Executives battling 18 months of supply-chain disruption, container shortages, port pileups and escalating labor costs might finally be warming up to the idea of bringing production back to the US of A.
The chaos that has subsumed global supply chains since March last year might effectively catalyze the nearshoring movement, according to UBS equity research director Chris Snyder.
“We think the continued disruption supports our call that the pandemic could serve as a catalyst for U.S. reshoring and broader investments in supply chain resiliency” such as automation, he wrote in a research note.
With labor costs climbing, the UBS team believes outsourcing’s benefits are in structural decline, tilting the scales in domestic manufacturing’s favor.
During the pandemic, many companies reviewed their supply operations, from where finished goods were produced to how they arrived at their end market, encompassing upstream components at the raw goods level. At the beginning of the year, many once again dismissed reshoring as a costly venture as America’s service-economy structure lacks the factory base and talent needed to stand up new manufacturing enterprises.
Any serious reshoring schemes might be years in the future, given the level of infrastructure investments needed to bring these ambitions to fruition.
At Sourcing at Magic in August, Central American outfits made a stronger showing versus the muted presence of their Chinese and Asian brethren. “Finally, the market is realizing that China is not everything,” Michel Chabaneix, CEO of Peru’s All Cotton Corp. SAC, told Sourcing Journal at the time. While “price point is important,” he added, “it’s more important to have the goods and the quality your customer deserves and have the merchandise on time.”
Clothing companies that pulled production out of China in recent years amid surging labor costs might be in a stronger position to truly consider nearshoring or reshoring, presuming they didn’t simply hop over to Vietnam where the a tsunami of Covid-19 infections has hamstrung manufacturing and supply logistics for even giants like Nike.
UBS’s Snyder believes 2022 and 2023 will bring supply chain tailwinds, though inventories are expected to remain constrained in the meantime. Automation will reduce labor costs and introduce efficiencies.
Last year Evolution St. Louis established a high-tech knitting facility, with the aim of assembling a Made-in-America supply chain and reinvigorating the Missouri city. The Missouri Department of Economic Development and the St. Louis Economic Development Corp. offered tax credits and other incentives. The facility replaces labor-intensive cut-and-sew manufacturing facilities with machines that digitize operations, making the business model cost-competitive with Asian production. Fewer workers needed to operate the machines offset their higher pay. What’s more, goods produced at Evolution shirk the high tariffs of imported clothing and bear lower transportation costs as well.
According to a New York City apparel CEO, automated on-shore production is well suited for basics such as T-shirts and other tops, underwear, simple dresses and some bottoms.
Walter Loeb, a former retail executive turned analyst and now a consultant, said the reshoring conversation could spur action.
“I believe that retail and some apparel firms will be the last to bring production that’s feasible back to the states. The problem is that they haven’t figure out how to reduce costs in the U.S. in a way that would make producing here pay off. Most still count on the fact that even with all the difficulties, China is still cheaper than producing it in the U.S.,” Loeb said. “In my opinion, I’m hoping some stuff does come back here and that they can produce something at a reasonable cost, make money and bring employment back to the U.S.”
For now, the immediate focus is on surging shipping rates. And the increases are expected to continue to climb, making it a challenge for all companies, particularly retailers, according to Michael Lasser, U.S. hardlines retail analyst at UBS.
“While container rates have been rising over the course of the pandemic, they have recently jumped higher. This has caused many retailers, both big and small, to call out the impending freight headwinds on their most recent calls,” Lasser said. He noted that the average Shanghai-to-Los-Angeles 40-foot container rate was $4,100 in 2020’s the fourth quarter, rising to $7,500 in Q2 and $11,000 to date for the third quarter. Even contract rates have gone up.
“So, regardless of whether retailers are having their contracts honored, they are likely still experiencing pricing pressures,” Lasser said.
A multitude of factors including demand oustripping supply, labor challenges and the holiday season all present additional headwinds for the supply chains. He expects the drag from shipping rates will be much more pronounced in the coming quarters.
Walmart and Target are the top two retail importers of 40-foot containers, with Home Depot, Lowe’s and Dollar Tree also making Lasser’s top 10. Dollar Tree’s low-priced products put the chain at greatest risk from sky-high shipping rates.
Lasser expects retailers to offset cost pressures through sourcing changes and price increases that consumers are forced to swallow. Using the consumer price index (CPI) as a gauge for inflation rates, retailers selling household appliances and sporting goods are likely in the best position to be able to raise prices, he noted. In contrast, apparel, which has had the lowest level of CPI on a two-year basis at down 3.3 percent, would have a harder time implementing price increases. And that means retailers such as Dollar Tree and Five Below are likely to struggle to pass on increases to their customers due to their fixed price structures. However, they might still be able to “at least partially offset freight increase by using their considerable purchasing power,” he said.