Covid-19 lockdowns have disrupted global supply chains across the board and placed the concepts of reshoring and resilience on every policymaker’s lips. A new report from Euler Hermes examines how the pandemic could push manufacturers to rethink their supply chain strategies.

Covid-19 disruption

Georges Dib

Georges Dib, Economist for International Trade at Euler Hermes, comments:

“Rarely have supply chain leaders been confronted with a shock of this scale. 1 out of 2 leaders reacted by hedging i.e. demanding protection through insurance, stockpiling, or resorting to emergency supply solutions. Interestingly, 32% also reported ramping up ESG due diligence on suppliers. In the longer term, resilience strategies will be multifaceted: only 10 to 15% of companies consider reshoring (bringing production back home) but we estimate around 30% consider nearshoring, i.e. bringing production to a nearby country. Multi-shoring or diversification is also on the agenda, as companies look for cost-effective supply and production solutions (notably still in China) after an unprecedented shock.”

94% of companies reported a Covid-19 induced disruption to their supply chains. Euler Hermes surveyed a sample of high-level executives in 1,181 companies across five countries (the U.S., the UK, France, Germany, and Italy) and six sectors (IT, tech and telecoms, machinery and equipment, chemicals, energy, and utilities, automotive and agri-food) about their experiences with disruption and their plans to make their supply chains more resilient.

One out of five companies surveyed reported a “severe disruption.” U.S. companies stand out as 26% reported a “severe disruption” (vs. 17% in average for other companies), as well as around 25% of the machinery and equipment, IT, tech and telecoms and energy and utilities companies (vs. 16% of chemicals and automotive companies).

The Covid-19 crisis has prompted most companies (52%) to resort to hedging through insurance, stockpiling, and the search for alternative supply solutions to activate when needed. Companies also engaged actively in a better monitoring and understanding of supply chains.

Supply chain reorganization follows, with 4 out of 10 companies indicating they were already changing some overseas suppliers and relocating parts of their production. U.S. companies embraced ESG due diligence significantly more than all other companies in our sample.

The digital edge: the more digitized, the more active to mitigate disruptions. Highly digitized companies (reporting 6 to 8 different digital activities[1]) took significantly more actions to mitigate supply-chain disruptions than the least digitized companies (reporting 0 to 2 digital activities). For instance, 57% of highly digitized companies resorted to hedging strategies vs. 43% of the least digitized ones; 47% improved their understanding of their supply chains vs. 33% of the least digitized; and 39% reported increasing ESG due diligence on suppliers vs. 14% of the least digital ones.

No massive support for reshoring, but many companies looking to find new suppliers at home and to nearshore their production 55% of the companies surveyed are considering looking for new suppliers in the next 6 to 12 months, with 62% considering to do so in the long-term.

Yet, in a third of the cases, companies consider moving their suppliers to countries that are already in their top 3 existing supplier locations. Companies would prefer looking for new suppliers at home – and the U.S. is the most economically “patriotic” in this regard. However, this does not suggest that companies are turning away from Chinese suppliers, which remains popular in the responses received. This could be due to the search for cost-effectiveness in times of great uncertainty and after an unprecedented shock; “improving margins” is cited as the most popular reason to look for a new supplier.

Around half of companies surveyed consider moving their current production sites in the medium to long term. Yet only between 10% and 15% consider relocating production in their home country, i.e. reshoring. Euler Hermes estimates around 30% consider nearshoring, i.e. bringing production to a nearby country (particularly if it’s part of the same customs union or Free Trade Agreement). Companies are divided on the reasons for this choice, from finding better quality suppliers, increasing turnover and margins to reducing delays and better managing inventories.

An increasing demand for protection and a multifaceted resilience strategy are the post-Covid-19 game changers. But such changes in the supply chains are not straightforward: higher labor costs, tied with the quality of the supplier and investment costs, are the most cited challenges of switching to domestic suppliers or reshoring production. Most companies state they are ready to incur the higher costs of reshoring but 40% would pass it along to customers. Three quarters of companies surveyed believe customers are willing to pay more for domestically produced goods.

Alexis Garatti

Alexis Garatti, Head of Economic Research at Euler Hermes, comments:

“We do not expect the return of the early 2000s globalization trends, nor a complete de-globalization. We see competing dynamics in global trade, and thus a multifaceted future, with increased demand for protection: traditional issues such as production costs, quality, and transportation issues will continue to drive supply chain decisions, but companies seem to worry about environmental risk, potentially announcing more scrutiny and a shortening of less ESG compliant supply chains. Reshoring could happen conditionally on appropriate incentives; in fact 17% of companies that are not planning supply chain reorganization mention that the most effective measure to help them improve supply chain resilience would be domestic tax incentives to bring some production back home.”

[1] 8 digital activities proposed: Use of software to monitor production or other activities, use of software to facilitate collaborative work, use of cloud computing, use of artificial intelligence, use of big data, use of social media to recruit employees, E-commerce and electronic invoicing