Insight & Analysis

TT’s 25th anniversary: making sense of manufacturing movements

Published: Aug 2023

From offshoring to sustainable procurement, supply chain strategies have evolved at a rapid pace over the last quarter of a century.

When Treasury Today first emerged in 1998, the world of logistics was in the midst of what some refer to as the intersection of the integration and globalisation eras of supply chain management where collaborative technologies and production and distribution networks consisting of multiple separate supply chains were developing rapidly.

Offshoring was in vogue as firms looked to outsource elements of their supply chain to cheaper locations. Developing countries (particularly the East Asian economies) took this opportunity to industrialise, while developed countries saw the replacement of industry jobs with higher value-added service jobs.

In 2013, Livio Stracca, Deputy Director General Financial Stability at the ECB produced a paper in which he concluded the rise of large emerging manufacturing exporters such as China and India was a positive development for developed economies, particularly those who were open to trading with emerging markets and facilitating a reallocation of production.

But by this time the concepts of onshoring or nearshoring were gathering momentum as companies realised the cost savings promised by offshoring often fell short of expectations. A 2013 paper published by the World Trade Organisation notes that although at the turn of the new millennium offshoring was viewed as a necessity for manufacturers and those dependent on manufacturing to compete, as many as half failed to generate the expected financial benefits.

The latter part of the last decade saw the emergence of a trend to diversify China-centric supply chains on the back of rising labour and tariff costs and concerns over market access that was exacerbated by China’s response to the Covid pandemic.

Countries such as Vietnam, India, Malaysia, Indonesia and even South Africa were identified as suitable partners for ‘China+1’ manufacturing strategies, particularly those focused on labour intensive production processes.

However, the expertise and infrastructure China has acquired in high tech manufacturing is not so easy to replicate elsewhere. As a result, we have seen many corporates ramp up their investment in China while also investing in alternative locations.

This approach is best summed up by Young Liu, Chairman of Taiwanese multinational electronics contract manufacturer Foxconn, who has referred to the emergence of separate supply chains for China and developed economies including the US.

In Europe, the trend for relocating or investing in manufacturing capacity close to an end customer, target market, or corporate hub has been most evident in Hungary, the Czech Republic, Portugal and Turkey.

The latest location to benefit from diversification from China is Mexico, which has emerged as a key nearshore location for manufacturers targeting the North American market. Earlier this year, Unilever announced it would invest US$400m to build a new manufacturing plant in the state of Nuevo Leon to produce beauty and personal care products for regional export, while Tesla, Mattel and BMW have made similar announcements.

Reginaldo Ecclissato, Unilever’s Global Supply Chain Leader said the new factory represented an important investment for the growth and development of Mexico as well as Unilever.

When companies discuss nearshoring some, or all of their operations from China to Mexico, the benefits most commonly mentioned are improved risk management and the ability to achieve savings in areas such as labour and shipping, explains Robert Kossick, International Trade Attorney at law firm Harris Bricken.

“Benefits less frequently noted include the availability of a free trade agreement (the USMCA) and an emerging set of regionally attuned investment/production incentives,” he says. “There is also the opportunity to avoid the reputational damage that comes with operating in China as well as Mexico’s growing internal market.”

According to Rosa Ana Aranda López, Tax Partner at RSM Mexico, this is unlikely to bother China too much as it is just following the pattern of countries like Japan, Korea and Taiwan which, as they developed, shifted to higher value manufacturing, serving domestic as well as international markets.

“The key question is not where China is headed but where international manufacturers may go instead,” she adds. “Any move must be carefully considered in terms of taxes, foreign trade and logistics. Expert advice is essential – without it, businesses may find they are just swapping one set of problems for another.”

The importance of sustainability has also grown rapidly in recent years. A study published for research firm Forrester in 2021 found that 70% of the finance, procurement, and supply chain decision makers surveyed reported an improvement in supplier relationships from implementing corporate social responsibility initiatives.

Given supply chains can account for more than two-thirds of an international company’s sustainability footprint, polymer supplier Covestro set a target of having all its suppliers comply with its sustainability requirements by 2025.

“Digitisation in procurement leads to increased transparency, traceability, and accountability across the supply chain – which, in turn, helps to drive more efficient and sustainable organisations,” says Rocío de la Cruz García, Senior Project Manager Procurement Sustainability at Covestro.

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