There has been an upheaval in the global economy, that much is obvious. What is not so obvious is that not all of this can be attributed to the damage created by COVID-19 and the subsequent efforts to contain the outbreak. A prime example would be the changing nature of supply chains and the reaction to globalization. These changes have been underway for a long time and had been altering many business practices. The lockdown recession that has occupied the world of late has certainly accelerated the process, but it did not start this year.
There have been four trends that have been accelerating over the last decade and all four have implications for manufacturing, transportation, construction, and the consumer as well.
- Lack of Reliability. The most immediate trend has been the lack of reliability in a single-sourcing global supply chain strategy. It was common enough to concentrate all sourcing in one country, based largely on price, and often that country was China. It seemingly “checked all of the sourcing boxes” by providing a low-cost production environment and more importantly, offering the infrastructure to support a high volume of trade.
Unfortunately, there are other issues that have affected China’s place in the global economy. It’s politics complicate relationships and create rivalries. The movement of operations to China have threatened countries all over the world, creating animosity in the process. The intensity of that rivalry has convinced some companies to seek a more diversified sourcing strategy, leading to expansion into nations such as Vietnam, Thailand, Malaysia, Mexico, India, Brazil, and others. The shift has negatively affected efficiency but has improved reliability.
- Immediate Gratification. It was only a few years ago that the concept of “Just-in-Time” dominated supply chain strategy. It was made possible by the technological advances in supply chain management and allowed companies to reduce inventory costs as they could get materials and component parts at the precise moment they were needed.
The last few years have demonstrated that such a system is exceedingly fragile. A recent survey of corporate executives found that 85% are considering significant changes in their global sourcing strategy. Natural disasters and trade disputes unexpectedly disrupted upstream flows of parts and raw materials. This has convinced many to return to the days of warehousing and storage; and the COVID-19 pandemic has made this decision even more urgent.
As of June 2020, there were over 500,000 sailors stranded on ships or in ports. They are either in quarantine or the port they were headed to has been quarantined. It is estimated that over 45% of global cargo has been stranded or delayed. Cargo operations are engaging in “blank sailing” (sending an empty ship to an alternative port or skipping a normal trade route altogether) and that has led to certain ports being skipped over for months. The construction sector has seen a surge in demand for warehouse operations and there is little sign that this demand will fade.
- Technological Advancement. The third is connected to the shift in supply chains as technology has altered the appeal of overseas supply. The primary advantages that were offered by global supply chain sourcing was access to low wage environments and low production costs. The extent to which an operation depended on a large labor pool determined the appeal of a supply chain rooted in Asia or Latin America. The cost savings made up for the added expense of global transportation.
As robotics and technology have developed, it has become easier for developed economies (with higher labor rates) to compete and that has spurred the return of manufacturing to the US (re-shoring strategies). It is becoming efficient to use technology to close the cost gap and since production can now be located closer to consumption, it reduces transportation costs. These are not hard and fast rules, but it serves as the underpinnings for re-shoring and near-shoring production and sourcing strategies.
- Regional Alliances. The last trend will be created by the new USMCA (US/Mexico/Canada Agreement) that replaces NAFTA. An increase in the regional value parts content requirement for autos from 62.5% to 75% will force many companies to rethink sourcing strategies. Many will consider shifting some production to US/Mexico markets as a result, which will increase cross-border activity and potentially open up a host of labor, tax, and regulatory considerations.
Generally, these are positive changes for many companies. Adjusting does come with both challenges and opportunities. A diversified supply chain means working with a variety of nations and a variety of rules and regulations, including tax implications. Many of these nations have trade agreements in place. Many have local incentive structures that can be accessed by companies in the US. There could be additional regulatory considerations and changes as the US expands new trade relationships and restricts or tightens older ones.
There are a variety of tax advantages also available for these reshoring efforts as well as for the expanded use of technology. MarksNelson can guide you through the advantages and disadvantages related to tax implications, manufacturing processes and technology, as well as location strategies to help you make a fully formed decision.
The rationale for shifting and altering the supply chain is compelling and with proper advance planning the benefits will likely outweigh the concerns.
