When Mike Newman started to hear warnings earlier this year about delays at ports on the US West Coast because of labour negotiations, the threat of more supply-chain chaos “became the last straw for us.”
So the chief executive of New York-based Returnity Innovations moved about two-thirds of his production of reusable shipping bags and boxes to Mexico from China to reduce the amount of merchandise flowing through the clogged docks in Los Angeles and Long Beach, California.
Even though Mexico’s manufacturing costs are as much as 30 percent higher than China’s for Returnity, the absence of tariffs and the speed of trucks give its customers a rarity in today’s disorderly arena of global commerce: more certainty about when their delivery will arrive. Newman plans to keep a significant portion of production in Mexico over the longer term.
“Having that flexibility,” he said, “is really necessary and valuable.”
Several years of supply-chain instability are pushing an increasing number of US retail companies to shift some production from China to North America. There’s no one-size-fits-all strategy and some options are quicker and cheaper than others. But adding suppliers outside China is emerging as a better short-term fix than more costly investments, such as building a new factory close to customers.
“Folks are definitely looking at near-shoring, on-shoring, re-shoring where it makes sense,” said Jon Gold, vice president of supply-chain and customs policy at the Washington-based National Retail Federation. “It’s happening, but it’s not happening overnight.”
About 70 percent of the 1,610 executives surveyed by engineering company ABB in June said they plan to bring at least part of their operations closer to home to address ongoing supply-chain issues.
During the past several years, barriers to the easy and cheap flow of goods have continued to mount, including former President Donald Trump’s tariffs on Chinese imports; months of delays during the pandemic to unload merchandise at snarled US ports; and, more recently, the on-again-off-again closures of major factories in China because of the country’s Covid Zero policies.
The unrelenting problems have convinced some executives that it’s time to rethink the corporate playbook of the past several decades.
“We have to look at China not as the factory of the world like it used to be,” said Jean Madar, chairman and CEO of Inter Parfums Inc., which manufactures and distributes fragrances for brands including Oscar de la Renta, MCM and Donna Karan.
“China is the store of the world,” Madar said. “It’s more interesting to sell to China than buy in China.”
Inter Parfums plans to cut its production of perfume bottle components that are made in China and sold in the US to about 25 percent by 2023, from around 70 percent in 2020, Madar said, as the company shifts to manufacturing in the US as well as Europe. The rewiring will reduce the volume of goods that Inter Parfums ships through ports by about half, he added.
While it’s about 20 percent more expensive for Inter Parfums to manufacture the parts in the US versus China, Madar said it’s worth it. Last holiday season, Inter Parfums missed out on sales to American shoppers because some of its containers were stuck at port.
“If you cannot get the product on time, how good is it to be 20 percent cheaper?” he said.
But shifting so much of Inter Parfums’s production stateside hasn’t been seamless. The company is still facing potential delays this holiday season because US factories in states such as New Jersey can’t find enough employees, Madar said.
That limits the number of shifts the factories can run compared to China, which means the production process is taking longer in the US. As a result, Inter Parfums will start to produce components for its holiday fragrance packages in January instead of May.
“America is not 100 percent ready,” Madar said, “for the re-industrialisation of the country.”
Similarly, Newman, the Returnity CEO, said setting up production in Mexico took longer than he expected, added costs and required “some late-night, difficult phone calls.”
For that reason, many American companies have chosen to expand their supply chains elsewhere in Asia, rather than closer to home.
There’s been “growth of manufacturing to Southeast Asia via Vietnam, Indonesia, Thailand and Malaysia,” said Mario Cordero, executive director of the US’s second-largest port, in Long Beach, California. “You’ve had major conglomerates and corporations have the ‘China plus one’ policy.”
High-end retail companies are more likely to move first on reshoring their production to the US and Mexico because their profit margins tend to be wider.
Jenni Kayne, a high-end apparel and home goods company based in Los Angeles, is shifting the production of all of its furniture from Asia to the US within the next two years. The company is fed up with repeated delays, CEO Julia Hunter said.
In early 2021, for example, the company put in an order for a line of patio furniture with an Indonesian factory. While Jenni Kayne wasn’t planning to market the products for another year and a half, Hunter said she wanted to get ahead of the increasing delays at the California ports. But the furniture arrived four months late — and without the cushions.
“We keep building in longer lead times but it’s still hard to receive the products when we want to receive them,” Hunter said. She’s starting to work with factories in North Carolina and Oregon to make the furniture, which includes $4,395 beds and $5,995 credenzas.
Other brands with narrower margins are in standby mode about increasing production in the US.
“The economic equation needs to change quite significantly for that to be viable,” said Andrea O’Donnell, the CEO of apparel and accessories company Everlane Inc. “We’ll wait and see how other bigger businesses really deliver on that.”
Nearly two-thirds of CEOs surveyed by consulting firm Kearney said they might be influenced by seeing other US companies reshore or near-shore. That’s in part because executives are waiting to see if more companies moving production closer to home pushes manufacturers to “reach enough critical mass for supplier ecosystems to be built out,” Kearney said in a report published in April. That would make it more cost effective for other firms to follow suit.
The higher production costs in the US and Mexico compared to China, though, could ultimately push some companies to increase prices to preserve profit margins.
“In a broad sense, globalisation has peaked. We’re not going to be importing as much from China anymore,” Wells Fargo chief economist Jay Bryson said. “It’s still cheaper to produce it over there. But if things are coming back on shore, you’re going to have the reverse.
By Augusta Saraiva and Jeannette Neumann
Building Resilience and Value in Fashion’s Supply Chain | BoF Insights
Read the latest BoF Insights report to get BoF’s perspective on the state of the fashion industry’s supply chain model, plus data-driven guidance on how companies can strengthen their supply chains in the face of pandemic and geopolitical challenges.