Reshoring trend: can inventory-trapped capital be released in a more conservative supply chain model?

Compared to the turbulence of the Trump years, the first few weeks of the Biden presidency have been noticeably drama-free. One development which you may have missed was an Executive Order signed at the end of February requiring 100-day supply chain reviews for semiconductors, pharmaceuticals, electric vehicle batteries, and certain minerals used in manufacturing cars and weapons. Some commentators have argued this is symptomatic of a wider supply chain trend: the reshoring of production back to the US and a long-term pivot away from traditional East-West trade flows. And if more conservative supply chains are indeed the future, is there a way to address one of the more persistent downsides of the Just in Case model: inventory-trapped capital? Falcon Group may have the answer.

The focus on semiconductors is unsurprising, not least as they are vital components in everything from cell phones to fighter jets. However, whereas in 1990 the US made 37% of the world’s microchips, this share is just 12% today. This reliance on overseas producers, particularly China, has been causing growing alarm in both the Pentagon and the boardrooms of Ford and General Motors. American import dependence for key mineral commodities has also doubled since 2000, with the US now 100% import-reliant for 17 key minerals, despite North America having rich deposits of many of them.

Against this backdrop, the past year has witnessed a perfect storm of semiconductor supply chain disruption. This crisis has had a particular impact on the car industry. When Covid triggered a slump in car sales in early 2020, manufacturers were quick to cut orders, including for electrical components. When demand returned in Q3, semiconductor manufacturers were already committed to supplying electronics customers. The trade war with China also impacted supply as did fires at critical Japanese factories. Airfreight capacity has also been impacted by vaccine prioritisation and the grounding of much of Boeing’s 777 fleet. Unfortunately, the inevitable fall in car production has coincided with the return of demand.

Biden’s supply chain edict has therefore been warmly welcome by the US automobile and mining sectors. Industry sentiment will be further buoyed by Taiwan Semiconductor Manufacturing Company – the world’s largest semiconductor manufacturer – committing to building a $12bn factory in Arizona. Elsewhere, USA Rare Earth recently opened a minerals processing facility in Colorado and has also acquired Hitachi’s permanent magnet manufacturing equipment in North Carolina. Clearly, though, it may take time before such positive developments bear fruit and reshoring will not happen overnight. There are China’s longer employment contracts to consider, Chinese authorities will be reluctant to relinquish key equipment and IP cannot be easily rebottled once decanted.

Over the coming decade, the intensifying rivalry between Beijing and Washington will drive the dovetailing of US supply chain and national security interests. The call for critical manufacturing and mining activity to return to the US will become ever louder, and more supply chain-related Executive Orders are likely. However, implementing this strategy will clearly take time, require considerable political will, and undoubtedly encounter stiff resistance from China. How this long-term recalibration plays out remains to be seen. In the meantime, Just in Case inventory management is likely to be the preferred supply chain model, particularly for industries deeply scarred by Covid and wary of future shocks.

Of course, one of the drawbacks of the Just in Case approach is the risk of trapped capital, a high Days Inventory Outstanding number, and a slow Cash Conversion Cycle. Such downsides are seen as a price worth paying for supply chain security. However, this need not be the case. Falcon Group is a specialist company that can help businesses address this challenge, buying new inventory and then making it available when required on a Just in Time basis. In this way, inventory-trapped capital is set free, and supply chain vulnerability is mitigated. The best of both worlds can be achieved.