• In response to pandemic-induced supply chain congestion, US public company leaders have markedly increased their discussions of “reshoring” and related concepts during earnings calls and presentations.
• The compelling economics of global supply chains remain relevant. Over the past several decades, US companies have built global supply chains which enable higher margins, expanded customer offerings and enhanced ROIC (return on invested capital).
• Rather than expensive and disruptive wholesale reshoring efforts, we believe more pragmatic efforts such as supplier diversification, additional inventory and highly targeted reshoring efforts would be a more prudent and cost-effective approach to build resiliency into global supply chains.
COVID-19 Supply Chain Disruptions
“Reshoring” - the practice of transferring a business operation that was moved overseas back to the country from which it was originally relocated - has become a fashionable narrative in response to global supply chain disruptions due to COVID-19. Consumers, companies and governments all continue to seek relief from dreaded “supply chain” predicaments.
Over the past decade, supply chains faced little congestion and disruption until the emergence of the COVID-19 global pandemic in 2020. As a result of global lock downs, supply chain pressures spiked in mid-2020 and again in late 2021. For many companies, these pressures created immense operational disruptions with stock-out conditions and multi-month delivery delays. Since peak pressure in December 2021, bottlenecks have eased, however pressure indicators remain at significantly elevated levels relative to their 10-year averages.
Supply chain disruptions have become a catalyst for companies to assess potential operational changes to reduce delivery delays and stock-out conditions. Early in the pandemic, as COVID-19-induced supply chain issues become more prominent, the mention of “reshoring” in earnings calls spiked in Q2 and Q3 of 2020 but became more muted over the following year, perhaps as company leaders were anticipating resumption of normalized activities. However, supply chain issues persisted and company leaders increased their mentions of reshoring in subsequent periods.
Global Supply Chains Continue to Provide Compelling Economics
As competitive pressures mounted beginning in the 1970s and 1980s, US companies sought low cost suppliers of raw materials and finished goods and built global supply chains in pursuit of higher margins, expanded customer offerings and enhanced ROIC (return on invested capital).
As illustrated in the chart nearby, developing economies provided significant cost advantages at the onset of globalization in the 1970s. These cost advantages have persisted, although the US-East Asia per capita GDP ratio has declined 67% while the US-Latin America ratio has remained relatively constant.
“Reshoring” Efforts – Prudent or Pipe Dream?
Companies, media and government entities have all been recently captivated by the reshoring narrative, but the compelling financial incentives that drove initial efforts for companies to build and maintain global supply chains are still relevant.
The cost advantages of many developing regions continue to be consequential. Global supply chains have been built and refined over several decades, often supported by several generations of highly trained and specialized low-cost labor. In addition, US regulatory and environmental burdens have increased significantly since the start of global sourcing in the 1970s, creating additional advantages for firms to leverage ex-US operations.
In short, it would be enormously expensive and disruptive to replicate global supply chain operations domestically. Add 5-10 years or more to complete regulatory reviews, build facilities, acquire infrastructure, hire workers and implement new procedures, and wholesale reshoring endeavors appear to be almost futile.
Given the cost, complexity and time considerations of full-scale reshoring, we believe in more prudent and productive efforts to create additional supply chain resiliency. These would include supplier diversification for key resources, additional inventory and infrastructure investments and more targeted reshoring efforts limited to critical and high value-add components.
The narrative of reshoring may provide some consolation for US businesses as they work to address supply chain disruptions. Wholesale supply chain transformation, however, appears to be a pipe dream.
Important Disclosures & Definitions
Global Supply Chain Pressure Index (GSCPI): an index that integrates a number of commonly used metrics with the aim of providing a comprehensive summary of potential supply chain disruptions. One may not invest directly in an index.
Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.
One may not invest directly in an index.