Background

Global supply chains continue to experience the impact of the late March 2022 Shanghai and Shenzen Covid-19 lockdowns in China, which impacted the port operations of both cities, sending a long-term ripple effect into the global supply chain:

“The disruption in the wake of Shanghai’s shutdown comes shortly after the same thing happened in the port city of Shenzhen. The lockdown posed challenges for all shipping companies as well as congestion and delays at ports due to restrictions and testing requirements.  Recent weeks and the Shenzhen shutdown have created turmoil in the shipping and logistics industry, where fears of new Covid-related restrictions at Chinese ports have shot down hopes of an early normalization in the container market somewhat…logistics company DSV’s chief executive, Jens Bjørn Andersen, has expressed concern that new Chinese closures will delay normalization of the pressured freight market until sometime in 2023.” (1)

The central role of Shenzhen’s manufacturing and logistics operations in the global supply is important to understand:

“Another typhoon has prompted the ports of Shanghai and Ningbo to close for the second time in 10 days, with forwarders expecting a ‘ripple effect’ of shipping delays.

Although weaker than Typhoon Hinnamor – which saw Shanghai, Ningbo, and Busan all suspend operations last week – Typhoon Muifa is on a direct path to hit Shanghai tomorrow, according to the US Joint Typhoon Warning Center.

Norman Global Logistics (NGL) told customers Shanghai’s Yangshan container terminals were due to stop gate-in handling by 7 pm local time today, while both Waigaoqiao and Yangshan terminals would be fully closed by 8 am tomorrow morning.

Ningbo’s container terminals and yards were already closed this morning, NGL said. A spokeswoman for Dimerco said Muifa was due to pass Shanghai in ‘no more than a day’ but added that inland trucking would be ‘dangerous’ during the typhoon’s impact.'”  (3)

Reshoring Will Accelerate and Rethinking Supply Chains

Future Typhoons.  Future Covid-19 Lockdowns.  Future Pandemics. Future Climate Crises Impacts.  Future Wars.  All of it adds up to a clear incentive structure for American businesses to reshore manufacturing and shorten supply chains.  OODA CTO Bob Gourley spelled it all out in a post earlier this year:

“Reshoring is the transfer of business operations back to their country of origin. The term is usually associated with manufacturing but it applies to any business operation.

The trend of reshoring back to the US from China began about a decade ago when some businesses realized costs in China (including labor and compliance and also transportation) were rising. Meanwhile, automation was changing the cost equation for some business operations, making reshoring decisions easier. Over the last decade, tariffs due to unfair practices and persecution of ethnic minorities added new motivation to reshore. The pandemic and China’s zero covid policy and resulting shutdowns of industry and transportation in China have now built an even stronger motivation to reshore, and the war in Ukraine has proven to doubters the importance of having supply chains free of the influence of totalitarian nations. The trend of reshoring will clearly accelerate.”

Bob’s insights have proven remarkably prescient, as reshoring is proving not to be a passing trend for American companies, but potentially a long-term strategic realignment of the U.S. manufacturing base:

“There has been a sense in financial circles that the fever among American executives to shorten supply lines and bring production back home would prove short-lived. As soon as the pandemic started to fade, so too would the fad, the thinking went.

And yet, two years in, not only is the trend still alive, it appears to be rapidly accelerating.

Rattled by the most recent wave of strict Covid lockdowns in China, the long-time manufacturing hub of choice for multinationals, CEOs have been highlighting plans to relocate production — using the buzzwords onshoring, restoring, or nearshoring — at a greater clip this year than they even did in the first six months of the pandemic, according to a review of earnings call and conference presentations transcribed by Bloomberg. (Compared to pre-pandemic periods, these references are up over 1,000%.)” (4)

Following are some of the signals from the market on this reshoring activity in the U.S.:

• “The construction of new manufacturing facilities in the US has soared 116% over the past year, dwarfing the 10% gain on all building projects combined, according to Dodge Construction Network.
• There are massive chip factories going up in Phoenix: Intel is building two just outside the city; Taiwan Semiconductor Manufacturing is constructing one in it.
• Aluminum and steel plants are being erected all across the south: in Bay Minette, Alabama (Novelis); in Osceola, Arkansas (US Steel); and in Brandenburg, Kentucky (Nucor).
• Up near Buffalo, all this new semiconductor and steel output is fueling orders for air compressors that will be cranked out at an Ingersoll Rand plant that had been shuttered for years.
• Scores of smaller companies are making similar moves, according to Richard Branch, the chief economist at Dodge. Not all are examples of reshoring. Some are designed to expand capacity. But they all point to the same thing — a major re-assessment of supply chains in the wake of port bottlenecks, parts shortages, and skyrocketing shipping costs that have wreaked havoc on corporate budgets in the US and across the globe.
• In the past, says Chris Snyder, an industrials analyst at UBS, it was as simple as ‘if we need a new facility, it’s going in China.’ Now, he says, ‘this is being thought through in a way that has never been done before.’
• In January, a UBS survey of C-suite executives revealed the magnitude of this shift. More than 90% of those surveyed said they either were in the process of moving production out of China or had plans to do so. And about 80% said they were considering bringing some of it back to the US. (Mexico has also become a popular choice.)” (4)

The case study of Generac Holdings is also instructional, as it includes a company’s reaction to the impact of the Trump Administration’s China tariff, well before the impact of the Covid 19 pandemic, and the strategic response by the company to the war in Ukraine as well (both of which have impacted global trade in addition to the drivers discussed so far):

“Generac Holdings, a maker of power generators, started mapping out plans to shift some production from China, and when the pandemic hit, those plans got supercharged. The company now gets more of its parts from suppliers in the US and Mexico, produces more generators near its headquarters outside Milwaukee and runs a brand new plant in a small town just north of Augusta, Georgia.

‘We wanted to be closer to our customers in the southeast,’ said Chief Operations Officer Tom Pettit. Low shipping costs and quick delivery times are proving a hit with clients and paving the way for the company to keep growing, he said. Opened just a year ago, expansion work on the plant is already underway.

Russia’s invasion of Ukraine also got Pettit’s attention.

Not just because the war further snarled global trade and added to the surge in freight costs but because it reminded him that China could try something similar in Taiwan. And in the same way that business ended for most Western companies in Russia, so too it could end in China. Suddenly, that benign geopolitical backdrop that had helped encourage so many executives to globalize their operations over the past few decades was vanishing. And this, Pettit said, added to his sense of urgency to change things up.

‘President Xi Jinping has not been shy about wanting to reunify China and Taiwan,’ Pettit said. ‘We still think China is incredibly competitive. However, we need to have dual sources outside of China.'” (4)

What Next?

• “This is, of course, a nascent trend. And so many manufacturing jobs were lost here over so many decades — about 8 million from peak to trough — that almost no one would argue that the current trend marks a return to those halcyon times. The rise of automation, which has eliminated many low-skilled, low-paid jobs, means US factories today require a much smaller group of workers.
• What’s more, the soaring US dollar threatens to curtail the whole thing just as it’s beginning.  As the dollar surges against the yuan, yen, pound and euro, it becomes costlier to make goods in the US rather than in those countries.” (4)
• Bob Gourley offers the following recommendations in his May 2022 post Reshoring Will Accelerate: Businesses should fully assess supply chains first:
  • Ensure a disciplined approach to reshoring planning that includes input from all lines of business and support functions including technology, security, and cybersecurity. Aim for a detailed roadmap that has broad input from the leadership team and can be understood and acted upon broadly.
  • Continuously seek to better understand geopolitical risks, globally. Reshoring to the US is a major trend, but there are other open societies where stability and good access to resources and energy will support reliable partners and lower-tier suppliers.
  • Planning should be informed by detailed assessments of current supply chains including all partners providing any material to the manufacturing process. Based on geopolitical risk assessments and other factors your analysis may reveal, the supply base to the supply chain may need to be encouraged to relocate as well. Know where all suppliers and tier 2 and tier 3 manufacturers are and plan accordingly.
  • Understand the penalties and other consequences that may arise by shutting down foreign operations. There could be fines and penalties the leadership is not aware of.
  • Ensure plans are made with the awareness of current manufacturing technology. Manufacturing planning capabilities from firms like Siemens will be informed by the current state of the art, but ensure your technology team is also looking at the startup world and the automation capabilities being created relevant to your sector. This will help build in agility to your manufacturing capabilities.
  • Seek insights into hidden costs which could include uncertainties about future energy and water costs.
  • Analysis of new locations should include awareness of access to workforce and transportation of both inputs and transportation of the final product.
  • Be sure that goals are resourced to enable realistic accomplishment. Track reshoring efforts closely to ensure change is managed. Continuously look for issues and failure points.
  • Look for new ways to leverage advanced IT to accelerate reshoring smartly. If the move to reshoring was done 20 years ago, planning would have had to be done with just PCs and lots of email and Microsoft Excel/Microsoft PowerPoint. But today plans for reshoring can leverage incredible SaaS applications, super scalable cloud computing, great collaborative platforms, and data analytics platforms capable of understanding entire supply chains.

Reshoring manufacturing and rethinking supply chains will be discussed (when we gather as the OODA Community in October at OODAcon 2022 – The Future of Exponential Innovation & Disruption) in the context of the panel Tomorrowland: A Global Threat Brief, with: 

Bob Gourley, CTO of OODA LLC | Former CTO at Defense Intelligence Agency

Johnny Sawyer, Founder of the Sawyer Group | Former Chief of Staff at Defense Intelligence Agency

A description of the panel:  The Pandemic, Russian invasion of Ukraine, demographic inversions, and technological labor force disruption have combined to forever shift the global geo-strategic environment. This session will examine the new world economy, seeking actionable insights for practitioners who need a deeper understanding of new realities.   Impacts on individuals, investors, businesses, the military, and governments will be examined.

Further Resources

Bob Gourley’s aforementioned post Reshoring Will Accelerate: Businesses should fully assess supply chains first.

OODAcon 2022

To register for OODAcon, go to: OODAcon 2022 – The Future of Exponential Innovation & Disruption

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It should go without saying that tracking threats are critical to inform your actions. This includes reading our OODA Daily Pulse, which will give you insights into the nature of the threat and risks to business operations.

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