In recent years Vietnam has had its day in the sun, as production of certain items has shifted from China. It’s been cheaper to manufacture in Vietnam, and it’s been a boon to Vietnam’s economy.
But Covid brought a lot of problems to Vietnam, especially at ports. Now firms have to consider whether it’s time to move on, and go to another country.
Instability of supply chains is the new norm. While it’s costly and traumatic to change, sometimes the proper strategy requires it. You can see businesses are thinking hard about it. It’s supply chain strategy playhing out in the real world.
Many manufacturers have been shifting offshore production to Vietnam since the Trump administration tariff wars with China. Most of us realize wages in China have gone up a lot, and China is no longer a cheap place to have items like clothes manufactured.
Here we see that a Covid lockdown is causing problems for supply chains that depend on manufacturing there. The measures taken in the lockdown are interesting for us in America.
This is an interesting article referring to a study of reshoring in 2014. It seems to be the case that there is a lot of talk about it, but lots of times companies decide not to do it. And those that do often don’t add anywhere as many jobs as they give up abroad. That’s often due to automation.
It is also consistent with the labor economics. What the offshore enterprises have to offer is labor, and they have a shortage of capital. Offshoring from the US lets them use their comparative advantage in labor. And they will probably use more workers, or at least a similar number, as the facilities that were replaced in the US. But if those jobs are again imported by the firm through reshoring, there will not be as many created, since the US has a comparative advantage in capital. We’ll use more robots and automated facilities, and require less jobs in the manufacturing sector.
First, how do we measure the benefit of reshoring, if we can’t just count the jobs? These new facilities may create jobs in other sectors such as robot repair, software, automated equipment maintenance, and perhaps also in higher skilled jobs required to supervise the automated factories. Which sectors should we look in? We presented some research recently that attempts to answer this question, though it was oriented toward transportation and logistics clusters rather than manufacturing. Manufacturing is a bit more complex, I think.
Second, is there a game going on? One opportunity to wring concessions out of US communities and states is to offer to reshore some jobs. Politicos are very sensitive to this kind of pitch, and if a firm tries enough locations, they may find one offering a huge tax break or other concessions to locate there. Those might buy down the cost of reshoring to make it look short run attractive. But it might not be a good investment for the community.
The one constant in globalization has been firms increasing their flexibility in where they operate. Firms now actively seek to position themselves so they can take advantage of short term local dislocations in cost and currencies to shift production around at will. What that implies is a lot more variability in the stock of jobs at a given place. This trend will go on without question.
So regional and local planners had better think about the fact that the game is a repeated one, and giving away too much up front may result in pain later on. It’s certain the firms are thinking that way.