Long before the Coronavirus outbreak, the underlying tension in the globalized logistics model was clear: from imminent trade wars and security concerns to product quality, climate goals and the new opportunities that Industry 4.0 holds. The challenge that COVID-19 presented, could have been the proverbial last straw, or at least a wake-up call to business that changes to global Supply Chain networks are imminent.
From off-shoring to re-shoring the manufacturing industry. Is the pendulum swinging back?
Since the 1990s, manufacturing activities in many different sectors have been transferred to parts of the world where it is simply cheaper to produce: off-shoring. Today, China produces 60% of all shoes and toys and no less than 80% of all air conditioners. The country also became an undisputed leader in electronics production (70% of all smartphones, and 90% of computer accessories are made in China). China has become an indispensable link in the world market, as evidenced by the mega ports in the country: 7 out of 10 of the largest container ports on the planet are located in China. Economic growth created a broad middle class with, consequently, increasing wages and labor cost. In other words, the business argument for off-shoring has gradually eroded. In addition, the ‘Western brands’ are increasingly facing competition from (in our Western eyes relatively new) Chinese brands.
But the consumer has also changed: China is no longer just the producer, it has also become an important sales market with its specific characteristics, standards and a sometimes deviating taste from the West. In addition, in the West there has been a growing interest in ecology in recent years. At the same price, the Western consumer prefers products with a small CO2-footprint today. In other words, there seem to be some evolutions that might slow down off-shoring.
Some researchers even go a step further: according to them, a substantial part of the new investments in the manufacturing industry would move to the original homeland, on the continent where the original business story was written... Re-shoring. What is the deal with this exactly?
Why re-shoring just became a topic today... Logistical lessons learned from COVID-19
The COVID-19-crisis has made Supply Chain managers and business leaders realize that it is important to build in sufficient flexibility in the logistics network. The empty shelves in shops we saw recently were unmistakably an eye-opener, but in fact, the assembly sectors in particular were even more heavily impacted (automotive, electronics, bicycles, machines…). Parts and finished products were initially stuck in the Chinese lockdown, but due to the disruption in container traffic and the entire maritime transport, supply remained extremely unstable until a long period after the actual lockdown.
Not only a wake-up call for companies, but also governments today stimulate initiatives that make our logistics chains more resistant to shocks. In today's competitive and fast-changing world, companies cannot afford not to have a plan B ready. The world has proven to have become more unpredictable and Supply Chains need to be ready to deal with this. The logistical network needs to be investigated and prepared for the business disruption following natural disasters or geo-political events. In other words, we need to weigh in the risks of going global and not just focus on the short-term economic benefits. Does this mean we need to abandon the whole idea of going global? No. Not immediately. But we will need to address certain trends… Let’s take a look at this in more detail.
Public finances in imbalance and economic anxiety: a driver for re-shoring?
The economic consequential damage of COVID-19 can hardly be overseen to date. The economic blow of the lockdown is estimated by most analysts around 10% of GDP. Moreover, the second-line consequences are feared: declining consumer confidence is hampering a rapid recovery, which will make it very difficult for some sectors, ultimately yielding job losses.
As Europe gears up for what is likely to be the longest economic winter in history, business leaders are also worried about COVID-19's potential tax implications. The European Commission estimates the total confirmed support from Europe and national budgets to citizens and businesses at around 4,200 billion euros in much-needed funds and support measures. 2020 and 2021 will be recorded as years in which public finances completely collapsed, partly due to the support measures. Obviously, that money will have to flow back from the real economy to the government in the long term. Governments therefore have every interest in seeing the local economy grow.
The quick observer will see why governments are already supporting initiatives to innovate the logistics chain and, if necessary, bring production back to the EU. Just think of the VLAIO-subsidies in this regard, a concrete example of how our local entrepreneurs can apply for support to reinvent their Supply Chain.
The Green Deal and the associated European taxation will determine the Logistics Network of our companies
While greenhouse gas emissions produced in the EU fell by 13% between 1995 and 2017, its actual carbon footprint only dropped by 8% because it has remained a net carbon importer. A third of the EU's carbon footprint comes from emissions embedded in imports. However, Europe has clearly expressed how it sees the future: by 2050, the European economy must become climate neutral.
International trade agreements also refer more compellingly to the Paris Agreement as a fundamental premise. “If it cannot be done green, then we will do it ourselves” also seems to be the starting point for the recently announced Carbon Border Adjustment Mechanism (CBAM). Paolo Gentiloni, EU Commissioner for the Economy, explained on July 21 that the Green Deal will be converted into concrete legislation via the CBAM to prevent European companies, via taxation, from shifting production to countries with less strict environmental legislation (please note that Europe can really use the extra employment). In this way, climate neutrality and climate objectives are assigned a business value that can easily be included in the marketing mix. It is written in the stars that the manufacturing industry will gradually start to move again. In other words, new investments in manufacturing are more likely to take place in Europe and the US than outside.
The recent technological developments that we have seen in Robotics, Machine Learning and Artificial Intelligence, are an additional reason why we can believe that new investments in more complex production processes, relatively more than the past two decades, will take place again, in Europe, in Belgium. Obviously, we need to train more technical people, engineers and computer scientists, but that seems feasible in itself.
The number of start-ups in the technology field is also making significant progress. This way, the actual work on the floor, previously mainly performed by manufacturing operators, will shift from manual labor to more technologically advanced work, supporting a more automated shop floor or factory. Moreover, this whole concept is perfectly in line with ecological thinking and the Green Deal, because assembly will gradually take place again closer to the end consumer, be it in Asia, Europe or the USA.
Quick debriefing with Joël Wijns, Partner and responsible for the Supply Chain Consulting department at Moore.
We read in the media that COVID-19 is becoming a trigger for bringing the manufacturing industry back to the West. What is your opinion on that matter?
Joël Wijns: “This trend has been picked up by the media quite well. You could say that there’s a buzz around re-shoring. Personally, I am persuaded that certain investments will indeed take place in the West again. Closer to the consumer, better for the environment, in line with the fiscal philosophy and the practical implementation of the Green Deal, here in Europe. But also in line with growing protectionist ideas seen in the US.”
In your opinion, does this mean that factories in the East and South will close?
“The effective closing of factories in former low-wage countries, will in our opinion not really happen. We do expect that production and assembly will again take place closer to the end consumer. The factories in the East and the South will gradually, in relative terms, be producing more for local markets. More than today, new investments in new technological goods, intended for Western markets, will again take place in the West. Of course, you've got to see this as an evolutionary process, it's not going to be a big bang.”
According to Moore, what are the big opportunities for Supply Chain managers?
“The EU outlines a clear framework of where it wants to go. The Green Deal and the CBAM (Carbon Border Adjustment Mechanism) provide not just the long-term story, but also clearly show the direction we are heading in today... Those who produce or import goods into the EU tomorrow, which can be related to high CO2 emissions, will have to make a fiscal contribution. There’s no doubt about that. However, there is a clear opportunity to address this, well in time: Industry 4.0. The technological developments we have seen over the past decade, and especially so in the past five years, really offer the perfect solution. Also, the ageing European labor market can be compensated by investing in smart factories. European employees will do less physical labor in the future. Instead, they will help design and monitor the automated shop floor. There will be lots of new opportunities: new jobs, innovation, a shorter, more flexible Supply Chain, in line with the climate philosophy. In our opinion: a real win-win."