BY STEFAN KARLÖF
In recent years, disruptions in global supply chains have led to a growing tendency to shift manufacturing from China to other manufacturing and sourcing markets. The main goal is to shorten lead times, establish more alternatives, and thereby reduce risk—and, ideally, become more climate-smart in the process.
This general trend is leading to new global trade patterns. Aside from the fact that trade between Russia and large parts of the democratic world has been virtually wiped out, the clearest pattern is that trade between China and the U.S., as well as between China and Europe, is steadily declining. This is shown, among other things, in a report from New York University Stern School of Business and DHL (2022). The report indicates that the share of goods the U.S. imports from China fell from 21.6 percent to 16.6 percent during the period 2017–2022. Exports from the U.S. to China are also declining slowly, from 8.4 percent to 7.3 percent during the same period.
Europe Leaves China
The same trend is underway in trade between Europe and China. Many European companies are choosing to move their manufacturing operations from China to their home markets or to other countries. According to the European Union Chamber of Commerce in China, many European companies are now choosing to leave the country due to increased pessimism regarding China’s economic and democratic development. A recent study by Accenture (“Resiliency in the Making,” 2023) shows that 72 percent of the 1,230 companies surveyed in the study state that they intend to begin manufacturing and sourcing from multiple geographic markets (multisourcing) over the next three years, compared with only 42 percent of companies that do so today.
Regional Sourcing
More than half of British, German, and Italian manufacturing companies—53, 54, and 53 percent, respectively—say they intend to source the majority of their key components from regional suppliers by 2026 at the latest. And a full 91 percent of French manufacturing companies plan to produce their products in the same region where they are sold, within the next two years. This is more than double the current situation, in which 44 percent of French manufacturing companies produce and sell in the same region. This ambition is shared by all manufacturing companies in Europe, regardless of country. Accenture’s study also shows that proximity to customer markets is becoming increasingly important. 65 percent of the companies surveyed intend to source and manufacture regionally by 2026, compared to the 38 percent that do so today.
The U.S. Chooses Mexico
The decline in U.S. trade with China has contributed to Mexico becoming the U.S.’s largest import market last year, while imports from China fell by as much as 20.3 percent. High tariffs and geopolitical uncertainties are contributing to China being increasingly passed over as a manufacturing location in favor of Mexico, India, and various countries in Southeast Asia, such as Vietnam, Singapore, Malaysia, and Indonesia. A recent study by the Boston Consulting Group (BCG) highlights Mexico, India, and Southeast Asia as three particularly competitive manufacturing and sourcing markets. They all have an attractive cost structure, good access to labor, and proven expertise and capabilities across a range of industries.
Willing to pay for greater stability
BCG also highlights Turkey and Morocco as examples of other attractive manufacturing countries that are competitive, have an abundant labor force, and are also located close to EU markets. Low costs remain a key driver in where companies choose to manufacture and source, but BCG’s study shows that short lead times, stable business environments, and increased flexibility and resilience are also important factors. The decision-makers surveyed stated that they were willing to reduce their gross margins by more than 2 percent in order to achieve shorter lead times and guaranteed access to labor. They were also willing to pay more to achieve greater stability and a well-functioning logistics infrastructure.
Reduced Risk and Increased Resilience
All of these examples provide a clear indication of how global trade patterns are being reshaped with the goal of building more robust supply chains. After several years of increasing disruptions and delivery problems in global supply chains, many companies are choosing to review and redesign their supply networks—often with the goal of establishing more alternative suppliers and sourcing markets. Another contributing factor behind decisions to relocate production and procurement is a growing reluctance to do business with authoritarian regimes such as China and Russia, and instead a focus on doing business with friendly nations that share similar values.
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Stefan Karlöf is the editor-in-chief of Supply Chain Effect
