Area Development
There is plenty of manufacturing capability around the world for consumer goods, PPE, testing equipment, medical devices, consumer goods, and other industrial products. So why are companies reshoring their manufacturing operations now?

The Tax Reform Act of 2017 helped. The 301 China penalty tariffs gave a little push. But the global pandemic made executives acutely aware of their global supply chain risks and vulnerabilities and provided an opportunity to rethink their global manufacturing strategy. New strategies typically include at least some capacity for manufacturing and sourcing critical goods in America.

{{RELATEDLINKS}} Pharmaceutical manufacturers were among the first to consider reshoring in an attempt to reduce America’s dependence on basic ingredients coming from China and India. Other industries are now actively following, including automotive, plastics, and machinery. But how easy is it to extract your manufacturing from China or end your relationships with suppliers and contract manufacturers?

It’s not so easy.

Global Supply Chains Sourcing from China
Global supply chains are part of the problem. Much of the production in China includes consumer products, finished goods, and parts that go into other finished goods around the world. This is because, over the past 20 years or so, China has become the low-cost production leader, particularly for high-touch, high-labor-content processes such as electronics assembly and sewing. This production cost profile (high-touch, high-labor-content) is well suited to low-cost countries such as China, Vietnam, Bangladesh, Mexico, and others.

From a market economy perspective, this is appropriate. But strictly economic decisions have not served the markets very well in this pandemic emergency, with so many human lives at stake. Having no capacity for producing products such as PPE, medical devices, and pharmaceuticals in our home country leaves us vulnerable and completely dependent on China.

The global pandemic made executives acutely aware of their global supply chain risks and vulnerabilities. The pandemic has been a wake-up call and a catalyst for reshoring, or at least for considering a multi-country manufacturing strategy. The U.S. government has also started to consider an industrial policy that supports critical industries and may even offer incentives for reshoring. But leaving China to return production to the U.S. is likely to be complicated and expensive.

Leaving China
Even if some industries are deemed critical and incentives are provided, there are still difficult hurdles in leaving China and redirecting supply chains to a third country or toward reshoring to America. Companies cannot expect to simply pack up shop, lock the doors, turn out the lights, and move back to the U.S. It’s complicated.

The decision to leave China isn’t an easy one. With nearly 350 million people in China’s middle class and growing, China is likely to be a company’s biggest target market over the next 20 years. As the Chinese middle class grows, so do its disposable income and the desire for all kinds of products, particularly those with Western brand names. To serve this market, many manufacturers are deciding to leave at least some of their production in Asia.

Further, America’s relationship with China has deteriorated significantly over the past four years. Not only has the anti-China rhetoric ramped up in America, but also the anti-America rhetoric is equally as bad in China. The Chinese government and the Chinese Communist party have made no secret of their unhappiness with American trade and sanctions policy. They aren’t going to make it easy for companies to move manufacturing out of China.

Let’s examine the various facets of the Chinese operation: Obtaining a permit to leave may be yet another hurdle. Depending on your industry, the Chinese government may not want you to leave the country. High-tech companies, in particular, may be subject to extended exit permit times. Anything that would be considered a strategic industry or strategic technology is likely to experience delays in the permitting process.

To serve the growing Chinese market, many manufacturers are deciding to leave at least some of their production in Asia The Way Forward
There is a lot to consider when designing a new global manufacturing strategy. Many things are now in flux, including the global trade wars, domestic industrial policy, and incentives. With the U.S. presidential election of Joe Biden and Kamala Harris, changes in policy will affect global relationships. Katherine Tai has been nominated as the next U.S. Trade Representative, and with her significant background in China relations and negotiations, the U.S. relationship with China is likely to improve. But so much damage has been done during the past four years that improving and changing the China-America relationship now is a daunting task that will surely take time.

So many companies make the mistake of simply comparing labor costs when determining their reshoring pathway. But there is so much more to a reshoring decision, especially within the context of a global pandemic and the resulting global recession. There is no sweeping correct answer applicable to all enterprises in all countries. Microeconomics of the firm will drive the final decision to reshore or not.