First it was onshoring and reshoring, then near-shoring and multi-shoring, and now “friend-shoring” is all the rage.

After two years of supply chain disruptions, U.S. shippers are rethinking their sourcing abroad, particularly their reliance on suppliers in faraway countries like China.

As ports remain clogged, the Russia-Ukraine conflict strains European logistics networks, and China locks down factories to combat the rapid spread of Covid-19, a rewrite of shippers’ sourcing plans seems as good an idea as ever.

But building factories in new jurisdictions and choosing suppliers in different countries can come with a new set of risks that shippers need to keep in mind as they scope out ways around the bottlenecks.

The Biden administration has long been pushing U.S. businesses to bring production home.

In a June 2021 report, White House officials outlined their recommendations for building up domestic manufacturing capacity and sourcing in the semiconductor industry and other sectors, such as funding incentives for chip manufacturing and research in the U.S.—and Congress recently passed legislation doing just that.

Still, the White House report said, moving a significant amount of production back home will require a big boost in available labor. Government-subsidized investments in U.S. production capacity will also take years to become operational, and for small shippers, domestic suppliers are simply too expensive.

Creating Redundancy and Geographic Diversity in Supply Chains

A pure “Made in America” approach to supply chain rejiggering also raises the risk that shippers will put all of their supplier eggs in one basket.

As the International Monetary Fund found in April, geographic diversification of global supply chains can somewhat blunt the effects of a disruption such as Covid-related lockdowns in a major supplier country.

IMF researchers reported that a large contraction in the labor supply of a single, large global supplier would dent the average economy’s gross domestic product by 0.8%. “In the high-diversification scenario,” however, IMF staff wrote, “this decline is reduced by almost half.”

As U.S. shippers work to achieve that sort of geographic diversification of their suppliers, Latin America—especially Mexico—is emerging as a popular region for such “multi- shoring,” as well as “near-shoring,” or bringing production closer to the shipper’s customers at home.

“If you’re a manufacturer and you used to have strategic relationships with one or two suppliers that produce the same good or a similar good, we’re now seeing that same manufacturer have relationships with three or four different suppliers,the chief executive of procurement software firm Jaggaer said in April.

Mexico offers not only a close proximity to the U.S., but also an existing manufacturing infrastructure in the auto and other industries, as well as established networks of freight transportation.

Shippers seeking to near-shore there are running into problems, however, such as a lack of supplier networks or supplier sophistication. A supplier must have its own chain or web of suppliers and may be prohibitively expensive without the scale of an established manufacturer—the sort that is easy to find in China.

An additional wrinkle to keep in mind is the tax liability created by adding facilities in new jurisdictions, especially as the Organization for Economic Cooperation and Development negotiates a 15% global minimum tax that could curtail the benefits of credits and other incentives. The U.S. already applies a lower minimum tax to foreign income in excess of a normal rate of return on tangible assets such as factory equipment, which some argue makes it beneficial for U.S. companies to expand production in other countries.

Which ‘Shoring’ Is Right for You?

Shippers can shop around for the right suppliers in multiple, more proximate regions through consulting firms like Kearney with knowledge on the ground in countries like Mexico, as well as law firms like Baker Tilly US LLP.

Firms like Jaggaer allow shippers to send out what are essentially requests for proposals to prospective suppliers in different countries and weigh the merits of each. The startup Zipfox even operates as a sort of online store for shippers seeking suppliers in Mexico.

Ultimately, decisions on near-shoring, multi-shoring, or other changes to shippers’ global supply chains should follow extensive cost-benefit analyses that factor in labor, capital, transportation, storage, investment, tax, and research costs, along with product quality and the existence of supplier clusters, in which producers at various links in the supply chain aren’t geographically isolated.

Sources

https://www.wsj.com/articles/nations-aim-to-secure-supply-chains-by-turning-offshoring- into-friend-shoring-11652612580

https://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review- report.pdf

https://www.semiconductors.org/sia-applauds-house-passage-of-chips-act-urges- president-to-sign-bill-into-law/

https://blogs.imf.org/2022/04/12/global-trade-needs-more-supply-diversity-not-less/

https://www.wsj.com/articles/mexican-factories-gain-in-supply-chain-revamps- 11648831914?mod=hp_lista_pos5

https://www.wsj.com/articles/u-s-companies-face-hurdles-in-moving-production-closer- to-home-11650301164

https://budgetmodel.wharton.upenn.edu/issues/2018/9/10/trading-tangible-for-intangible- the-incentives-created-by-gilti-and-fdii-in-the-tcja