United States manufacturing is at a critical juncture. Russia’s invasion of Ukraine, the sanctions imposed for doing so and new pandemic-induced shutdowns in China are adding to the pain of already distressed global supply chains.

The global supply-chain disruptions, geopolitical uncertainty and the resulting movement to strengthen domestic supply ecosystems mark a turning point for U.S. manufacturing. Reducing dependence on China for components and finished goods, reshoring essential products and restoring supply-chain resilience have become vital to our economic and national security. This is a defining moment for U.S. manufacturing. Reshoring will be key to a secure new course.

 

Natural Disasters and Geopolitical Risk

Black swan events like the pandemic may be uncommon occurrences, but impacts from natural disasters and geopolitical unrest are happening more frequently. Natural disasters like the aftermath of the 2011 Tōhoku earthquake and tsunami that destroyed the Fukushima nuclear power plant put significant pressure on the world’s supply chain, resulting in crippling automotive-component shortages for shuttered OEM factories and suppliers.

Today, geopolitical strains from the Russian invasion of Ukraine are adding to the turmoil of already disrupted global supply chains. Supply-chain-related developments connected to the Russian invasion of Ukraine include surging energy prices and shipping costs; tanker and air cargo route adjustments; prolonged deliveries; and global supply risks for oil, platinum, aluminum, neon, titanium, sunflower oil and steel. The price of fuel for the container ships has risen sharply. These issues – plus shuttered factories across the European Union, Ukraine and Russia – are exacerbating already strained global supply chains.

 

Supply-Chain Chaos Escalates

The Russian invasion of Ukraine has escalated global supply-chain disruption. Russia accounts for 40% of palladium that is used in car and electronics chip production, exacerbating a global chip shortage. About 140 ships have been trapped off the coast of Ukraine. Ship fuel costs have “gone parabolic,” according to Braemar ACM Shipbroking. Fuel spikes have surged to a historic $1,000/ton as war repercussions worsen. The corporate exodus from Russia highlights the global risk with companies like Apple, Mercedes-Benz and BP pulling out of the country to live up to corporate responsibility standards or to comply with Western sanctions. McKinsey research estimates that disruptions lasting a month or longer now occur, on average, every 3.7 years.

Supply-Chain Transformation

As Mercedes-Benz makes the transition to electric vehicles (EVs), they may be accelerating a shift to U.S.-made parts due to geopolitical tensions, like the Russian invasion. Historically, the company has imported internal combustion engines from Europe to supply its U.S. factories, but now those imported components will be replaced by U.S.-made batteries. Mercedes-Benz recently invested $1 billion in a battery factory in Woodstock, Ala., and in revamping its nearby conventional SUV factory to produce an electric SUV.

Ola Källenius, chairman of the board, said Mercedes-Benz would have wanted to have local battery-cell production anyway, but, “In this time of insecurity and uncertainty, it certainly makes that decision maybe even more clear.”

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Are you thinking about reshoring?

Look for me and The Onshoring Project at IMTS 2022 September 12-17 in Chicago, where we look forward to discussing reshoring successes and opportunities with you.