic supply chains are significant. After recent inflation, the CHIPS Act, with its promised allocation of $250 billion, is now worth $170-180 billion. The bang for the buck is largely gone, as is the appetite for doing more to build resiliency in the US.
Talent: A lack of skilled talent and bodies, especially for manufacturing, plagues industries. More than half of Americans cannot read above a 6th grade level, how are they going to be skilled technicians or build complex products in factories? If it were going to be done, it would have already occurred. The U.S. is estimated to need 400,000 new engineers annually to meet demand and needs. Currently, it produces roughly 25% of that.
Add to this a dysfunctional educational system, those who do not want to work in factories, talent restrictions, and the ability to reach domestic policy goals are almost out of reach. This has been summed up nicely in the Chicago Tribune.
Demand: Customer demand is a critical variable often left last in the calculation if included at all. A key component of any reshoring is whether the customer will pay and whether newly onshored industries will grow and/or be maintained. We saw during the PPE wars that U.S. organizations would not pay more money for masks made in the U.S. than they would for those from China. If you’re not willing to buy something to save someone’s life because it costs too much, will you be willing to buy semiconductor chips or EVs that cost more?
When rates stood low, and financing costs to build out supply chains were cheap, customers were more willing to pay a little more, as overall, the geopolitical costs were more significant factors. An overall supplier move wouldn’t hit the bottom line too much. Fast forward to today, and those calculations are different. Customers are less willing to purchase goods at a higher cost, regardless of location. Just look at recent reports of Intel and Samsung. If U.S. domestic demand were there, even in the long term, these companies would be building out their supply chains and products to meet that estimated coming demand.
It was easier to try and move or build supply chains when financing was cheap; customer demand was higher due to it not hitting the bottom line; and there was copious government support. All of those are now gone.
Political Changes: When one political party or politician decides to create a policy or regulation, the next one can change it. This risk always leaves the question of stability in policy making and long-term adherence. Examples range from pulling out of the Paris Climate Agreement to tariffs on Chinese goods. Stability in both politics and economics is key for any company, industry, or worker to understand the road ahead and plan the best investments and strategy possible. Changing political wills and winds cause uncertainty, conservation, and lack of investment. We are seeing this now with possible rollbacks of the IRA and an increase in tariffs. This is also not usually included in calculations on reshoring.
Time: Supply chains take decades to build out and evolve. Even when new technology or processes are invented, they take many years to be adopted and/or rolled out at scale. The aerospace supply chain took decades to build, as did the sourcing for coffee beans at Starbucks. When policies like the CHIPS and Science Act are created and passed, they have a time limit — in this case, 10 years. This is not enough time to build out an effective supply chain ecosystem, which takes at least ten years or more. This lack of time will affect any attempt to create or upgrade supply chains.
These five factors are not typically included (or regularly updated) when calculating how, when, and the cost to move and build new supply chains. Not including them creates problems in building out a business, an industry, or an ecosystem that can be resilient. As long as this is the case, any kind of “shoring” will have limited effectiveness.