From Globalisation to Reshoring to Rightshoring by Dr Gaj Bagga
Globalisation is a well-known strategy that has been is use for many years now and one, which is loved by economists around the world. However, it is a complicated issue and perhaps requires greater attention.
The initial thought process behind Globalisation was that it would be a win-win solution for both the developing countries as well the developed countries. For the developing countries this would mean reduced unemployment and poverty whilst providing access to world markets for exports. For the developed countries it would mean import of cheaper goods and services due to the cost differential, which ultimately would benefit the end user. As a result of Globalisation the world has seen benefits through greater exchange of information, communication and cultural diversity. Lifting of trade barriers together with movement of labour and transfer of know how and skills have also been a positive outcome of this strategy. So Globalisation made perfect sense, correct?
Perhaps in the light of COVID-19, a number of questions should be asked and the Globalisation strategy be revisited. 1. How well has the above strategy worked?
2. Have Supply Chains worked and responded in a timely manner?
3. Why are we seeing so many empty Supermarket shelves?
4. Why is there a shortage of masks and hand sanitizers?
5. Has Just in Time gone too far?
6. Have technologies been copied or stolen? In the early 1980s, Gangways and Couplers for trains used to be manufactured in Europe. Slowly this shifted to China and now has become the norm. Some may blame this on stolen IP whilst others may put this down to collaboration of technology.
7. Have we seen more equality between the developing countries and developed countries through Globalisation?
8. How has unemployment changed for the developed countries as a result of manufacturing jobs going overseas?
9. Is there a direct correlation between jobs lost at home and Globalisation?
10. How has the Balance of Budget faired for the developed countries?
11. How has the risk profile changed as a result of sourcing from “low cost countries?”
12. Is it time to re-think our Globalisation strategy and bring manufacturing back home (Reshoring)?
Supply Chains can be complex with a number of links between countries and companies. As I enjoy the occasional cup of coffee, perhaps this concept can be demonstrated through the journey of a coffee bean. There are a number of steps involved in producing coffee. The first step is to grow the coffee seed in a humid climate perhaps in Brazil, Guatemala or Vietnam. The tree will mature in 4- 7 years time and is followed by harvesting, removal of the husk, drying, packaging, blending and roasting. Each step in the supply chain involves intermediaries and transportation to distribution centres worldwide. The slightest disruption in the Supply Chain could lead to users either paying higher prices for their coffee or going without. Where there are many parts in a product such as for Lifts & Escalators which might be produced overseas, the Supply Chain can be very complex and a breakdown in any one link can have a detrimental affect on the ability to service the product.
In the light of COVID-19, should companies now consider bringing back home manufacturing and seize control of their Supply Chains with shorter lead times? After all, Reshoring can help in avoiding currency fluctuations, improve risk management, provide better and shorter supply chains together with enhanced quality. To make this happen though, lower energy and labour costs are both critical success factors in helping this become a reality.
Research shows that in the USA, there has been a boom in gas production recently making it viable and cost effective for manufacturers to produce at home. Secondly, China has seen rising wages and salaries whilst wages have remained stagnant at home. Both these variables provide a favourable platform for a move towards Reshoring. However, this may not be the same for other developed countries. Some recent examples over the years of Reshoring in the USA include Boeing, General Motors and Ford.
Even with Reshoring, there are challenges. For example: 1. Where will money for the investment come from?
2. What is the payback period if it was to go ahead? 3. Where will demand predominantly come from? 4. Given the ongoing levels of automation, will Reshoring significantly reduce the level of unemployment? 5. How will the lost manufacturing skills be replaced and how long will it take? 6. Will governments provide additional incentives to bring manufacturing back in house in the form of subsidies, tax incentives, tariffs, enterprise zones etc? For examples the end user will often buy a product from China because it is cheaper compared to a homemade product (cost savings/cost avoidance). What if the Government was to encourage companies to employ people at home by offering subsidies whilst at the same time placing higher tariffs on imported goods? This could make it a level playing field. Governments could recoup some of their investment by way of taxes and having to pay less for Centrelink.
An alternative strategy could be to consider Rightshoring where the focus could be on putting things in the right place i.e. have a number of plants around the world, which will reduce disruption. But in the light of the current pandemic, this also has proved to be challenging.
In summary, we can continue down the path of Globalisation but in the light of the current pandemic it is perhaps worth revisiting this strategy. Globalisation offers both positive and negative aspects but then so does Reshoring and Rightshoring. What COVID-19 has done is that it has exposed some great weaknesses in the Supply Chains and given companies the opportunity to re-evaluate their strategies.