No research is ever complete. That’s something US president Joe Biden will need to keep in mind as he attempts to overhaul the country’s supply chain. His order on Wednesday for a 100-day government review of supply chain vulnerabilities across high and low-tech industries is partly a response to pandemic shortages caused by disruptions to global trade. As factories closed during Covid-19, shipping patterns broke down and companies failed to move goods from factories to consumers.
But US companies have already been dancing around this issue for years, with limited success. Thanks to several years of rocky US-China trade disputes and China’s rising costs, global firms have weighed detangling themselves particularly from China and sourcing closer to home.
A survey of 260 global supply chain leaders conducted at the height of the pandemic found 33% had already moved sourcing or manufacturing out of China or planned to do so within the next three years. The biggest driver cited was expenses from US-China trade-war tariffs, which for some executives totaled more than $100 million, Quartz’s Marc Bain reported.
Sinking money into sturdier supply chains to weather global disruptions made less sense in stabler times. But the tradeoffs between cost, speed, and control are changing, leading some industries like fashion to begin spreading production across more countries (called “regionalization”), or closer to home (“reshoring”).
Still, many firms appear to be doing more talking than doing. The decision to leave China got tougher once the country’s factories reopened quickly in the spring and global trade rebounded. China’s share of Asia-Pacific export goods has mostly held up throughout the crisis, suggesting that a supply chain shift away from China hasn’t yet materialized.
For companies considering reshoring, there are hefty costs to consider aside from just labor, including China’s longer employment contracts, which make it pricey for companies to abruptly close factories. Reclaiming a company’s specialized equipment like machines, tools, and molds can also be tricky if the Chinese government chooses not to let them go. And a firm’s intellectual property is hard to guard once factory workers have been trained to make its products. Then there is the extensive red tape to withdrawing from China as a foreign investor.
Biden’s review is bound to end in a hefty price tag to incentivize US companies to move back home. Countries like Japan and India are already offering local firms incentives to move production out of China. South Korea has made reshoring a critical part of its expansive five-year New Deal. For profitable US companies intent on staying put to serve China’s exploding middle class, backing away will demand an extra push.
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