In the Changing Global Supply Chain, There’s No ‘Shore’ Thing
Offshoring, reshoring, nearshoring —
manufacturing and supply chains around the world are undergoing some seismic
locational shifts, many of which the conventional wisdom did not see coming,
and for reasons that may surprise you.
Morris
Cohen, professor of operations, information and decisions at Wharton,
and his colleague, Georgetown professor Shiliang (John) Cui, have
been tracking those shifts for the past few years. They recently spoke with
Knowledge@Wharton about their latest findings — and especially the
counter-intuitive results.
An edited transcript of the conversation
appears below.
A Benchmarking Study
Morris Cohen: This
is a benchmarking study dealing with the issue of the sourcing of manufacturing
in a global supply chain network. As you know, most large companies today
operate globally. They have factories all over the world. And in recent years,
the last 10, 15 years, there have been major shifts in the locations where
companies have sourced their production. In particular, there’s been a major
shift out of the developed economies, the U.S. in particular, to Asia — China
in particular. This has, of course, led to a loss of millions of manufacturing
jobs and a lot of consternation among the political classes and the
commentators, and commentary as to how can we bring these jobs back? How can we
revitalize our manufacturing sector? And this political season, these issues
have not gone away. In fact, probably, the discussion has become even more
heated.
The original purpose of the benchmark study was to gather,
objectively, some empirically based information on what companies were actually
doing. Not on stated intentions or not on predictions, but on actual decisions
that were made.
Last time I was
here, I discussed the first phase, which dealt
with a benchmark study of about 50 global companies that were operating in
China. And we talked about the results we saw. Since that time, we did a second
phase with about 75 companies that were much more globally dispersed. And we
asked the same questions to see what their current set of decisions was, and
what were the drivers of those decisions, what was the expected impact of those
decisions.
Shifting Production
Cohen: Well, in phase one that
is true: We did not observe too much of this reshoring or shifting of
production into North America, or the U.S. in particular. In phase two, which
had a bigger sample, and a much more diverse set of companies, we actually saw
a significant amount of shifting production — I have to be careful — not
“back,” but into the U.S. What was surprising was where it was coming from. It
was not coming from U.S.-based companies, it was coming from Europe-based and
Asia-based companies. So they are shifting production into the U.S. American
companies, not so much. Do you want to add to that, John?
John Cui: Yes. The statement
Morris just gave was entirely correct. Part of the reason that we did not
observe similar results in phase one was because the respondents that we had in
phase one were Chinese divisions of global companies. So they may not have
given us the complete picture of the companies’ movement. But when we got to
phase two, which involves a lot of U.S. and global companies’ headquarters, we
were able to identify this unique shift of non-U.S. companies entering the U.S.
Decision Drivers
Cohen: As part of our study we
ask companies, why are you making these decisions? What are the drivers of
those decisions? And the drivers that are driving companies — particularly
non-U.S. companies — to come to North America for manufacturing are market
access and access to innovation, not for low labor costs, obviously. This is
one of the biggest markets in the world, still — if not the biggest. But I
should also say that those are the same reasons that a lot of companies
continue to go to China — not for low labor costs, but for access to its huge
and growing market.
That raises another point: There was no dominant pattern in what
we saw. We saw a very complex set of flows of manufacturing from one location
to another. We call that “rebalancing of production.” We also saw what we call
“reloading of production,” where some companies would increase their capacity
in their domestic country, but not necessarily shift to another market.
So to answer your question, I don’t know if we have a definitive
answer as to why we saw that. But clearly, they claim market access and
innovation are what’s driving them to this country. You might argue that the
U.S. companies already have that access to the market, and therefore the
incremental benefit to them is not as great.
Cui: Yes, I totally agree.
We thought that that could explain why the U.S. companies do not benefit as
much as foreign companies entering the market. Also, I agree with Morris that
cost is no longer the single dominant factor that firms consider when making
those reshoring decisions. It used to be dictating their decisions, but these
days, we observe much more complexity in their decision-making, and in terms of
the outcomes that we observed.
Surprising Conclusions
Cohen: I think that there were a
couple of things that we saw in the second phase that reinforced what we saw in
the first phase. I think I had already mentioned that there was no one dominant
reason, there was not one dominant flow. There seems to be a complex trade-off
analysis that companies are undergoing. What’s really interesting to us is that
this is pervasive. We are in the midst of a major restructuring of global
supply chains. In region after region, company after company, companies are
asking the questions: Do we have the right structure? Do we have the right
sourcing locations? Are we bringing our product to market in the most effective
way? And they’re oftentimes shifting capacity, changing the way in which they
produce products, adding technology.
For example, technology and R&D — across the board, everybody’s
invested in this. So I think that we’re in the midst of a period of flux, of
change, which is redefining the way the world produces its products.
Two-Way Streets
Cohen: [Offshoring] had been
perceived as a one-way flow — a “your loss is my gain” type of thing. But now
we see two-way streets. We see movement in both directions. And that’s why we
call it a rebalancing, which is one of the dominant modes. A lot of companies
are making multiple decisions — sometimes offsetting decisions — to gain access
to developing economies and their markets, to gain access to their labor, to
their suppliers.
So there is no one way to go. But there is a lot of shifting
back and forth.
‘The Biggest Flow Was Still Into China’
Cui: We found that
companies — European companies and non-Chinese companies — are moving to China
for market reasons. China is growing to be the largest market in the world. But
at the same time, we also observed companies moving out of China, not for market
reasons, but this time for cost reasons. For example, in the apparel industry,
there were a lot of companies moving out of China and going to South Asia
countries like Vietnam, Bangladesh — countries that have even lower costs than
China. So I just found it amazing that companies are going in and are going out
of China for different reasons.
Cohen: Let me add that
what we saw in phase two, consistent with phase one, is that the biggest flow
was still into China. Even now, in spite of the rising labor
costs, in front of the fact that some companies in China are moving out of
China, if we asked, “Where are you going, what are you doing?” the biggest
observed flow was companies moving into China. Oftentimes, Chinese companies
were expanding within China — we call that reloading — or foreign companies
were moving into China. That was still the most popular decision….
Another thing that we saw very pronouncedly in phase two was
that quality was a positive reason to go into China, not a negative.
At some stage, years back, one might have said, “Oh, if you
leave the U.S. and go to Asia, you may have quality problems.” But certainly
that has not been true in Japan for a long time. And it seems to not be a
problem in China. High-quality, complex products — not necessarily labor
intensive, but complicated products — are being produced in China at very high
quality.
The U.S. and Europe
Cohen: Now, Europe is a very
interesting point. In both studies — and I think even more in the second study
— Western Europe was the one place that we saw a decline, shifting production.
In North America, there was actually stuff coming in from other places. If we
add it up, all over the world, we’re gaining. Not at a great speed, but we are
gaining ground or recovering…. But Europe is a net loss — except, of course,
for Eastern Europe and Russia, which is perceived to be a nearshoring location,
just as Mexico is to the U.S. So they’re gaining, but Western Europe is
declining.
‘The Global Economy Is Not Flat’
Cohen: I’d say that the global
economy is not flat, that there are many possibilities and many opportunities.
One thing in particular that we should bear in mind is that there are
opportunities in this country to grow our manufacturing and to grow our
economy. It may be based on innovation, it may be based on different types of
technology, but we should recognize that the world will come to our door as
long as we manage that process correctly.
http://knowledge.wharton.upenn.edu/article/rebalancing-the-global-supply-chain/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-03-09
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