The era of easy, frictionless supply chains is over, according to GlobalData, which says that in a post-pandemic world companies have had to adopt a just-in-case strategy for their supply chains – where hoarding inventory offers a safety net for unforeseen supply chain disruptions.
However, reworking supply chains is complex and expensive, with no quick fixes. As the world’s manufacturing hub, China controls many global supply chains. Given the country’s massive investments in digital and clean energy technologies, a complete decoupling from China is virtually impossible, the research group says.
GlobalData’s latest report – Thematic Intelligence: Supply Chain Disruption – explores how companies can improve supply chain resilience by relocating production closer to home, diversifying their supply chain, digitalising their networks, and adopting a circular economy model.
“Supply chain disruptions are becoming worse and more frequent,” says Carolina Pinto, thematic analyst at GlobalData. “These disruptions are exacerbated by geopolitical fractures, climate change, and demographic changes. However, it is trade restrictions that are primarily driving the reshoring efforts.”
From materials to end products, Chinese suppliers are not only major producers of consumer goods and electronics, but China also dominates the solar panels, batteries, and 5G infrastructure industries. Strong economic growth and other developments have changed some of the factors that first made China an attractive manufacturing destination, namely: China no longer has the scale of cheap labour it once had; China has a shrinking population; and China is a major target of decoupling efforts.
The US-China trade war is increasing the regulatory and reputational risks of doing business in China. More and more companies are relocating their manufacturing to countries that carry less geopolitical risk.
“The Chinese government’s long-term plan to make China self-sufficient anticipated the importance of emerging technologies to the future global economy and invested billions in digital and clean energy technologies,” Pinto says. “A fast and cost-effective energy transition will still rely heavily on Chinese supply chains.”
Alternatives to China
Companies must assess the best destination for relocating production and finding new suppliers to decouple from China and build supply chain resilience. Depending on a country’s physical infrastructure, workforce, and existing industrial environment a company can choose to move supply chain operations back to its home country, a nearby country, or a politically and economically allied country.
“Both Western governments and the Chinese government are heavily subsidising reshoring efforts of critical industries,” says Pinto. “However, high production costs and severe labour shortages make reshoring for Western companies a costlier process.”
Western companies are more likely to nearshore or friendshore, meaning they move supply chain operations closer to the final consumer, but not back to the home country. This can reduce the cost of transportation while complying with trade restrictions and avoiding high labour costs.
“Latin America is a promising nearshoring location for many US tech companies,” says Pinto. “Argentina, Brazil, Colombia, Costa Rica, and Mexico have strong engineering talent with expertise in the cloud, AI, and cybersecurity. Companies outsourcing to Latin America can benefit from a large pool of talent, low labour costs due to lower average wages and very high inflation, and proximity to the US.”