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Firms are bringing production back home because of the Ukraine war, China's slowdown — and TikTok

Marcel Obioha 152 June 1, 2023
The U.S. is pushing forward with incentives for domestic manufacturing of computer chips and electric vehicle components, while the European Union has announced a 43 billion euro ($46 billion) package to boost chip manufacturing in the bloc.

A new "reshoring" trend is set to upend global supply chains as firms look to source products — such as clothes and computer chips — closer to home, turning away from manufacturing powerhouses like China.

Some executives even appear more concerned about manufacturing domestically than they are about the effect of artificial intelligence on their businesses.

China, which has been at the center of global manufacturing for decade, is losing its dominance — and its factory activity declined in April and May.

Meanwhile, Russia's invasion of Ukraine and the aftereffects of the Covid-19 pandemic are continuing to disrupt shipping, meaning some companies are rethinking their sourcing methods.

At the same time, the U.S. is pushing forward with incentives for domestic manufacturing of computer chips and electric vehicle components, while the European Union has announced a 43 billion euro ($46 billion) package to boost chip manufacturing in the bloc.

A number of banks noted mentions of the domestic manufacturing trend in U.S. earnings calls for the most recent quarter.

In an analysis of S&P 500 earnings call transcripts, Bank of America said mentions of "reshoring" — in which companies move production from overseas to the countries where goods are sold — were up 128% in the first quarter of the year against the same time a year ago.

Mentions of artificial intelligence, meanwhile, were up 85% year over year, according to an April 29 note by BofA strategist Savita Subramanian.

UBS also examined the trend, with many senior executives in different sectors surveyed by the bank intending to move parts of the supply chain closer to home — 78% in Europe, 70% in the U.S. and 54% in China plan to do so, according to a research note published on March 2. The bank polled more than 1,600 executives.

The brokerage Strategas Securities analyzed S&P 1500 earnings call transcripts for last year, seeing a "notable uptick" in mentions of "reshoring" and "nearshoring" — in which manufacturing operations are transferred to countries closer to home.

"This is in stark contrast to the lack of mentions throughout the 2010s as low growth/inflation, global supply chains and ultimately globalization were in full swing," Strategas Securities Managing Director Ryan Grabinski stated in an April 21 research note.

In the apparel industry, the model of producing goods overseas and shipping them to where they're sold is broken, according to industry veteran Bill McRaith.

"It's typically one factory, one place in the world that makes one end product that we place a purchase order to, three, four, five months in advance and keep our fingers crossed that it sells. And we have never … got the target right," McRaith told an audience at a supply chain conference organized by software company o9 Solutions in April.

The challenge is that the supply chains that were in place were built for the old model.

McRaith, a former chief supply chain officer at Tommy Hilfiger-owner PVH, said the apparel industry both over-orders and under-orders stock by about 20% to 25%. Too much inventory leads to the liquidation of goods, while having too little to sell results in margin loss, he said.

"The model that we've used for the last 30 years is redundant at this point. It should be destroyed," he said at the conference.

A solution for this, which could reduce negative financial and environmental effects, is to create a "supply lattice," McRaith said, where some goods continue to be sourced offshore, others are bought from neighboring countries, and a third portion are manufactured close to where they are sold.

In apparel, sales of common items such as white shirts are fairly easy to predict, so making and shipping those types of goods from overseas makes sense, McRaith told CNBC by phone. But producing onshore could work for more niche fashion items that see overnight demand from being featured on the likes of TikTok, with businesses able to react fast to produce items that are supplied locally.

"As we've moved into this Shein, TikTok, multiple influencer [world] … more and more stuff falls into that highly unpredictable, what I would call 'fringe' space," he said. "The more unpredictable that happens to be, the more probability, you want a higher percentage of onshore or near shore [sourcing]," McRaith added.

Last month, Chinese fast-fashion giant Shein announced a $150 million investment into production in Brazil for the Latin American market, a move McRaith expects the company to replicate in the U.S. and Europe. "They can afford to make stuff locally, far more than any other retailer can," he said, referring to Shein's model of ordering a small number of items from a large base of manufacturers.

A worker makes clothes at a garment factory that supplies Shein, in Guangzhou, China. Shein is set to produce goods in Brazil for the Latin American market, instead of shipping them from China.

The Covid-19 pandemic accelerated some business trends by five years, McRaith said. "It's no longer a case of brands telling the consumer what to buy, it's actually now the consumer telling brands what they want to buy. So it's really reversed that whole model. The challenge is that the supply chains that were in place were built for the old model," he said.

U.S. companies are set to make a record number of hires in manufacturing, according to lobby group Reshoring Initiative, with around 360,000 job announcements in 2022, up 53% from 2021 (figures cover U.S. manufacturing roles from both domestic and overseas companies). Electrical equipment-makers announced the most jobs, with EV batteries one of the top products, followed by computer product-makers including chips.

If we build an economy based on electrification and batteries, it's going to be really important to control our own supply chain.

The Inflation Reduction Act, signed by U.S. President Joe Biden in August, provides tax credits for EVs. In February, the U.S. administration said it wants 500,000 public EV charging stations on highways by 2030.

Lithium hydroxide is a key component of EV batteries, with most of it produced in China right now. Those efforts by the U.S. government are set to benefit domestic suppliers, said Keith Phillips, president and CEO of U.S. mining company Piedmont Lithium.

"If we build an economy based on electrification and batteries, it's going to be really important to control our own supply chain," he told CNBC's "Street Signs Asia" in April.

Elon Musk broke ground on Tesla's lithium refinery in Corpus Christi, Texas, on May 8, and said the car company aims to produce enough lithium to manufacture a million EVs a year. And Piedmont's planned production facility in Tennessee will produce 30,000 metric tons of lithium hydroxide per year — double the current capacity in the United States, the company said.

Phillips said it will "take time" for the U.S. to become self-sufficient in lithium hydroxide production, and said more mining of the raw lithium itself is needed.

In the U.K., 40% of manufacturers surveyed by industry group Make UK said they had sourced more goods domestically over the past year, and around the same proportion plan to over the next year. Make UK surveyed 137 companies in January and February. 

While producing goods close to their point of sale can reduce costs, the main reason for local sourcing is to avoid the disruptions that can happen in longer supply chains — such as Covid and the Ukraine war — according to Make UK's survey.

For British audio equipment-maker BishopSound, moving some of its supply chain from China to Yorkshire in northern England has improved its cashflow because minimum order quantities are lower domestically.

"In the past, we imported finished plywood speakers from 7,000 miles away in China. We are now manufacturing all our speakers in the North of England and using British-made components wherever possible. We stopped importing finished wooden speakers last December," company founder Andrew Bishop told CNBC via email.

Other benefits of producing domestically include the lower chance of products being copied, Bishop said, as well as improved quality control and smaller environmental impact. There is also a political reason for moving production: "The Chinese use Russian Plywood and we do not want to support war," Bishop added.

— CNBC's Lora Kolodny contributed to this report.