23008_Nearshoring Report

SO, WHAT ARE THE FACTORS THAT ARE ACTUALLY DRIVING NEARSHORING?

SUPPLY CHAIN DISRUPTION

REGULATORY ENVIRONMENT

COST

Disruptions due to shutdowns in major production and manufacturing area in China, Taiwan, Vietnam and other Asian countries meant there were global shortages of goods – finished goods, intermediate goods or primary materials – being sent to markets of consumption. Added to this, this shutdowns at major export gateway ports (such as the ports of Shanghai, Yantian and Ningbo in China) meant the diversion of goods and ships to alternative ports which added time and cost. Companies are therefore now considering how they diversify their supplier base in order to reduce their exposure to risk of supply chain shocks. Strategies being considered include ‘China +’, whereby additional manufacturing locations are established elsewhere to complement production in China and help mitigate supply chain interruption risks, and fully locating production in locations closer to markets of consumption.

One of the biggest factors is that the cost arbitrage that offshoring offered has become smaller. Labour costs in particularly have been growing significantly in Far Eastern locations, especially China, as industrialisation in these countries moves into a new phase of higher value-added and therefore higher wages. And whilst they remain at a significant discount to many locations across Europe, the gap is not as compelling when considering other factors as well.

Another key factor is the cost of transportation. Whilst shipping costs were previously negligible when moving over long distances in bulk, in the lead up to the pandemic, costs had already begun rising and then skyrocketed to more than 900% higher than immediately before March 2020. Whilst they have moderated in the intervening years, the volatility of this previously mostly considered marginal cost has come into sharper focus as a cost risk.

Although a positive factor from a people and environment perspective, higher levels of regulation in farther-away production locations have made operations more costly and less flexible. Additionally, businesses in Europe and other mature markets are translating their expectations of workplace safety, worker welfare and environmental protection to farther away locations. In order to monitor this, many businesses are engaging in supplier workplace audits to ensure that they meet their standards, which can be challenging when located a long way away. With reporting requirements extending to now involve Scope 3 levels (that is, the environmental impact of entire supply chains right back to primary sourcing and transport by secondary and tertiary suppliers), this is even more challenging if suppliers are based in farther away locations.

MANUFACTURING ANNUAL WAGE IN CHINA

100000

80000

CHINESE YUAN

60000

40000

20000

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

SOURCE: National Bureau of Statistics of China

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