Electronics

Reshoring, nearshoring, or friendshoring?

John Denslinger is a former executive VP Murata, president SyChip Wireless, and president/CEO ECIA, the industry’s trade association. His career spans 40 years in electronics

This month, John Denslinger explores the benefits and limitations of reshoring, nearshoring and friendshoring, with a focus on the semiconductor ecosystem

China’s economic grip on the world’s supply chains ended with the pandemic shutdowns. The pandemic may have been the catalyst, but punitive tariffs, geo-political uneasiness and protectionist measures supported by hundreds of billions of Fed dollars in economic hand-outs helped usher in a new age of strategic sourcing. Across every industry it’s quite evident manufacturers have decidedly pivoted from sole source, low-cost status quo to one that delivers diversification and resilience.

From a manufacturing perspective, offshoring appears to be dead. A new vocabulary has replaced it: reshoring, nearshoring and friendshoring. Each has unique deliverables and risks.

Reshoring

Reshoring is by far the most talked about of the three and basically brings business operations, manufacturing and sourcing functions back to the home country. A company trades the benefit of domestic location, flexibility, security, improved quality control, reduced logistical costs and proximity to local market against potentially higher labor and operating costs. It should be noted that smart companies mitigate these operational expenses by introducing robotics and AI tools during transition. Despite the apparent advantages, two issues still stand out:

1. There is a skilled worker shortage, with 82 per cent of US manufacturing companies saying they are experiencing a labor shortage according to a 2023 Career Advancement in Manufacturing Report. Competition for scarce talent likely drives up recruitment, training and retention expenses.

2. Reshoring requires significant initial capital investment. New facilities, state-of-the-art equipment and automation technology are expensive. If your business happens to be semiconductor or EV related, Federal subsidies may make the decision quite easy.

Nearshoring

Nearshoring relocates a business’ operations to a neighboring country within the same region or continent. In this case, the company gets many of the advantages of reshoring but maintains

much of the offshore benefit of lower labor costs. A good example is the proximity of Mexico to the US. While initial investment may be similar to reshoring, ample labor is generally available. Nearshoring still requires some outsourcing and reliance on local suppliers but the complexity is considerably less than the offshoring model. If a company is just looking for geographic proximity, real-time collaboration and better supply chain visibility at a lower cost, nearshoring seems a satisfactory solution.

Friendshoring

Only the government could invent this word. The definition seems loosely translated as locating manufacturing in countries with shared values, ‘friends’ so to speak. Who qualifies as a friend is somewhat undefined, but this trust-based relationship seems to hinge on a trading pact between nations. Friendshoring might be a workable solution for some such as the semiconductor industry. Questions remain though. Is a partner country in an unstable part of the world? Are there shipping bottlenecks and added inventory costs? What are the ESG compliance requirements? Is the ongoing regulatory environment favorable to business?

In the short-term semiconductor is ripe for friendshoring. Currently, 74 per cent of semi design is US based; 41 per cent of global equipment processing is US based; 57 per cent of global material processing is done in Taiwan, South Korea and Japan; 56 per cent of manufacturing capacity is concentrated in Taiwan, South Korea and Japan; and 38 per cent of global semi assembly is done in China (Deloitte article dated March 2022).

All these governments have committed funds to subsidize semiconductor production on home soil. It’s not likely any country can possess the critical mass to dominate the complete semi supply line. America might find friendshoring adequately provides the security it seeks: design (US and EU), equipment (US, EU and Japan), materials (South Korea, Japan, US and EU), wafer fab (Taiwan, Japan, South Korea, US and EU) and assembly (India). There seems to be plenty of countries with shared values to make friendshoring work.

The post Reshoring, nearshoring, or friendshoring? appeared first on Electronics Sourcing.


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