By Dan Shea*, Managing Director and Leader of the M&D Practice Group
Co-authored with David Horwich, Managing Director of GHJ
Over the past several years, manufacturing has begun shifting away from China (known as The World’s Factory) and back to the United States (aka onshoring) and/or to other countries including those south of the U.S. border (aka nearshoring).
In 2019, pre-pandemic China exported $450B in goods to the U.S., with Mexico in second place at $356B. Both countries are major trading partners with the U.S.
WHAT IS DRIVING THIS TREND?
Onshoring and nearshoring are driven by several coalescing factors:
- Supply chain disruptions underscored by the COVID-19 pandemic
- Challenges with manufacturing in China:
- Rising labor costs in China now exceed labor costs in Mexico
- An aging skilled workforce in China, which is now less productive than labor found in Mexico
- A changing political environment between China and the U.S.
- Risk considerations associated with maintaining control over access to goods
- National security considerations, particularly regarding chips and other tech components/devices, precious metals and pharmaceuticals
- Intellectual property theft
- A desire to diversify vendor partners to deconcentrate supply risk
WHAT ARE THE INCENTIVES?
At the same time, manufacturers have seen incentives to increasing activity in North and Central America:
- Closer proximity to end customers with operations in the Western Hemisphere, which results in lower transportation costs and lower required lead times
- Improved capabilities of Mexican and Central American vendors in terms of skilled output, particularly in electronic goods
- Improved trade agreements between the U.S. and Mexico as well as key Central American countries
WHAT QUESTIONS SHOULD BUSINESS OWNERS BE ASKING?
Business owners should consider two key questions: 1) What if my vendors move their production out of China? and 2) Should I consider similar changes to my supply chains?
As your vendors relocate, potential fallout for U.S.-based companies could come from several sources:
- A need to realign logistics from the vendor’s new location
- Potential disruption in supplies during a transition
- The attendant risks inherent in creating and implementing a new supply chain
- Potential retaliation from the Chinese government
WHAT DEEPER QUESTIONS SHOULD BE CONSIDERED?
Any company contemplating a change in location for the production of materials or finished goods should take into account the following:
- Which vendor options outside of China make the most sense
- Where these potential vendors are located and how they might fit in with an overhauled supply chain strategy
- The adjusted labor costs and ability to find necessary enterprises with the right skills in the new location
- How transportation costs from the new location would change
- Where raw materials for production would come from and how challenging it would be to access secure and cost-effective materials
- How disruptive a change would be to your internal operations and to your customers
- How disruptive the transition period would be in itself
- What the incentives in a new location would be (e.g., tax holidays, workforce incentives, local restrictions and community requirements)
WHAT INDUSTRIES WILL BE MOST IMPACTED?
Certain industries will be more impacted than others as this trend continues. Informed by our recent engagements, here are a few examples:
- Consumer products, including vehicles, computers, food, beverage and apparel
- In particular, food safety from Chinese production is of paramount concern to virtual brands
- Electronic products and components, in particular semiconductors, integrated circuits, optical devices and medical devices
- Material inputs, such as precious metals, mineral fuels and chemicals (including specialty chemicals)
Relocating manufacturing out of China has been picking up steam for a while. Nearshoring and onshoring are hot topics for American businesses. While there are many reasons to consider new suppliers and locations, wholesale changes of this magnitude require significant analysis and consideration.
Indeed, supply chain missteps can be enterprise–threatening and must be carefully planned. Both of our firms are skilled in assisting clients examine such fundamental decisions. Consider reaching out to GHJ’s Growth Planning and Strategic Advisory Team or Objective’s Manufacturing & Distribution Investment Banking Practice Group to learn more about onshoring, nearshoring and how these may be a benefit to your business. Additionally, if you are interested in learning more about Objective’s Manufacturing & Distribution practice group, click here to read and download an overview.
About the Author:
Managing Director, M&D Practice
This news release is for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. Principals of Objective Capital are Registered Representatives of BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities.