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Extended Supply Chains Are Going Away: What Comes Next?

May 6, 2022
While champions of “bringing it back home” are understandably excited about the prospects of an American manufacturing renaissance, some challenges need to be addressed.

IndustryWeek's elite panel of regular contributors.

During America’s Bretton Woods era, from 1944 to 1971, the International Monetary Fund was established and dollars were convertible to a fixed price of gold. One of the most important economic results of that time was the expansion of global supply chains to more and more nations.

Southeast Asia, first, then defeated Japan, and later South Korea, Singapore, Taiwan, Philippines, Malaysia, Thailand, Indonesia, and even Vietnam and China—countries that had each fought bloody wars against the Americans—took full advantage of the security and market guarantees of Bretton Woods to make their peoples’ lives better. 

By integrating with the American-led global capitalist system, these nations all built societies that would have been unimaginable just a few decades prior. The former Soviet republics of Central and Eastern Europe sprinted ahead with much of the same vigor as their Asian counterparts. The quality of life has dramatically improved in these nations as well since they joined in the 1990s.

Offshoring for Profit and Survival

Even prior to NAFTA and China’s emergence as a global manufacturing center, many U.S. and European firms embraced offshoring 

In the 1980s, General Electric under Jack Welch famously relocated several back-office functions to India. However, the conventional wisdom in government, academia and much of industry was that companies chose to close their costly domestic operations in favor of better prospects and profits in other countries.

While it was certainly true that U.S. and European companies were pulled overseas by the allure of potential profits and cheap labor, the vast majority were also being pushed overseas by something that was much more proximate to the domestic industrial structure than the desire for new markets, lower labor costs or greater efficiencies in sourcing: the Western world’s dysfunctional distribution system. And, although its impact was ubiquitous, the clear connection of this force to the surge in offshoring went largely unnoticed.

It was not only corporate avarice that drove a good deal of manufacturing out of the United States and Western Europe. Nor was it the desire for the cheapest price on the part of consumers. What forced thousands of companies to close U.S. and West Europeans operations and lay off workers was an imbalance in the sales and distribution model that has evolved over the past four decades.

Distribution has been turned on its head as distributors have wrested control of the strategic prerogatives of manufacturers to capture a disproportionate share of the value of the supplying company’s products. Concentration of power across every economic sector in the hands of an ever-smaller number of “Mega-Distributors” has led to ceaseless pressure for continuous cost-cutting and greater “efficiencies.” The Megas ended up profiting greatly at the expense of their vendors, and manufacturers earned little or nothing on the sale of their own products. As a result of this phenomenon, U.S. and Western European companies compulsively embraced offshoring not so much because of their internally generated goals and objectives; rather, as a necessary response to the demands of sheer corporate survival.

The Offshoring Cracks Form

Before the pandemic, rising costs were already making offshoring an expensive and increasingly riskier proposition. Significant increases in wages, transport costs, as well as real fears over continued intellectual property theft and poor-quality control offset many savings advantages from offshore manufacturing.

The re-emergence of “America First” under President Trump and the prospects of a drawn-out trade war gave further impetus for realigning supply chains. By 2019, for example, both HP and Dell had shifted much of their laptop production out of China. Sony split for Thailand. GoPro left China for Mexico. Under Armour moved out of China in favor of the Philippines. Nike quietly transferred much of its production in China to other facilities in Africa and Asia. Korean electronics giants Samsung and LG both shuttered significant Chinese operations and reshored back to their home country.

The global supply chain disruptions that grew out of the pandemic found things getting even closer to home. Driven by the need of being as close as possible to their end users, companies accelerated the realignment. After 25 years in Shenzhen, Stanley Black & Decker relocated much of its China-based operations to Fort Worth, Texas in 2021. Toymaker Hasbro culled half of its Chinese production because of shipping concerns. Microchip maker Intel recently announced new manufacturing facilities in Phoenix and Columbus, Ohio, replacing Chinese plants. 

An Offshoring Remnant: Little or No Inflation

While many domestic manufacturers, their workers, and communities were significantly harmed by this vicious cycle of chasing the cheapest, consumers in the West benefitted immensely. The natural scourge of inflation was largely engineered out of those economies. Conducting international business is a time-intensive process. To best manage risk across the value chain, it makes sense for companies around the world to use the most stable currency available: the U.S. dollar.

Since the end of the Cold War, the dollar has overwhelmingly been the preferred currency of international transactions precisely because it lowers the risk that something bad might happen along the way. While a wonderful insurance policy for global traders, the dollar’s dominance has the effect of “passing the buck” (forgive the bad pun) on inflation. In other words, the inflationary impact of non-dollar global transactions would be felt immediately. However, leveraging the stability of the dollar ensures that any inflation that would have occurred in a non-dollar deal is kicked down the road for a later date. Clearly, that date has now arrived.

So, What Comes Next?

While champions of “bringing it back home” are understandably excited about the prospects of an American manufacturing renaissance, some challenges need to be addressed. Most obvious is the return of significant long-term inflation within the economy. Now that most of the benefits of offshoring are used up, we are faced with a reckoning. Any inflation within the manufacturing/ delivery/ sales cycle will be immediately felt. It can’t be outsourced to the future. In fact, it is already being felt. What is now popularly labeled as a “supply chain issue” in most cases is simply a return to the natural order of things. Despite the challenges that long-term inflation will pose, more companies have little or no choice but to get closer to home.

Still, at present, in many sectors, the workforce simply does not exist right now in enough quantity to meet the need. Anyone who spends time speaking with manufacturers knows full well the tremendous shortage of qualified workers across the economy. This is no recent phenomena. The lack of skilled technical workers can be traced to the Manpower and Training Act of 1962. It was at this moment that the full force of the federal government was used to re-prioritize the American workforce. Over time, federal money and policy increasingly focused on getting larger numbers of American youth into college at the expense of vocational and technical training. Today, the government spends about $6 on college preparation for every $1 on vocational training.

Some 66 years later—and laid bare by COVID-19—Americans have finally awoken to the fact that too many kids focused on college and not enough learned essential skills. This recognition is a good thing for America’s economy. Since the pandemic, nearly two million kids who would have gone to college chose to go to work instead. A large percentage of them are learning while engaging in the skilled trades. And, critically, many are earning more than their four-year degree peers, plus with none of the debt.

Nevertheless, it will take a while for this trendline to thicken.Substantial gaps in the workforce will remain as we await this next generation of specialized American workers to make their contribution. On balance, however, the long-term looks better than at any time in the recent past when it comes to closing the critical skills gap.

In the Meantime  

While American industry eagerly anticipates the renaissance in vocational and training that will take hold over the next several years, many companies simply can’t afford to wait. In addition to higher inflation and greater risk (the extreme zero-Covid measures once again in place across China being an example) many decision-makers are being forced to do something now.

Someone who has his hands on the pulse on this situation is Lloyd Graff, President of Graff-Pinkert & Co. A three-generation company started in 1941, Graff-Pinkert is an international leader in selling used CNC Swiss lathes and automatic multi-spindle screw machines for high-volume precision-turned parts. According to Lloyd, who has over 50 years of experience in the industry, things are changing in ways no one could have predicted just a few years ago. 

The rapid reshoring of production to the U.S. ran squarely into the workforce challenge. It has caused a significant alteration in how companies in this sector operate. Many bigger shops—already woefully understaffed—simply closed their doors. Others looked to Mexico and Central America as places where key portions of their operations could be located to help meet the higher demand in the U.S.

It appears that regionalization will be a preferred approach for some firms going forward. That is, leveraging workforce advantages in neighboring countries across the Western Hemisphere to deal with the labor shortages in the U.S.

In addition, Lloyd observes that many of the liquidated machines from the bigger shops have been purchased by individuals who are setting up in their basements or garages. These smalltime gig workers, who are often recent immigrants, are taking advantage of opportunities from the global supply chain realignment and meeting real customer needs. He speaks of recent home-based customers that are producing in-demand ammunition and parts for watches and bicycles.

The end of extended supply chains is upon us. It will not all go away tomorrow. Yet, the trajectory is clear. The challenges today managing this new reality are certainly formidable. As always, however, American capitalism and ingenuity will ultimately overcome.

Andrew R. Thomas is associate professor of Marketing and International Business at the University of Akron, and, a bestselling author/editor of 25 books .His newest work is The Canal of Panama and Globalization: Growth and Challenges in the 21st Century , scheduled for release later in 2022. His book The Distribution Trap: Keeping Your Innovations from Becoming Commodities was awarded the Berry-American Marketing Association Prize for the Best Marketing Book of 2010. A successful global entrepreneur, Dr. Thomas was a principal in the first firm to ever export motor vehicles from China.

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