Please fill in the required fields.

* Please fill in the required fields

Resume :

Cover letter :

Please fill in the required fields.

* Please fill in the required fields

Back to all publications

Reshoring as a natural consequence of pandemics, digitalization, climate change and protectionism?

Pandemics, #Digitalization, Climate change… Especially now, in times of the #Coronavirus, it becomes visible how vulnerable globalized structures can be.
Decisions on where to produce and source, might be crucial for the survival of a company.
Is #Reshoring the natural consequence and answer to the current situation?

For more than two decades, many companies from high-wage countries have shifted a significant portion of their supply and value chain to countries with lower factor costs – primarily to Asia (“offshoring”). In many cases, the driving force behind this development was the significant differences in labor costs, so that products for the domestic market were also manufactured abroad or at least required assemblies were sourced from there in order to achieve a cost advantageExploiting the domestic market of the production location was and is often a secondary matter. 

However, a number of factors are causing a change of thinking across industries: In the meantime, the opposite question of relocation back to the original home locations (“reshoring”) is at the center of many projectsA large number of different factors are responsible for this reversal – these factors should be evaluated in the decision-making process for the best production location accordingly.

In this article, we want to give an overview of the main drivers for location decisions and, in particular, show the effects of current megatrends, such as digitalization, growing ecological awareness and faster customer requirements. 

Classical key questions on the design of global value networks

Although wage costs were the previously predominant motivators for relocation, the holistic design of production and value-added networks takes a variety of other factors into account in order to make a well-founded and sustainable decision. In the sense of a good business model, here too the consumer or the market should be considered first: 

1. Market complexity 

a) Market individuality of the products (competition on the market)
b) Need for regional adaptations (e.g. local standards & laws) 
c) Intensity of customer loyalty 
d) Emotionality of the product and quality requirements of the customers (regarding place of origin, speedavailability, etc.) 
e) Purchasing behavior of the customer (cash and carry vs. customer individualization) 

2. Product maturity 

a) “Age” of the product in terms of the experience level
b) Length of the product life cycle
c) Protection of know-how and intellectual property
d) Permanent vs. selective further development
e) Product costs 

Figure: Example product lifecycle

3. Manufacturing process

a) Maturity & availability of the required processes and technologies
b) Automation capability
c) Capital intensity
d) Degree of individualization (customer-specific) vs. standardization

Figure: Example evaluation of profitable transport distance

4. Supply chain

a) Factor costs vs. transport costs (including transport intensity and transportability)
b) Supplier base
c) Agility of the supply chain in terms of reaction speed
d) Material availability & prices
e) Regularity of demand (predictability)

Figure: Example evaluation of profitable transport distance

 

5. Macroeconomic situation

Predicted development of location factors (wage costs, exchange rates, customs duties, political stability and risk of protectionism, availability of qualified specialists, taxes, legislation, security, probability of natural disasters)

Figure: Example development of factor costs over time

 

6. Soft factors in the choice of location

a) Delivery times
b) “Made in…” branding
c) “Consistency of quality”
d) “Green Label”

On the basis of the criteria listed, it can be decided on a case-by-case basis which global positioning should be considered for the value chain.

Trend towards reshoring

A trend reversal from offshoring to reshoring has been evident since 2010. The main causes are regularly found in the areas of total costs, quality assurance, availability of personnel, “know-how outflow” and the need for greater responsiveness to end customers.

It is precisely in the area of the original cost advantages of relocation that the wage gap between high-wage and some typical low-wage countries has increasingly narrowed. While unit costs in China for example have risen significantly over the past ten years, they have tended to decline in many high-wage countries. In addition to higher transport costs, there are also currency effects, as the currencies of low-wage countries have appreciated significantly in the meantime.

As expected, the majority of the relocations will come from East Asia, especially from China. In terms of industries, capital-intensive production areas in particular lend themselves to relocation, whereas personnel cost-intensive industries maintain their production sites abroad. Eastern European countries are less affected by this relocation, in fact they are more likely to serve as alternative production locations for East Asia.

Effects of global megatrends

In more recent discussions on the subject of supply chain strategy and production network, further aspects that go beyond the classic key questions are increasingly important. In our view, four megatrends in particular play a key role here:

1. Availability and knowledge exchange

In order to exchange knowledge and generate innovations, almost all companies depend on international collaboration. This global networking and the dependency of globalization is currently being illustrated to us by the corona virus. A formerly local outbreak of the pandemic is currently turning the world economy upside down. In the consequence, once again new working models (possibilities of communication and collaboration, working from home, etc.) will put our previous working methods to the test as many previously unthinkable methods are suddenly feasible.

In the context of the now required increase in efficiency, these new models will greatly reduce the significance of classic factor costs and require a new evaluation of products and processes as well as resources and know-how.

2. Digitalization & connectivity

Even today, it is hard to imagine everyday life in the private and business world without people to people and machine to machine connectivity. This has both, technological and social implications for the interaction between people and technology and thus affects products, processes and collaboration models at the same time. This will have stronger effects on the design of value-added networks the more the current technological hype fades away and instead the focus shifts to the question of increased efficiency and new business models. In this case, the requirements on resources and know-how change along with the basic characteristics of products and processes. In many cases, an increasing dependence on high technology, specialists and services is becoming apparent – in return for a decreasing importance of classic factor costs.
(Further information on digitalization with a focus on small and medium-sized enterprises can be found in the following article: Link).

3. Individualization & availability

Consumers and users are less and less satisfied with off-the-shelf or one-fits-all solutions. Instead, even mass products are increasingly individualized and adapted – or at least configured – to meet the customer requirements. At the same time, however, such individualized products must be delivered in the shortest possible time, preferably on a same-day basis. This is expressed in drastically increased demands for flexibility both in the internal workflows and business processes of companies and in the entire supply & value chain. Mastering the supply chain including the last mile to the customer is also moving to the spotlight – resulting in the effort to reduce complexity and international dependencies.

4. Ecology & Sustainability

Climate change, energy transition, EU plastics regulation, etc. – all of these have an impact on every aspect of our everyday lives. The awareness of ecological sustainability is increasingly influencing investment and purchasing decisions. Whether personal consumption, social values or corporate strategy – even if not always apparent at first glance, this megatrend, coupled with available technological innovation, is a major driver for changes in entrepreneurial thinking and action. With regard to global supply and value-added networks, the pursuit of sustainability also leads to a reduction in resource requirements, clustering of production steps and shorter transport distances.

Quick check Reshoring Strategy

We have put together the afore mentioned criteria to a comprehensive quick check for your own localization strategy. By self-assessing the individual aspects of your market, products, production and supply chain, you will receive a first indication of where to focus your strategy:

Figure: Quick-check reshoring strategy

Conclusion

In times of protectionism (trade dispute between the USA and China) and global pandemics (as the current Corona virus spread), location decisions made so far must be re-examined and further factors have to be taken into account. A simple decision like the one probably made a few years ago with a dominant focus on production cost is no longer expedient. Instead, further factors must be taken into account. The assessment of production losses due to extreme climate or pandemics is certainly not a dominant part of the standard location criteria but has to be thoroughly considered.

The ongoing assessment of an existing location strategy will become more and more complex and a balanced distribution of supply chains more and more important – the topic is therefore not only relevant for the own production network but as well for the sourcing and cooperation strategy. It will become obvious within the next weeks and months that a balanced distribution of the supply and value chain will be decisive for the least damage in the ongoing pandemic. At the end of the crisis, the following questions will arise: were my processes the right ones, which new ones do I have to build and how can I use the new knowledge to better evaluate future decisions based on facts and figures? Let’s dive in and elevate industrial competitiveness!