Why ‘China Plus Many’ is a Realistic Future for the Supply Chain
China plus one, or “China plus many” strategies are becoming more of a reality.
The U.S. is continuing to reduce its reliance on China, and Asia at large, and Mexico stands to be the biggest beneficiary.
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Douglas Kent, executive vice president of strategy and alliances at the Association for Supply Chain Management (ASCM), called the shifting volume out China the “biggest a-ha moment” when compiling the quarterly KPMG Supply Chain Stability Index.
Citing Freightos Baltic Index (FBX) data, the index highlighted that inbound container freight from the continent dropeed 27 percent in the quarter, while inbound air freight plummeted 50 percent.
Mexico overtook China by 15 percent in overall U.S. import volume during the first quarter of 2023, while Canada overtook it by 5 percent, marking the first time in more than 20 years that trade volume shifted to both U.S. neighboring countries, according to U.S. Census Bureau data.
In March, goods from Mexico accounted for 16.1 percent of U.S. imports, or $42.8 billion, beating out Canada (15.5 percent of imports) and China (10.1 percent), according to the data.
Jim Lee, managing director at KPMG, said the “China plus many” conversation is gaining steam among brand clients.
“Part of the engagements we’re working through, whether it’s a retailer or a manufacturer, are looking to rationalize their footprint not just from a U.S. standpoint, but from a reshoring, nearshoring, regionalization standpoint,” said Lee. “Some of it driven by China, and some of it driven by Russia/Ukraine. It’s not just that it popped up during the first quarter of the year, but it’s been building up to it.”
According to Lee, the recent West Coast port disruptions are going to drive the regionalization conversation further as retailers opt to set up different nodes and facilities and rely on the region less.
“A number of our clients have told me directly, ‘There’s a reliance on West Coast ports, and every few years, it kills us. We want to see what we can do to not eliminate it, but mitigate it,’” Lee said. “I think it’ll just play more of a factor, a more prominent factor and role in the network optimization conversation.”
The Stability Index also touched on the volatile labor market, which would likely be impacted further by any reshoring activities.
Transportation and distribution job openings remain relatively volatile, especially as the industry is already seeing trucking capacity disappear. According to data from the U.S. Department of Transportation released in May, 11,000 operating authority agreements had been revoked since October 2022, suggesting that trucking companies are voluntarily exiting the market.
While the unemployment rate in transportation and distribution bottomed out at 3.7 percent in October 2022, it has slowly increased since then to 5 percent.
There is also a noteworthy change in where transportation and distribution employees are needed, the index said. A shift in volumes from intermodal transfers at large seaports to road transfers at land ports at border crossings means networks will likely need more truck drivers and fewer incoming customs and port laborers.
On the manufacturing side, the labor market has continued to loosen. Job openings decreased 11 percent in the last quarter, according to KPMG data, continuing a 12-month downward trend that has dropped 30 percent since the second quarter of 2022. This number is still 42 percent higher than pre-pandemic levels.
Lee attributed the loosening to the closing of $2.9 trillion in total M&A deals in 2021 when the stock market reached all-time highs.
“When you consolidate and merge companies, post-merger you’re going to obviously have some efficiencies in manufacturing labor and sometimes distribution labor,” said Lee. “That definitely plays a role in why we saw some of that manufacturing job opening rate steadily decrease. On the distribution side, that’s been experiencing large swings up and down—very volatile. Companies open up a fulfillment center before shutting it down, regionalize, engage in China plus one or move the sourcing.”
Unemployment in the sector reached its lowest level in 14 years this past December but has risen slightly since, the report noted.
Manufacturers are working to achieve inventory efficiency in the wake of a highly elevated 2022 by balancing consumer expectations with inventory affordability. Many companies are still using buffer inventory to create resilience against volatile customer demand, with the inventory-to-shipment ratio increasing to twice the pre-pandemic level, the index said.
Strategies to address the inventory glut typically include a mix of delaying and canceling orders while increasing promotions and markdowns on existing stock. The resulting hit to profit margins is spurring more cost-cutting initiatives, such as downsizing the workforce and closing locations.
“There are good signs for a return to some semblance of profitability, but unfortunately consumer pricing hasn’t gone down and we’re still in a recessionary inflationary period,” Kent said. “There’s always been the question—with ongoing pressures relative to the consumer—is that going to have an impact on the demand volatility? That means I’ve done my job internally, but yet I don’t have the demand coming in because the consumer can’t afford it.”
