Shrinking Supply Chains and Trade Wars: Is Globalization Unraveling?

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Crain’s Detroit Business

July 26, 2019

By Dustin Walsh

For two decades since 1990, globalization boomed, trade borders eroded and billions were lifted out of poverty. U.S. manufacturers chased cheap labor and profits overseas to great success. Hyperglobalized supply chains were created. Southeast Michigan automakers and suppliers could source parts and materials from anywhere in the world.

But much of the last decade has been spent rethinking the ideals of far-flung suppliers, leaving manufacturers to transition to regional manufacturing—parts are made where cars are assembled and sold. Globalization was oversold and overextended. A tsunami in Japan stifled auto sales in 2011, for example, and the geopolitical landscape has worsened in the last three years, partly due to high-profile trade spats between the U.S. and nearly all of its allies.

Supply chains stretched thin to make products and parts cheaper are now risky. In return, supply chains are shrinking and further overhaul is on the horizon. This leads to the inevitable question: Have we hit peak globalization?

It’s complicated.

Economic experts are coining this the era of “slowbalization.” Global trade growth slowed to 2.1% this year, compared to 5.5% in 2017, according to the Organization for Economic Cooperation and Development, an economic organization containing the 36 wealthiest nations.

Last year, gross capital outflows—corporate spending on investment, operations, research & development, trade, etc.—fell to just 1.5% of the global gross domestic product from 5% in 2007. Foreign direct investment dropped to 1.3% of global GDP last year from 3.5% in 2007. Those percentages appear paltry, but the drop in capital outflows represents nearly $3 trillion.

At least some of those drops can be linked to ongoing geopolitical strife across the globe. President Donald Trump has attacked global trade since taking office in 2017. The White House has introduced tariffs on solar panels, washing machines, steel and aluminum, threatened tariffs on imported cars and imposed tariffs on $200 billion of imports from China.

Japan and South Korea, two key U.S. trading allies, are engaged in their own trade war. South Korea has sought reparations for its people forced to work for Japanese occupiers during World War II. The spat led to Japan, citing national security concerns, placing restrictions on exports to South Korea of three chemical materials used to manufacture semiconductors and screens used in smartphones and televisions.

“All of this trade craziness has led to companies basically sitting on their hands,” said Kristin Dzizcek, vice president of industry, labor and economics at Ann Arbor-based Center for Automotive Research. “There’s nowhere left to hide right now, so companies aren’t investing anywhere until something shakes out.”

The White House, however, believes the tariffs and political unrest globally is moving and will continue to move manufacturers back to the U.S.

On Twitter in November 2018, Trump said, “Billions of dollars are pouring into the coffers of the USA because of the tariffs being charged to China, and there is a long way to go. If companies don’t want to pay tariffs, build in the USA. Otherwise, let’s just make our country richer than ever before!”

While not a mass rush to the border, companies have indeed been shifting to the U.S. in recent years. Roughly 145,000 jobs were “reshored” from overseas or created through foreign direct investment in the U.S. by 1,389 companies in 2017, according to the 2018 Reshoring Report by the Reshoring Initiative.

But that’s been part of a broader initiative to reduce supply chain costs more than a move tied to tariff avoidance, according to Carrie Uhl, vice president of purchasing and supply chain for the Americas for the third-largest global auto supplier Magna International Inc.

“This trend is not new,” Uhl said. “The desire to have a supply chain largely in an area where you’re not manufacturing or selling is going away.”

Reshoring became a widely used term in 2012—former President Barack Obama touted the practice in that year’s State of the Union address—as companies began realizing the full costs of shipping products back and forth over oceans.

“Companies realized they were miscalculating the total cost of the supply chain,” said Uhl. “There’s just so much extra stock, longer lead times, etc. They were underestimating the environmental impacts, the packaging and energy it requires to ship things far distances. They underestimated the challenges in communication, working with suppliers in different time zones. The desire to have a supply chain in an area you’re not manufacturing or selling is just not smart anymore.”

In 2012, Crain’s Detroit Business reported on an effort by Bloomfield Hills manufacturing conglomerate TriMas Corp. to increase capacity at plants in Indiana, Texas, Oklahoma and elsewhere instead of overseas.

“I’d rather compete on speed than costs, and manufacturing locally allows us to move product quicker with fewer problems,” then-TriMas President and CEO Dave Wathen told Crain’s in 2012. “We’ve reduced inventory, turnaround and sped up the supply chain. That creates a pretty strong case for strategically bringing (manufacturing) back.”

By 2016, China’s manufacturing cost advantage over the U.S. plummeted to only 2% to 4% better than the U.S. from as much as 15% in 2004, according to research by Boston Consulting Group. That’s before transportation and logistics costs are factored in.

It’s since widened again to 7% thanks to a weakening yuan and falling energy costs, the report said.

But current TriMas CEO Thomas Amato said U.S.-imposed and retaliatory tariffs are expediting their process of reshoring manufacturing.

“The tariffs have been the biggest driver to what is causing U.S. manufacturers to move back to the U.S.,” Amato said. “The trade initiatives have customers asking the deeper questions, trying to eliminate variables. To me, it’s more exciting and interesting to put capital in the U.S. and a lot of that is because of the uncertainty created by tariffs.”

But when Amato talks about onshoring, he’s talking about returning manufacturing to North America, not necessarily the U.S. He said while the company is looking to expand plants stateside, much of that has been plant consolidation and construction of a new plant in Mexico.

It recent years, it shifted production at a company in its aerospace division from Paris, Ark., to another in Ottawa, Kan., as well as consolidate work from two locations in Tulsa, Okla., to a third in the same city, in its engineered components division. Its packaging division shifted production from Mexico City into the new plant in San Miguel de Allende, Mexico.

General Motors Co. became the top automaker in Mexico this year as it plans to shutter four plants in the U.S. “I don’t think globalization has peaked,” said John Taylor, associate professor of supply chain management and chair of the marketing and supply chain management department at Wayne State University. “There’s a lot of rhetoric and noise and posturing around the tariffs, but at the end of the day, there’s still plenty of room for growth in sourcing from further away.”

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