By David Ross, Chief Strategy Officer at Ascent
The ‘80s and ‘90s (and even the early ’00s) were all about globalization and off-shoring, where companies extended supply chains to take advantage of cheaper labor in Asia, specifically China. Over the past 40 years, China has built an impressive manufacturing infrastructure that now produces a big chunk of the goods purchased in the major consumer markets of the U.S. and Europe. But things change. So, while this long-lead-time model may have looked optimal 30 years ago, it does not resonate as well today for many companies and products.
We can talk about the rise in Chinese labor rates (Chinese manufacturing unit labor cost per hour up ~8x in the last 15 years, according to Haver Analytics), the increase in global transportation costs, geopolitical tensions, and the explosion of e-commerce. But the first sign of problems with this offshoring model surfaced during the 2002 West Coast port lockout. When freight wasn’t moving through the SoCal ports, shippers realized for the first time how vulnerable their supply chain was to any disruption in the flow of goods from Asia to the U.S. At the time, most of their goods came into the West Coast ports. But while that interruption made them pause, it didn’t lead to any change in sourcing decisions. But it did lead to the start of a gradual share shift that we’ve seen play out over the past 20 years, from West Coast to East Coast ports for Asia-U.S. traffic. Most Asia-origin freight still comes into the U.S. via the West Coast, but supply chains have shifted somewhat to allow for a greater percentage flowing through the East Coast to hedge some risk.
Then other exogenous events popped up from time to time, like the earthquake/tsunami in Japan in 2011. This exposed those supply chains with single-sourcing for specific parts or products in Japan, because their whole manufacturing operation had to halt when those plants went offline (like for some auto OEMs). So, now add supplier risk to port risk. Then in 2014, the West Coast was at it again with a labor contract negotiation-related work slowdown that snarled freight at the ports. In each of these instances, articles were written about the idea of shifting supply chains – nearshoring, next-shoring, onshoring and re-shoring were all names given to moving production and sourcing out of Asia and closer to the end consumer (either in the US or Europe). But the pain of these events was typically over in 6-18 months, so by the time it ever got to the Board level for a big decision, things were generally back to normal. Status quo.
Throughout this period, labor rates in China grew much faster (off a lower base) than across the rest of the world, making that labor arbitrage less significant. Therefore, many companies initially moved to SE Asia (e.g., Vietnam, Malaysia) and even India. But it should’ve been clear that having a supply chain stretched halfway around the world is fragile. You can’t get further away from the customer than being halfway around the world. And to get from production to export to import to consumer involves many partners, significant planning, and many months (unless you have a high-value product that goes airfreight, like fashion or high-tech, but the vast majority of global trade moves over the water).
Also, e-commerce began to gain steam. Through that period of globalization (~1980-2005), Walmart became the world’s largest retailer, using supply chain as a competitive advantage to source its products at the lowest cost to provide the best prices to consumers. But then Amazon entered the ring with a completely opposite strategy. Faster. This approach meant a high-velocity and high-cost supply chain. And companies have had to adjust. To be faster, you need to speed up the mode you use (ocean à air, for example), shorten your supply chain, and/or move inventory closer to the end consumer. With a ~10x cost increase in transportation in an ocean-to-air move, most choose to relocate closer to the customer. This has driven growth in Mexico, Central America, and Eastern Europe. But until recently, none of this was enough to really rock the boat and drive significant global supply chain movement, because change is hard. And often painful.
These past few years marked the tipping point for companies. During the chaos surrounding the pandemic in 2020-2021, supply chains were painful enough (big problems, plus high costs) for long enough – more pain for longer than we’ve seen in prior disruptions – that the idea of nearshoring became a serious Board level and C-suite discussion. Still, just as it took a long time to globalize supply chains, it will take time to unwind them. There are many advantages to production/manufacturing in China, including the industrial clusters that have been built there. But there are also increased risks with staying in China (and certainly with sole-sourcing from China) due to their volatile, mistrustful, and potentially hostile government.
In speaking with fellow industry executives at conferences recently, the seriousness of this trend was echoed by several CEOs – that shippers are looking to take action. And we see it, too. Customers are looking to shift their supply chains, shorten them, and possibly build redundancies around sourcing and manufacturing. Yes, there are challenges with change. For that reason, they’re looking for guidance from their logistics partners. Change can be expensive in the short run. But the cost of not changing, as it relates to global production, sourcing, and supply chain design, has become more significant than the cost of change and disruption that may come with it. The fragmentation and movement of global supply chains will be one of the biggest trends shaping our industry over the next 10-20 years.
Ascent’s strategy has always centered around making our customers better. And when things don’t go as planned, often due to sudden external shocks, we’re there to help keep our customers’ supply chains on course. It’s why we’ve been operating in Mexico for the last 12 years. Our cross-border business continues to grow. With a renewed focus on re-shoring/nearshoring and the North American manufacturing complex, we’re investing in Mexico, where many new offices are scheduled to open south of the border in the next couple of years.