Reshoring changes “just-in-time” doctrine

Consumer electronics, household appliances and toys are in short supply during the Christmas season. Experts fear that the temporary problem will become permanent. The first companies are reacting, but retreating to one’s own continent, so-called “reshoring”, is only of limited use. by Dirk Mewis

In the second Corona autumn, Germany is experiencing a state not seen since the oil crisis of the 1970s: a shortage economy. The pandemic has stretched supply chains to breaking point, sometimes severing them. Freighters are jammed in front of closed ports worldwide, container rates are rising massively and primary products and raw materials such as wood and semiconductors are becoming scarce. Globalisation, which once ensured that almost every product was available in the shortest possible time in every corner of the world, is proving to be a fragile construct.

The Kiel Institute for the World Economy has calculated that the supply crisis will cost the German economy 40 billion euros alone. The economy, which has just started to pick up again, will be considerably weakened. The German government’s autumn forecast will be much lower than expected. The Munichifo Institute also forecasts only 2.5 instead of 3.3 percent growth for this year. A global spending and consumption spree fuelled by trillion-dollar government bailout packages is meeting with empty warehouses. It is precisely the rapid recovery of the economy after the pandemic that is now leading to supply bottlenecks. There is no improvement in sight any time soon, because the “excess demand”, as experts call it, is not abating. The industry therefore has little opportunity to make up for lost production and fill stocks.

In the construction industry, 90 percent of companies are now complaining about a shortage of materials, and in a recent survey by the German Confederation of Skilled Crafts, three quarters of member companies said they were having supply problems. At the tool manufacturer Würth, the waiting time has grown to ten weeks, Aldi has to postpone sales dates for its promotional goods. 48 percent of all SMEs are currently reporting bottlenecks in steel, wood or semiconductors to KfW. Washing machines, game consoles, upholstered furniture and trainers are also out of stock, sometimes for months. And all this just a few weeks before Christmas. The question that arises is: Is this temporary, or will it last? Because even small disruptions are enough to tear apart the finely chiselled logistics of the “just-in-time” doctrine.

Does reshoring help supply chains?

The causes of the recent breakdowns are manifold: the accident of the container ship “Ever Given” in the Suez Canal was compounded by weeks of corona-related port closures in China. Such shocks, which affect global production, are becoming more frequent and more serious, warned the consulting firm McKinsey in an August 2020 study. The triggers include not only extreme weather events, breakdowns and pandemics, but also trade wars.

But the retreats to one’s own continent, known as “reshoring”, are only of limited use. The example of Miele shows this. The Gütersloh-based company produces most of its washing machines, dryers and dishwashers in Germany. Even the circuit boards that go into the appliances are largely manufactured locally. But the capacitors on them come from Asia. Recently, production has had to be halted because of the pandemic, partly because there is a shortage of such preliminary products throughout the industry. Customers currently have to wait up to 16 weeks for some washing machines, 12 to 14 weeks for dishwashers.

Klaus Wohlrabe, deputy head of the Ifo Center for Macroeconomics, sees such domino effects across all sectors. Even a small, missing component can have serious consequences.

A rethink has begun in industry. CO₂ emissions are becoming more expensive, the carbon footprint more important for corporations. The increase in the price of pollution rights alone could make suppliers from Europe more interesting for companies again.

The fashion group C&A is now starting to sew jeans in Mönchengladbach again. Until a quarter of a century ago, the family-owned company manufactured at its home site, then it “went the way the whole industry went”, explains manager Uwe Gansfort: to Poland, Romania, finally Bangladesh – the distances became longer, the wages cheaper, the whole system more complex and vulnerable. Now it’s time for reshoring. The way goes back to the homeland. The ultra-modern production facility in Mönchengladbach, where people only assist the machines, is C&A’s blueprint for the production of the future: short delivery routes, automated processes, flexible machines should make “Made in Europe” possible again.

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