Globalization as we know it is over -and with that, one of the most basic assumptions which have driven the post-World War 2 economy has come to an end.
That’s why trend #16 of my “23 Trends for 2023” is The Great Decoupling – what happens as the assumptions behind the success of globalization are challenged, and a reorganization of the global economy occurs, aka “place-based economics.”
You see the impact of broken globalization all around you – stuff costs more, it’s harder to get, is in shorter supply, and has long lead times. Obviously, something is broken, and something needs to be rebuilt – that’s the great decoupling. Right now, companies, executives, and individuals are challenging many of the fundamental assumptions that have defined their success in the past by rethinking how to rebuild their operations in the face of new global realities.
Think about it – for a long time, the global economy was based on the assumption that we would see the continued integration of economies worldwide, accelerating deregulation, low-cost financing, geopolitical calm, logical and rational political leaders, and stable economic assumptions. But that integration, driven by easy money and cheap capital, has come to an end for a time. What drives the future now is whiplash political uncertainty driven by populist political agendas, high labor costs driven by skills shortages, supply chain challenges, relentless inflation, higher interest rates, the Russian invasion of Ukraine, and turmoil in energy markets.
The relentless volatility and uncertainty have meant that while globalization is not dying, it is certainly changing. Companies and industries have had to deal with absolutely wild challenges. In 2021, with Covid wreaking havoc on every form of freight, significant congestion in the sea freight shipping sector meant that an additional one million cargo containers traveled by rail from China to Western Europe. Companies reorganized their supply chains to take advantage of these new routes of predictable certainty – we saw a lot of similar efforts into rejigging supply chains in this way to deal with harsh new global challenges. And then, because most of these routes went through Russia, that opportunity shut down with the war in Ukraine. Once again, logistics companies and freight forwarders and logistics companies had to scramble to reinvent their supply chain path – certainty is now a luxury.
That’s but one example – everywhere you look, there has been volatility, uncertainty, challenges, and barriers. The result is that many industries have gone from just-in-time supply chains to just-in-case operations! It’s also why we are seeing phrases like reshoring, ‘friendshoring,’ deglobalization, and other similar concepts emerge with greater speed – the great decoupling! Here’s a fun fact: Sentieo, a market intelligence, and research firm, found that mentions of different forms of “shoring” during company earnings calls were higher in 2022 than at any other time since 2005.
What is “friendshoring”?
Friendshoring is a strategy where a country sources the raw materials, components and even manufactured goods from countries that share its values. The dependence on the countries considered a “threat” to the stability of the supply chains is slowly reduced.To globalise or not: Everything you need to know about friendshoring
14 November 2022, Business Standard
Trend Momentum
Clearly, there is a lot of momentum to localize, deshore, friendshore, or whatever we want to call it.
Teneo’s survey of global CEOs and institutional investors, representing more than $3 trillion USD of company and portfolio value, finds diverging views on the global macroeconomic outlook but significant alignment on deglobalization as CEOs and investors plan for 2023.
86% of CEOs and investors agree that deglobalization is a reality for the global economy.
Almost half believe that deglobalization is already underway and that it will be a significant event.Global CEOs and investors have diverging views on economic outlook, preparing for deglobalization in 2023, Teneo survey finds
20 December 2022, PR NewswireGathering responses from more than 1,000 executives at companies with U.S. operations and revenues greater than $1 billion, the report finds companies are shifting their manufacturing back onshore, nearshore, and to new “friend-shoring” (countries that are allies/friends of the United States) locations. The reasons cited for doing so include the pandemic, trade wars and tariffs, rising labor costs, tech innovation, the war in Ukraine, the climate crisis, and changing customer expectations.
Here’s a closer look at the key findings:
* 94% of companies are planning direct investment in onshoring or nearshoring.
* 85% want their factories and incoming material sources to be in the same hemisphere, while 78% want their factories to be within four time zones of the customer.
* 54% say manufacturing closer to home is key to survival.
* 1% say they can continue to grow with their current manufacturing footprint.
To make these nearshoring plans work, survey respondents report a focus on large-scale digital transformations of their supply chains as well as a switch to “smart” factories. These executives also say a new type of workforce will be required and that companies will need many more automation and robotics technicians.
“There is still such a great deal of untapped potential in the circular economy. Supply chain leaders can use the inflationary environment as a catalyst to reshape their relationship with materials. Instead of losing materials out of the economy in the form of waste, the circular economy helps capture value.”
—Sarah Watt, VP Analyst, Gartner Supply Chain PracticeNearshoring Picks Up Steam
11 November 2022, Inbound Logistics
And it’s not just big business pursuing the trend:
Small and midsize businesses (SMBs) are taking drastic action to optimize and innovate their supply chains.
A majority (88%) of SMBs plan to or are currently switching at least some of their suppliers closer to the U.S. in 2023, according to a study by software review and selection platform Capterra, which surveyed 300 U.S. SMB supply chain professionals. The move comes as the companies deal with economic headwinds, operational bottlenecks and an ongoing need to remain competitive.
“While industry experts predicted nearshoring to happen slowly over the course of several years, SMBs have already or are making a rapid shift to nearby suppliers,” the study said.
Nearshoring heads list of small, midsize businesses supply chain trends
19 December 2022, Chain Store Age
A lot of the initial effort came around problems with the chip shortage which was much in the news.
Apple is expected to get about one-third of its future processors from a new semiconductor fabrication facility set to be in production in 2024, according to a report by Bloomberg. The new $12 billion fabrication plant, being built by Taiwan Semiconductor Manufacturing Co. (TSMC) in Phoenix, is among more than a half dozen projects by chip makers to re-shore the industry in America.
As recently as the 1990s, the US produced 37% of all semiconductors; only about 12% of all computer chips are produced domestically now.
That decline in domestic chip production was highlighted by the recent worldwide supply chain crisis, and it led to calls for reshoring microprocessor manufacturing in the US. With the federal government spurring them on, the likes of Intel, Micron, Samsung, and TSMC have unveiled plans for new US-based fabrication plants. Qualcomm, in partnership with GlobalFoundries, also said it would invest $4.2 billion to double chip production in its Malta, NY fabrication facility.)
As reshoring brings chipmakers back to the US, Apple looks to jump on board
6 December 2022, Computerworld
But It’s Not Easy
This is a hugely complex issue. I went looking for data and insight on that point but came across this film. If you really want to understand the issue, watch this.
In this documentary film entitled “Manufacturing in America, post-globalisation,” Foroohar looks at why the US should bring manufacturing jobs back home and highlights the existing textile industry which has played an instrumental role in supplying thousands of products for all industrial segments, the military, consumer market, and personal protective equipment (PPE) to the public and private sector.
In the second of three films, based on her new book, “Homecoming: The Path to Prosperity in a Post-Global World,” Foroohar follows the all-American supply chain of clothing company American Giant to see how it impacts jobs, businesses and communities.
American Giant CEO and founder Bayard Winthrop, Parkdale Chairman and CEO Anderson Warlick, Carolina Cotton Works President Bryan Ashby, and National Council of Textile Organizations (NCTO) President and CEO Kim Glas, among others are all featured in the newly released film.
The Flip of a Trend
“De-shoring,’ for want of a better phrase, is a significant change. Back in 2005, the hottest book in business circles was by a New York Times columnist, Thomas Friedman. The World is Flat: A Brief History of the Twenty-first Century was seen as the best summary of the wild benefits of global free trade, interlinked economies, and global supply chains humming along in perfect harmony. Perhaps we never imagined what might happen to that perfect integration if many of the core assumptions were rendered irrelevant by fast-moving events and accelerating uncertainty – such as a global pandemic.
And so today, many companies are busily figuring out how to rebuild, reinvent, and realign their global operations, and that will consume a huge amount of the time of leadership teams in 2023.
They are busy looking at how to move production out of China into other countries – and doing it quickly. Vietnam is enjoying a manufacturing renaissance, and given its proximity, Mexico is particularly hot! Warehouse rents near airports are skyrocketing as companies turn to air cargo as the only possible solution to more complex logistics issues. The investment in automation, robotics, and skills acceleration is picking up speed as companies work to bring back overseas factory jobs to new facilities closer to home – seeking to achieve previously unattainable cost savings while doing so. Companies are discovering these investments can help to close the price gap – one American machinist notes they can now manufacture a high-precision progression stamping tool for parts used printed circuit boards, for about 5-15% above the price of Chinese toolmakers. Half a decade ago the gap was about 30-50%.
The trend is also driving forward the acceleration of many other trends. We are seeing new investments in technologies and ideas that bring production closer to home – more localized supply chains, vertical farming, 3d printing, mass customization technologies and other concepts. It’s a fascinating time for this to occur, as companies learned something significant about innovation during Covid – how to do it faster! Think about quickly many companies and industries quickly pivoted to the production of masks and PPE during the early days of the pandemic. They learned something new about speed, and are never going back!
All of this means that in 2023, many will discover that their next success will only come by challenging the most basic assumption about their previous success. Globalization was a big assumption and responsible for massive success, but now, with it being under significant pressure, new pathways to success must be discovered and capitalized upon.
National Efforts
One thing is clear – various nations are waking up to the scope of the opportunity. Consider this article which outlines how Mexico has to scramble to keep up. Similar initiatives are underway in multiple other countries.
The relocation of supply chains or nearshoring in North America represents the best growth opportunity for Mexico in the next 10 years, said analysts from Bank of America Securities (Bofa) in a report.
Bofa economists said that Mexico currently contributes 14% of U.S. imports, but if it can capitalize on the drop in China’s share, which went from 22% to 18%, its exports could increase by a proportion equivalent to 9% of gross domestic product.
Barclays estimates that Mexican exports to the United States could be 38% higher and BBVA Mexico estimates that the overall economy would have grown an additional 1.8% each year since 2018 had it had a manufacturing attraction policy in place.
Not only the proximity to the world’s largest economy, but also the existence of the trade agreement in the North American region, abundant skilled labor and few language barriers are features that specialists consider as advantages of Mexico.
Previously, the Ministry of Economy stated that more than 400 North American companies want to relocate their supply chains from Asia to Mexico. However, the saturation of industrial parks and bottlenecks in energy supply suggest that the opportunity to exploit the full potential of nearshoring is being missed.
The analysis mentioned other factors such as administrative obstacles, lack of skilled labor, insecurity and lack of tax incentives.
Following the disruptions to supply chains resulting from Covid-19, many international companies seek to lower their costs and increase the efficiency of their production process by relocating a proportion of their supply chain to nations with low labor costs, high trade integration, innovation ecosystems, energy competitiveness and established industrial clusters.
Although Mexico meets several of these requirements, it also has several conditions that undermine its attractiveness as a nearshoring destination, according to the study by Consultores Internacionales.
In this regard, the Mexican Association of Private Industrial Parks reported that there are more than 430 industrial parks in 21 states in the country, but the few that exist on the northern border are already at 90% of their capacity.
The study suggests that the government, industrial and commercial chambers should promote and facilitate mechanisms to bring Mexican companies closer to this global phenomenon.
Nearshoring to drive Mexico’s growth in next 10 years, says Bank of America
25 October 2022, CE NoticiasFinancieras
In other words, it’s not easy.
There are significant costs to implement the strategy; it is difficult to bridge the price gap and beat the tendency of people and organizations to purchase the lowest cost products; short-term Wall Street expectations don’t give public companies the runway to make the transition. most importantly, there is a lack of an advanced skills base as the Western world fell behind. I’ve long said, ‘there is no shortage of manufacturing jobs in the US. What is lacking is people with relevant advanced skills.”
In addition, there are previous failures based on unrealistic expectations. All you need to do is study what happened in Racine, Wisconsin, with their failure to succeed with the Foxconn manufacturing initiative. As I’ve also said – the future takes hard work.
Daily Inspiration: “You can’t manufacture success from wishful thinking!”
Closing
The video above does a wonderful job of putting this trend into perspective. The key area where I differ is that what I’ve seen with many Western manufacturing organizations is that they have sought the easy way out, failing to invest in the critical workforce retraining that is quired – and this film does not do an adequate job of the toxic political environment that has stymied success on that front.
Nevertheless, the fi;m and this article does the best job of explaining the reality of this trend!
Nearshoring, probably a pipe dream for many US brands just a short while ago, is now closer than ever.
The Financial Times and its global business columnist, Rana Foroohar, have produced one of the most honest and accurate portrayals of the adverse effects of globalisation on US textile manufacturing over the past two decades, while capturing the industry’s current renaissance in the wake of the Covid pandemic.
In this documentary film entitled “Manufacturing in America, post-globalisation,” Foroohar looks at why the US should bring manufacturing jobs back home and highlights the existing textile industry which has played an instrumental role in supplying thousands of products for all industrial segments, the military, consumer market, and personal protective equipment (PPE) to the public and private sector.
In the second of three films, based on her new book, “Homecoming: The Path to Prosperity in a Post-Global World,” Foroohar follows the all-American supply chain of clothing company American Giant to see how it impacts jobs, businesses and communities.
American Giant CEO and founder Bayard Winthrop, Parkdale Chairman and CEO Anderson Warlick, Carolina Cotton Works President Bryan Ashby, and National Council of Textile Organizations (NCTO) President and CEO Kim Glas, among others are all featured in the newly released film.
“I wanted to make this film about US manufacturing, because I believe that we are at a turning point. Since the 1980s manufacturing jobs have plummeted. In the constant drive to make things cheap, factories and jobs were moved overseas. Textiles were hit especially hard,” Foroohar says in the opening of the film. “But I want to show you how post-pandemic there is a new regionalisation of industry taking place. And jobs are starting to move back. It’s about being focused not on what is cheapest but about creating better jobs for local communities.”
The film opens in a cotton field in North Carolina and takes us on an American manufacturing journey stretching from the field to all points in the production chain and finally to a store shelf in New York.
It is a narrative within a broader narrative about how “prioritising efficiency over resilience, and profits over local prosperity, has produced massive inequality, persistent economic insecurity and distrust in our institutions,” which was expertly outlined in Foroohar’s new book.
Foroohar provides new arguments on why a post-global industrial strategy is needed and the “rise of local, regional and homegrown business is now at hand.”
Thirty years ago, the US was leading the textile sector, Foroohar explains in the film, but globalisation advocates and forces coupled with other seismic international trade actions, such as China’s accession to the World Trade Organization (WTO), exacted a heavy toll on the US manufacturing sector.
“What we were told was that we needed to normalise our relationship with China so that they would play by the rules,” says NCTO’s President and CEO Kim Glas in the film. “So their accession to the WTO, granting them Permanent Normal Trade Relations (PNTR) status—there’s nothing normal about it. We have suffered greatly.” On globalisation and China’s accession to the WTO former US Trade Representative Ambassador Robert Lighthizer notes: “There was this kind of hubris that the world had changed and that market forces forever now were going to move us in the direction of economic growth and freedom throughout the world and all these notions, which were lovely except they just don’t exist.”
Foroohar notes that many in the US manufacturing sector “feel that free trade was never really free, because it didn’t account for the lower labour and environmental standards that allowed a lot of countries overseas to make things more cheaply.”
“Free trade is about price optimisation and consumption,” Lighthizer says. “I think the important thing is production. Production leads to good jobs, good wages and solid fundamental American communities.”
Lighthizer believes the drive to globalisation saw the US effectively giving away its prosperity, Foroohar notes.
“If there is a sacrifice of a price of a T-shirt or your third television set, in order to have strong communities in America, that’s the sacrifice that I’m willing to make,” Lighthizer adds.
On globalisation and access to US markets, Parkdale Chairman and CEO Anderson Warlick notes, “This is the largest economy in the world and the price of admission is not that high and it should be. They should pay their share just like every American taxpayer.
It’s like letting other athletes start a 100-meter race closer to the finish line, she says citing Warlick.
“Competition is good and Americans thrive on competition. Now free trade? That’s a unicorn I’ve been chasing for 30 years, trying to find anybody in the world that practiced it,” Warlick says. My best way of describing it is, it’s economic treason.”
Yet, even as companies rushed to offshore production, gutting the US manufacturing sector’s workforce, a core industry remained here and thrived.
The film focuses on one American company’s perseverance and success, under the leadership of American Giant’s CEO Winthrop.
“The original idea behind the company was to reclaim the very high-quality American-made stuff. I had felt that… the care and the passion and skill and craft and work that goes into making a product was not just important from an understanding about how you build quality product but emotionally important and societally important,” Winthrop says. “The idea that there isn’t a good textile capability in the United States anymore is nonsense.”
Foroohar observes that American Giant’s supply chain encompasses cotton gins, mills, knitting and sewing factories all within a 120-mile radius.
“That not only cuts down on shipping costs. It also means he knows his clothing it is in line with American environmental and labour standards. For Bayard, it’s about keeping relationships and expertise close to home.”
Winthrop embraces that proximity to the entire supply chain, noting that standing in a cotton field talking to farmers about varietals and crop production is critical. “It’s creating that connection to the men and women involved in highly complicated processes of making the things we consume today.”
For Parkdale Mills, a major cotton yarn spinner and supplier to American Giant, “it’s all about being able to compete in a global marketplace, leveraging efficient production in the US to go up against the cheap cost of labour overseas,” Foroohar explains.
“We invest heavily in technology to create better efficiencies, to create better quality, roughly $500m in the last 10 years to create more automation to have the latest, greatest equipment to prepare the fibre and to spin the yarn,” says Davis Warlick, executive vice president of Parkdale.
Anderson Warlick adds, “We are constantly striving to make things more automated in order to be able to compete, I think that’s been one of the reasons we are still here.”
Cautious optimism prevails in the US textile industry. The pandemic and ensuing global supply chain crisis has turned the long-standing global sourcing paradigm on its head, forcing retailers and brands to diversify out of China and move production closer to home. And that is driving a renewed sense of optimism.
But Bryan Ashby, president of Carolina Cotton Works, stresses that policymakers must provide a long-term commitment to building the domestic supply chain.
“It’s great for a politician to stand in front of a microphone and say ‘Let’s bring jobs back to America,’ but show us the commitment by giving us some sort of reason to believe that 18 months from now the narrative doesn’t flip and we all of a sudden want to sell industries out.”
One need look no further than the latest US government trade data as evidence that onshoring and nearshoring is ticking upward.
“We have seen historic investment in the US textile production chain as well as in our Central America free trade agreement partners, including Honduras, Guatemala, and El Salvador,” Glas said. “We expect over $1bn of new investment to go into Central America this year alone for textiles. That’s an indication the world’s changed.”
US nearshoring vision closer than ever on global supply chain snafu.
6 December 2022, Just-Style
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