Half of businesses are reducing production capacity in China

Companies are not only planning to leave China; they are actually doing it. This is the conclusion from a survey conducted by Buck Consultants International (BCI Global) and Supply Chain Media among 150 supply chain executives. CEO René Buck from BCI Global called it ‘hidden reshoring’ during a recent Webinar Wednesday: “Companies don’t tend to shout about the fact that they are relocating production capacity.”

By Marcel te Lindert

According to the survey, a sizable 47% of supply chain executives have made significant changes to their supply chains in the past three years. But these haven’t been massive plant closures in China or elsewhere in Asia, said René Buck. “At most, companies are moving 20% of their production capacity from Asia to Europe or North America,” stated the CEO of BCI Global, who preferred to use the more neutral term of ‘decentralization’ rather than ‘nearshoring’ or ‘onshoring’. “It boils down to the fact that companies are increasingly choosing regional production for regional markets. It’s an ongoing trend. 60% of businesses intend to adapt their supply chain in the next three years.”

What that means in practice varies from one region to another. In Europe, 41% of companies are opting for onshoring (locating production at the heart of the sales market) and 28% for nearshoring (locating production close to the sales market). In contrast, in North America, nearshoring (38%) is more popular than onshoring (30%). “Companies don’t tend to shout about the fact that they are relocating production capacity,” said Buck, who used the term ‘hidden reshoring’. “The focus is often not on closure, but rather expansion of production lines: shall we make it in China or Europe? No company wants to hit the headlines with the news that it’s shutting an entire factory in China.”

It pays to decentralize

When asked about the reason for relocating their production capacity, almost half of the respondents (49%) indicated that their goal was to shorten the distance to the sales market. “Since the pandemic and other disruptions, such as skyrocketing rates for ocean freight, companies like to be closer to the market to improve their customer service. Another important goal is to strengthen resilience to reduce the risks associated with geopolitical tensions. And cutting transportation costs is also an important reason for decentralization,” explained Buck.

It seems that most companies have actually succeeded in achieving their goals. The results are in line with – or even better than – the expectations, particularly when it comes to reducing lead times and strengthening resilience. “The only area that is a little less clear-cut relates to cost reductions. While three-quarters of the respondents achieved their goals, a quarter saw smaller savings than hoped for,” stated Buck. “For many companies, it’s a challenge to find the right suppliers. You can set up a production facility in your key sales market, but there’s little point if you continue to source 80 to 90% of the raw materials from Asia.”

Decarbonization

Not every company is considering nearshoring or onshoring, mainly due to the high costs or lack of scale (56%). Companies are also put off by the high investments (30%) or the struggle to find suppliers in their intended production region (29%). “The economic uncertainty and high inflation are driving up costs, while rapidly rising interest rates are making it more expensive to secure the necessary capital to set up a new production site.”

BCI advises companies on issues related to nearshoring and onshoring. Patrick Haex, Managing Partner at the consulting firm, shared the case of a medical company with a central DC that was sourcing the majority of its products from the USA and China. “We analysed alternative scenarios, including the option to stop procuring from China and the USA, and to start producing regionally instead. This revealed that decentralization would substantially reduce costs, lead times and also carbon emissions. Decentralization and decarbonization are two mutually reinforcing trends,” Haex said.

Measuring Scope 3 emissions

The BCI and Supply Chain Media survey underlined the fact that decarbonization is high on the agenda of supply chain executives. As many as 88% of those surveyed are working to reduce their carbon footprint because sustainability is part of the business strategy. Meanwhile, just under half are investing in decarbonization in response to customer demand, and a similar percentage are doing so due to legislation and regulations. “In Europe, the Corporate Sustainability Reporting Directive (CSRD) will require companies to start measuring their emissions in 2024 in order to report on them in 2025, and similar legislation is in the pipeline in the USA. Legislative compliance will become an increasingly important reason to tackle not just Scope 1 and 2, but also Scope 3 carbon emissions,” Haex predicted.

In fact, 33% of those surveyed said they are already able to measure Scope 3 emissions. “Perhaps it’s wishful thinking, but I’m pleasantly surprised by this high figure because it means that one in three companies are ready for the CSRD. But it also means that two in three aren’t, so they’ve still got a lot of work to do,” Haex commented.

The impact of the CBAM

Another product of European sustainability legislation is the Carbon Border Adjustment Mechanism (CBAM). This dictates that manufacturers with factories outside the European Union must pay compensation at the border if they want to import products. The level of compensation is linked to the emissions at the factory where the products were made. “This EU measure is aimed at preventing companies from moving their production elsewhere to get around the CSRD,” Haex explained.

So how will the CBAM impact on supply chains? BCI works with a company that has opened a new steel plant in Vietnam. “Due to CBAM, it won’t be profitable for the company to use that plant to serve the European market,” stated Haex. “Almost 90% of the companies surveyed haven’t yet analysed the supply chain impact of CBAM, but 40% expect it to have some impact in the coming years.”