Bringing manufacturing back to Europe – ‘reshoring’ or ‘onshoring’ – is justified, if not a sound business strategy. Over the past two decades, manufacturers have shifted production of everything from cars to cosmetics, primarily eastward to China, in an effort to cut labor costs. The supply chain disturbances brought on by Covid and geopolitics are now forcing a rethink.
Some recent developments have helped. Carlo Altomonte, professor of economics for European integration at Milan’s Bocconi University, argues that the recent pace of European integration is promoting a “regionalization” of supply chains. But creating a resume is still complicated — and demands tough choices.
Take the plight of Dardanio Manuli, chief executive officer of Manuli Rubber Industries, an Italian multinational manufacturer of hydraulic equipment. He thought he had already brought his supply chain back from China, finding suppliers for steel and wire in Europe. After the Russian invasion, they found that their new suppliers were sourcing pig iron from Ukraine, specifically a single factory in Mariupol. “We thought we were already onshoring, but Europe turned out to be the weakest link,” he said.
It is difficult to find data on large scale reshoring. There is some anecdotal evidence. Düsseldorf-based retailer C&A Group is opening a new textile plant in Germany to produce 400,000 pairs of jeans a year. Swedish carmaker Volvo announced plans to build a third factory in Europe in 2025. Small businesses are getting into the act. Maia & Borges, a toymaker based in Portugal, is on course for revenue of €12 million in 2022, up from €1.5 million in 2019 when Asian supply chains were snapped in the early months of the pandemic. Chief executive officer, Patricia Maia, said the family firm will make 10 million toys this year and is building a third factory to tackle the deal expected to reach 40 million by 2024. “From a business point of view, we’ve had a good two years,” she said.
There are big challenges. Engineers are needed to populate high-tech factories, and Europe’s pharma industry has a constant problem with brain drain in America. Even makers of luxury goods are struggling to find hands experienced enough to make their goods. French luxury conglomerate LVMH Moet Hennessy Louis Vuitton has pledged to hire 2,000 young people, especially in Italy, to keep local manufacturing knowledge alive.
To bring about change, reshoring needs a more vigorous policy push and concerted support from the EU and its member governments. Some incentives provide recharge benefits only indirectly—such as meeting ESG targets. I spoke to executives from one of Europe’s largest industrial companies that faced supply chain difficulties last year. Part of the impetus for reshoring was investor pressure to ‘greener’ supply chains and reduce Scope 3 emissions (indirectly generated emissions). “Bringing suppliers closer to our plants means we have to limit carbon emissions,” said the firm’s global supply chain director.
After the EU pandemic, €750 billion ($811 billion) of money is available for companies to fund projects with a green or digital thrust. Maia & Borges has applied for funding partly because it uses robotics to manufacture products.
Those funds have had an effect: increasing investment in the European semiconductor industry and battery cell production. Some 24 battery giga-factories have been announced in Europe, with enough annual production capacity to equip 9 million electric vehicles per year, according to UniCredit’s chief economics advisor Eric Nielsen. Strategically, it overcomes supply and political problems with China – which is a powerhouse of EVs and batteries – as well as providing a smaller carbon footprint. Frank Pisch, professor of microeconomics at the Technical University of Darmstadt, argued in a recent research paper that perceived uncertainty would make localized timescale production more attractive.
But bringing the supply chain to Europe also creates fresh problems. Two hours by car from Porto is Tras-os-Montes in the Barroso region, a mountainous region of stunning beauty in Portugal. It is here that Savannah Resources plans to set up Europe’s largest lithium mine and processing plant. It is part of a larger plan to build a European supply chain for lithium, which also includes a refinery operated by Portuguese energy company Gallup Energia SGPS and Swedish electric vehicle battery maker Northvolt. Environmental groups argue that mines destroy a lush countryside and community. The project has applied for NextGeneration funding.
Some small companies just throw up their hands. Asked what he plans to do now as the war in Ukraine has broken his supply chain, the Manuli rubber chief said, “We are going to India.”
Rachel Sanderson is a contributing columnist at Bloomberg Opinion