The Supply Chain Matters blog calls reader attention to a very timely report recently published by global sourcing consulting firm, Kearney (formerly A.T. Kearney).

This report, Trade war spurs sharp reversal in 2019 Reshoring Index, foreshadowing COVID-19 test of supply chain resilience, the seventh annual reiteration, is very timely, to state the obvious.

Essentially, the annual Kearney Reshoring Index tracks how companies are shifting their global product and component sourcing strategies, with a separate index monitoring the trending among U.S. companies toward higher levels of reshoring. Supply chain sourcing

The report’s Executive Summary points a dramatic reversal of a previous five-year trend for the Reshoring Index, as domestic US manufacturing in 2019 commanded a significantly greater share versus the 14 Asian low-cost countries (LCCs) tracked in the study. Manufacturing imports from China were noted as registering a particularly sharp decline, on the order of a 98-basis point jump in the index. The value of all manufactured imports from various Asian based low-cost countries reportedly declined from a value of $816 billion in 2018, to $757 billion in 2019.

According to the report calculation of a manufacturing import ratio (MIR), the reduction in this ratio from 2018 to 2019 was first seen since 2011.

This year’s report includes the second installment of the Kearney China diversification index (CDI), which was designed to track the rebalancing of US manufacturing imports from Asia away from China to other Asian low-cost countries, most notably Vietnam. Stated in the press release: “Much of China’s loss was Vietnam’s gain,” said Patrick Van den Bossche, Kearney partner and co-author of the study. “Of the $31 billion in US imports that shifted from China to other Asian LCCs, almost half (46 percent) was absorbed by Vietnam, which exported $14 billion more manufactured goods to the US in 2019 than it did in 2018.

The Executive Summary further observes: “2019 saw companies actively adapting to what then felt like a major disruption—the US–China trade war—by reducing imports of manufactured goods from China while increasing manufacturing imports from the other countries in our Asia LCC sample, as well as from Mexico.

 

What it Means- Important Takeaways

The obvious top of mind question is obviously what the results of this index imply for the now ongoing manufacturing and supply chain disruptions occurring from the ongoing COVID-19 coronavirus pandemic. The report authors state: “At this writing, the full extent of the societal and economic trauma the coronavirus pandemic may cause is unknown. But it will be historic. As a result, we forecast that companies will be compelled to go much further in rethinking their sourcing strategies—indeed, their entire supply chains.

In the report’s detail, the Kearney authors note that while the shift out of China was substantial, driven by increased tariff levels and trade conflict, there remained a sense that manufacturing imports from China would revert to former patterns when the trade war subsided. The now growing order of magnitude of the COVID-19 disruption is still an unknown, but will be historic, according to the authors.  The authors further conclude: “While the trade war triggered some notable tinkering, the massive operational disruption wrought by the coronavirus pandemic will compel companies to fundamentally rethink their sourcing strategies.”

The above Kearney takeaway statement is one that is increasingly being shared by other global consulting and economist firms, and one that we have expressed in recent Supply Chain Matters commentaries addressing the post COVID-19 supply chain landscape. The Kearney Reshoring Index likely implies that U.S. Manufacturer’s and retailers who already initiated sourcing strategy shifts may have a leg up on other industry players, but that remains to be seen.

We will continue to share with our reader community highlights of other important published research and insights.

Readers can access the full Kearney report by clicking on the report title noted above.

 

Bob Ferrari