Corporate bankers are fielding more inquiries from their U.S. clients — businesses that are coping with fallout from the pandemic as well as technological and policy changes — about how to move supply chains closer to home.
The increased client interest in "onshoring," or at least "near-shoring" to nearby countries such as Mexico, represents a shift for bankers who have long worked with corporations seeking to build complex global supply chains.
The corporate rethink has accelerated thanks to problems that started to arise in 2020, when lockdowns and pandemic-induced changes in purchasing patterns exposed the fragility of far-flung
"The shorter that supply chain is, the less links in the chain, the less likely you have different bottlenecks," said Andy Arduini, who leads the global advisory group at Columbus, Ohio-based Huntington Bancshares, including its international trade and treasury business.
The idea of shortening supply chains was sparking discussions among banks' corporate clients even before the pandemic, as the U.S. and China were engaging in a trade war. And while Arduini and other bankers are now hearing more on the topic, they caution that any shift toward reshoring or near-shoring is complex and won't be immediate.
The decisions will also ultimately come down to each product and whether shifting operations can actually save companies money, bankers say. Production jobs that can be automated are easier to bring closer to home, while more labor-intensive tasks may be cheaper for companies to keep in places with lower labor costs, such as China and southeast Asia.
"The conversations are certainly happening," said John McQuiston, head of structuring and program management at Wells Fargo's global supply chain group, but the "reshoring will be governed by the economics of the labor costs."
Chatter about the supply chain rethink has picked up on corporate earnings calls and conferences, according to Sentieo, a unit of the market intelligence company AlphaSense.
In all of 2019, the terms near-shoring, reshoring and onshoring came up in just 61 events for 9,000 companies in the U.S. and elsewhere. That figure has quadrupled and reached 319 through just the first seven months of 2022, the company found.
Culp Inc., a North Carolina-based maker of mattress and upholstery fabrics, told analysts last year it was building a new production facility in Haiti. The facility "gives us a near-shore option to complement the already strong Asia platform that we have," Boyd Chumbley, president of the company's upholstery fabric division, said on an earnings call.
In March, then-Gap CEO Sonia Syngal told analysts that the retail clothing chain is "working on de-risking our supply chain by rebalancing our sourcing to rely less on single countries of origin and building deeper relationships with near-shore vendors."
The commercial real estate firm CBRE is seeing a "huge uptick" in companies looking to build manufacturing plants in North America, said Seth Martindale, who leads the company's industrial site selection practice for the continent.
"It really is happening all over the place, across sectors, whether it's food, pharmaceuticals, bioscience, consumer electronics," Martindale said.
Companies are also seeking out more warehouses and refrigerated storage facilities, as some bulk up their inventories and shift away from the pre-pandemic "just-in-time" model, which encouraged slim inventories and relied on speedy logistics.
The shift to larger inventories may delay some near-shoring decisions, said Inu Manak, fellow for trade policy at the Council on Foreign Relations. That's because executives could gauge whether the larger stockpiles are enough to "weather the storm when there are demand spikes" or supply disruptions, Manak said, pointing to the next holiday season as a test case.
Another potential inhibitor: complexity.
"There's so much that's involved in building out your production network. It's not like flipping an on-and-off switch," Manak said, pointing to finding new suppliers of raw materials and components, breaking existing supplier contracts, running financial analyses and hiring new workers.
Just like offshoring wasn't an "overnight exercise," a shift toward near-shoring could take many years to take shape, said Daniel Son, head of the global banking division at the banking unit of Minneapolis-based U.S. Bancorp. Near-shoring will make sense for some companies and industries, but others will find it harder to pull off if the final product they sell relies on many parts made elsewhere around the globe, he said.
"The more complex it is, the harder it is to near-shore," Son said.
Nevertheless, the prior expectation of reliable logistics and predictable demand "does not hold in this market," said Adoniro Cestari, Citigroup's global head of working capital solutions and structured trade.
Companies have learned that "far-flung supply chains carry previously uncontemplated risks," Cestari said in an email, pointing to companies looking to scale back their presence in China as geopolitical and trade tensions rise.
While China is still a behemoth in U.S. supply chains, the country was already becoming "less attractive" before COVID-related disruptions, according to Carson Strickland, global trade finance sales executive at Birmingham, Alabama-based Regions Financial. U.S. importers have grown worried about the potential for Chinese government intrusion and intellectual property concerns, pushing more companies to countries like Vietnam, Pakistan and Bangladesh, Strickland said.
Those worries were a major driver behind the CHIPS and Science Act, which President Biden
Though the law is aimed at boosting domestic manufacturers, it is prompting the South Korean chip manufacturers Samsung Electronics and SK Hynix to reconsider their footprints in China, according to the
Vietnam's government announced plans from Samsung to build a new plant in the country,
The news is a reminder that near-shoring is not just a U.S. phenomenon, said Manak of the Council on Foreign Relations. She noted that the pandemic and Russia's invasion of Ukraine have prompted several countries to reassess which critical goods they need the most.
"It's not just in the United States," Manak said. "It's everywhere now."
