The US is pushing ahead with stimulus for domestic production of computer chips and electric vehicle components, while the European Union has announced a €43 billion ($46 billion) package to boost chip production in the union.
Luke Sharrett | Bloomberg | Getty Images
A new “reshoring” trend is likely to upend global supply chains as companies look to source products — like clothing and computer chips — closer to home and away from manufacturing locations like China.
Some executives even seem more concerned about domestic manufacturing than the impact of artificial intelligence on their business.
China, which has been at the heart of global manufacturing for the past decade, is losing its dominance – and factory activity fell in April and May.
Meanwhile, the Russian invasion of Ukraine and the aftermath of the Covid-19 pandemic continue to affect shipping, causing some companies to reconsider their sourcing methods.
At the same time, the US is pushing ahead with stimulus for domestic production of computer chips and components for electric vehicles, while the European Union has announced a €43 billion ($46 billion) package to boost chip production in the union.
Earnings Conference Calls Talk About “Reshoring”
A number of banks mentioned domestic manufacturing developments in US earnings calls for the most recent quarter.
In an analysis of S&P 500 earnings release logs, Bank of America said mentions of “reshoring” — in which companies shift manufacturing from overseas to the countries where goods are sold — increased in the first quarter of the year compared to the same period have increased by 128% a year ago.
According to an April 29 note from BofA strategist Savita Subramanian, mentions of artificial intelligence increased 85% year over year.
UBS also studied the trend: Many senior executives in various sectors surveyed by the bank plan to relocate parts of the supply chain closer to home – according to 78% in Europe, 70% in the US and 54% in China plan to do so research note published on March 2nd. The bank surveyed more than 1,600 executives.
Brokerage firm Strategas Securities analyzed S&P 1500 earnings call logs for the past year and found a “notable rise” in mentions of “reshoring” and “nearshoring” — moving manufacturing operations to countries closer to home.
“This is in stark contrast to the lack of mentions of the 2010s, when low growth/inflation, global supply chains, and ultimately globalization were in full swing,” explained Ryan Grabinski, managing director of Strategas Securities, in an April 21 research note .
A “superfluous” model in fashion
According to industry veteran Bill McRaith, the apparel industry’s model of making goods abroad and shipping them to where they’re sold is broken.
“Usually it’s a factory, a place in the world that makes a final product that we place an order three, four, five months in advance and we cross our fingers that it sells. And we never got … the right goal,” McRaith told an audience at a supply chain conference organized by software company o9 Solutions in April.
The challenge is that the existing supply chains were designed for the old model.
Bill McRaith
Former Chief Supply Chain Officer, PVH
McRaith, former chief supply chain officer at Tommy Hilfiger owner PVH, said that the apparel industry has both over- and under-orders of about 20% to 25% in stock. Too much inventory leads to liquidation of goods, while too little to sell leads to a loss of margin, he said.
“The model we have used for the past 30 years is redundant at this point. It should be destroyed,” he said at the conference.
One solution to this, which could reduce negative financial and environmental impacts, is to create a “supply grid,” McRaith said, where some goods continue to be sourced abroad, others are bought in neighboring countries, and a third part is manufactured nearby where they are sold.
The TikTok Effect
In the apparel sector, sales of common items like white shirts are fairly easy to predict, so manufacturing and shipping these types of goods from abroad makes sense, McRaith told CNBC over the phone. But on-site production could work for more niche fashion items that are seeing overnight demand because they are featured on platforms like TikTok, as companies can react quickly to produce items that are delivered locally.
“When we moved into this Shein, TikTok, multiple influencers [world] … More and more things are falling into that highly unpredictable realm that I would call “rim space,” he said. “The more unpredictable that is, the more likely you are to want a higher percentage onshore or near shore.” [sourcing]added McRaith.
Last month, Chinese fast fashion giant Shein announced a $150 million investment in production in Brazil for the Latin American market. McRaith anticipates the company will do the same in the US and Europe. “They can afford to make products locally far more than any other retailer,” he said, referring to Shein’s model of ordering a small number of items from a large manufacturer base.
A worker makes clothes at a garment factory that supplies Shein in Guangzhou, China. Shein wants to produce goods for the Latin American market in Brazil instead of shipping them from China.
Jade Gao | AFP | Getty Images
The Covid-19 pandemic has accelerated some business trends by five years, McRaith said. “It’s no longer about brands telling consumers what to buy, it’s more about consumers telling brands what to buy. So the whole model has actually been reversed. The challenge is that the existing supply chains were built for the old model,” he said.
Made in the USA
According to the lobby group Reshoring Initiative, US companies with about 360,000 job postings are expected to post a record number of new manufacturing hires in 2022, up 53% from 2021 (figures include US manufacturing jobs from both domestic and overseas Company). Manufacturers of electrical equipment reported the most jobs, with electric vehicle batteries being among the top products, followed by manufacturers of computer products including chips.
As we build an economy based on electrification and batteries, controlling our own supply chain is going to be really important.
Keith Phillips
President and CEO, Piedmont Lithium
The Inflation Reduction Act signed by US President Joe Biden in August provides tax credits for electric vehicles. In February, the US government announced that it plans to install 500,000 public EV charging stations on highways by 2030.
Lithium hydroxide is an important component of electric vehicle batteries and is currently mostly manufactured in China. These U.S. government efforts are intended to benefit domestic suppliers, said Keith Phillips, president and CEO of the U.S. mining company Piedmont Lithium.
“As we build an economy based on electrification and batteries, it’s going to be really important to control our own supply chain,” he told CNBC’s Street Signs Asia in April.
Elon Musk has laid the foundation Tesla‘s lithium refinery in Corpus Christi, Texas, on May 8, saying the automaker wants to produce enough lithium to make a million electric vehicles a year. And Piedmont’s planned manufacturing facility in Tennessee will produce 30,000 tons of lithium hydroxide per year — double the current capacity in the United States, the company said.
Phillips said it will “take time” for the US to become self-sufficient in lithium hydroxide production and said more mining of the raw lithium itself is needed.
British trends
In the UK, 40% of manufacturers surveyed by industry group Make UK said they had sourced more goods domestically in the past year and around the same proportion plan to do so next year. Make UK surveyed 137 companies in January and February.
While producing goods close to their point of sale can reduce costs, the main reason for sourcing locally, according to Make UK’s survey, is to avoid disruptions that can occur in longer supply chains – such as Covid and the Ukraine war.
For British audio equipment maker BishopSound, moving part of its supply chain from China to Yorkshire in the north of England has improved its cash flow as domestic minimum order quantities are lower.
“In the past we have imported ready-made plywood speakers from China 7,000 miles away. We now manufacture all of our loudspeakers in the North of England, using British made components wherever possible. We stopped importing finished wooden speakers last December,” company founder Andrew Bishop told CNBC via email.
Other benefits of domestic production, Bishop says, include less chance of product being copied, improved quality control and reduced environmental impact. There is also a political reason for relocating production: “The Chinese use Russian plywood and we don’t want to support war,” added Bishop.
– CNBC’s Lora Kolodny contributed to this report.
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