Companies look to reshore after Covid decimates supply chains

More firms are considering reshoring manufacturing but complex supply chains and uncertainty about future trading relationships are barriers

Virus cell and industry symbols
Some British retailers are keen to relocate their supply chains closer to home following the pandemic

Covid-19 has upended the world. The New Normal is a 10-part series looking at the stunning ramifications for the world of economics and business. Part five looks at how supply chains were hammered by the coronavirus outbreak and as a result many firms are now looking to bring their supply routes closer to home, but this is far from an easy task.

The phone in the Coventry office of the Japanese robotics company Fanuc has rung twice as often as usual since the start of the pandemic.

Tom Bouchier, the firm’s UK managing director, says he’s been inundated with enquiries about replacing cheap Chinese labour with automation at home after the standstill in world trade in March. The soaring price of air freight as governments restricted passenger travel has exposed the vulnerability of global supply chains.

More companies, especially in the food and aerospace sectors, want to invest in “cobots” – collaborative robots – to ramp up productivity while maintaining space between workers in domestic factories, he claims.

Indeed, a PwC survey of 3,500 chief executives worldwide last month found that 77pc believe Covid-19 has accelerated an enduring shift from human labour to automation. Even before the crisis, in February, Bank of America projected a doubling of the global number of robots to five million by 2025.

Whether the interest is translating into orders, with cash-strapped firms uneasy about investing in such uncertain conditions and the Chinese economic recovery under way, is another story. Will Bouchier’s vision of a more self-reliant post-globalisation Britain become the “new normal”?

A Fanuc "cobot" – collaborative robot Credit: FANUC Europe Corporation

Reshoring is easier said than done, according to Steve Harris, head of manufacturing at Lloyds Bank. “The issue is that many supply chains are already deeply embedded, and in some cases the UK doesn’t have the right infrastructure to make a reshoring process easy,” he says. “This means significant investment will be needed and that’s hard for many businesses to commit to in the current climate.”

Bouchier admits that it’s easier for German manufacturers to access government-backed finance to automate. “We need to get that route to finance more available,” he says. “The government strategy here is about tax incentives but that doesn’t give you money to buy stuff this year – it just gives you money off your tax bill in a couple of years’ time.”

Bank of America notes that “European companies expect limited support from the government” and “do not appear geared up adequately to use automation as a mitigant against margin compression – only a third has some form of automation or efficiency plan in place”.

Fashion is a prime example of a high-volume, low-margin industry that could benefit from automation but Adam Mansell, chief executive of the UK Fashion and Textile Association, says: “There isn’t going to be a panacea of reshoring, unfortunately.

“If you remove the cost of labour and drop the cost of shipping, which from China went up seven-fold during Covid-19, it’s absolutely financially viable to have a much more automated manufacturing process in the UK. It hasn’t happened yet because garment-making companies tend to be quite small and people are waiting to see how the technology develops before they invest.”

Until there is more certainty in terms of global trading relationships, it will be “business as usual”, he adds. While large retailers may be keen to find alternative suppliers closer to the UK, especially in Turkey, the future of duty-free exports depends on trade talks, while it has already been confirmed that clothes from Bangladesh will continue to face no tariffs.

British luxury brands will face additional 25pc levies on exports to the US from October as collateral damage from the US-EU trade dispute over subsidies to Airbus and Boeing. “That’s hard to swallow in any circumstances but particularly now,” Mansell says.

The US says the EU has not complied with rulings over illegal subsidies to build Airbus jets Credit: REMY GABALDA/AFP

The reality is that reshoring supply chains is “not as easy as ‘bringing things home’”, Bhavina Bharkhada, of Make UK, says. “Manufacturing supply chains are global, integrated, complex, long and embedded and when you’re talking to multiple suppliers in multiple places in multiple countries, that’s a simple solution to a complex problem.”

Bank of America analysts estimated this month that the cost of shifting all export-related manufacturing by foreign firms out of China would cost $1 trillion over five years, in part because China’s industrial heartland, known as the “Goldilocks zone”, has offered an optimal mix of low costs, efficiency, human resources and infrastructure for 30 years, hence it accounts for a quarter of the world’s manufacturing value added. 

The journey of a product from factory to US shelf from Thailand takes almost twice as long – 40 days – as from China, and it is estimated that one Chinese worker can manufacture about the same value of goods as four workers from four southeast Asian countries combined, the analysts said.

It is also difficult to extricate a company from contracts with Chinese suppliers fast. “Pretty much everybody’s seen some activity around what they can do with contracts with Chinese suppliers,” Ross Denton, head of international trade at the City law firm Ashurst, says.

“It may be a long-term supply contract where you have to meet targets. You may have been in receipt of Chinese government subsidies that you have to repay if factories close down. People are looking at diversifying their supply chains but it’s certainly not as easy as simply leaving China and going somewhere else.”

Moreover, supply chains are often dependent on specific countries’ raw materials. The extraction of cobalt, for example, a key material in making electric batteries, is largely concentrated in the Democratic Republic of Congo, although Australia could scale up production in the longer term.

However, the Society of Motor Manufacturers and Traders (SMMT) observes that long supply chains are not necessarily fragile by default. 

Its annual trade report noted that the UK automotive industry was able to continue manufacturing for several weeks after the outbreak in China because the distance meant key parts produced in Hubei province were still in transit to the UK when it started enforcing strong lockdown measures. “If the epidemic started much closer to the UK, the impacts would have probably been more immediate,” the SMMT said.

For Miles Bogaerts, chief executive of Euler Hermes UK and Ireland, which insures payments to exporters, there’s more talk about reshoring than action. “In times of uncertainty you talk a lot about change and seeing opportunities instead of threats. I don’t see many moves yet.”