What's the point at which manufacturers decide to shift production from China and return it to the U.S.? Gregory Burkart, managing director and leader of the Site Selection & Incentives Advisory Practice of financial consultancy Duff & Phelps, offers some insight into the calculation.
There is a “tipping point” at which companies decide that manufacturing in China is no longer economically feasible, and return at least some production to the U.S. But it’s more than a matter of simply comparing factory wages between the two countries, says Burkart. Businesses that once focused almost exclusively on manufacturing and logistics cost now must take into account the heightened risk of siting production at great distances from their markets. The coronavirus pandemic demonstrated how even temporary disruptions in offshore manufacturing can wreak havoc with global supply chains. Today, additional considerations are being thrown into the mix, including the level of innovation and concerns over intellectual property protection. Finally, there’s the issue of rising trade tensions between the U.S. and China, resulting in heavy and unpredictable duties in both directions, higher overall costs, and reduced access to markets.
Companies had been aware of such risks before this year, but it took a pandemic to drive the point home. They began to feel its effects in late 2019 and early 2020, with the first wave of factory shutdowns in China and other parts of Asia where the disease struck first. “The expanded equation for determining whether or not to reshore some operations started with the pandemic,” says Burkart.
Not all industries are able to make the shift from China to the U.S. — much depends on the type and value of products being made — and the decision isn’t a binary one. The new trade pact with Mexico and Canada make those countries potential sourcing candidates as well.
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