China’s Economic Plight Seen as Result of Nearshoring
A report in an influential publication has both pointed to supply-chain issues, specifically reshoring and nearshoring, as causes of China’s economic slowdown.
Writing in the Harvard Business Review, MIT professor David Simchi-Levi declared, “I…believe that the slowdown is due, in part, to an acceleration of nearshoring, the practice of producing closer to the customer.”
The evidence Simchi-Levi adduces includes a survey by the MIT Forum for Supply Chain Innovation. The forum’s initial 2012 report on 156 U.S. manufacturing companies, showed that 33.6 percent of respondents were “considering” bringing manufacturing back to the United States, 15.3 percent were “definitively” planning to do so. A 2014 survey yielded similar results.
But a more recent AlixPartners survey suggested that the process is accelerating, with 32 percent of companies saying they have already nearshored or are in the process of doing so. Nearly half of company leaders surveyed reported near-shoring activities are likely within one to three years.
The monthly Purchasing Managers’ Index (PMI) is further evidence of the shift in manufacturing, according to Simchi-Levi. Recent PMIs show “a real decline in [manufacturing] activity” for China and continued growth in the U.S. and Europe.
“Altogether, these figures suggest that the decline in manufacturing activity in China is related to both a softening of local market demand and the impact of near-shoring,” Simchi-Levi wrote.
Labor costs are a major driver of this trend, according to Simchi-Levi. China has seen labor costs rise by 20 percent annually in recent years while the U.S. has seen three percent increases. Automation has also changed the economics of labor costs.
Global companies have also come to realize that outsourcing and off-shoring have significantly increased their risk.
The bottom line, for Simchi-Levi: “Companies need to evaluate on an ongoing basis whether the trade-offs for their particular industry have shifted enough to justify a change in their sourcing strategies.”
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