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Asia Update – Nearshore or Reshore

This year has been an uphill battle for many sectors, none more so than the electronics industry. Many large OEMs are experiencing major component shortages due to coronavirus-driven factory shutdowns in China and extended lead times. Will this upheaval trigger a fundamental change in supplier strategy or simple tweaks to the current model?

Initially, the industry turned to suppliers in other Asian countries and doubled down on existing diversification strategies put in place during the U.S.-China trade war. However, these moves have not eliminated the problem and operational risk continues to rise. This leaves many industries caught between two fires: ongoing tariffs and a pandemic that is shutting down factories, slashing global economic demand and calling conventional supply chain management practices into question.

While China will remain the primary source for many components, due to the supplier ecosystems that exist and the attractiveness of the local market, there is growing recognition of the inherent risks in having a single source for critical components. In reality, there is still too much uncertainty for companies to start implementing significant supply chain changes. Instead, reshoring and nearshoring will start to gain momentum after there is clarity on what is termed the “new normal”. Ultimately, companies will diversify suppliers and nearshore their supply chains if the price is right.

Current conditions are favorable for nearshoring in terms of cost and resilience. Logistics and labor costs are lower in Mexico than China, and reshoring reduces lead times and the risk of opacity in complex global supply chains. For EDOs, this means helping clients to de-risk a re-shoring investment (pre-employment training, flexible property deals, supply chain) and develop a cost model that can monetize the true value of re-shored production (shorter lead times, cost of rework, management overhead, quality).

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