There’s No Place Like a Supply Chain Close to Home

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Bringing manufacturing back to Europe  — what’s called “reshoring” or “onshoring” — is a reasonable, if not vital, business strategy. Over the previous two decades, manufacturers shifted production of everything from cars to cosmetics primarily eastwards to China, in an attempt to cut labor costs and protect margins. The supply chain snarls brought on by geopolitics and Covid-19 are now forcing a rethink.

Some recent developments have helped. Carlo Altomonte, professor of economics of European integration at Milan’s Bocconi University, argues the recent speed of European integration is fostering a “regionalization” of supply chains. But reshoring is still complicated — and will require difficult choices from both companies and governments.

Take the predicament of Dardanio Manuli, chairman and chief executive officer of Manuli Rubber Industries SpA, an Italian multinational that makes hydraulic equipment. He thought he had already brought his supply chain back from China, finding suppliers for steel and wire in Europe — specifically, Germany, the U.K. and Luxembourg. Then, Vladimir Putin’s invasion started and Manuli discovered his new suppliers had all been sourcing their 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 says.

Data showing large-scale reshoring is still hard to find. There is some anecdotal evidence. Dusseldorf-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 Car AB announced plans to build a third factory in Europe in 2025. Smaller businesses are getting into the act. Maia & Borges, a toymaker based in northern Portugal, is on course for 12 million euros (almost $13 million) of revenue in 2022, up from 1.5 million euros in 2019, having won multiple orders — from Europe, and the U.S. — when Asian supply chains were snarled up in the early months of the pandemic. Patricia Maia, chief executive officrer, said the family firm will make 10 million toys this year and is building a third factory to cope with demand expected to hit 40 million by 2024. “From a business perspective, we’ve had a good two years,” she said.

There are significant challenges. Engineers are needed to populate high-tech factories, and Europe’s pharmaceutical industry has a continuing problem with a brain drain to the U.S. Even luxury-goods makers are struggling to find enough experienced hands to make their goods. French group LVMH Moet Hennessy Louis Vuitton SE has pledged to hire 2,000 young people, especially in Italy, to keep manufacturing knowledge alive.

To make a difference, reshoring needs a more forceful policy push and tangible support from the European Union and member governments. Some incentives only indirectly benefit reshoring — such as fulfilling ESG goals. I spoke to executives of one of Europe’s largest industrial companies which suffered supply chain difficulties last year. Part of the impetus for reshoring was investor pressure to have “greener” supply chains and reduced Scope 3 emissions (emissions generated indirectly by a company’s activities). “Bringing suppliers closer to our plants means we get to limit carbon emissions,” says the global supply chain director of this firm. (Both executives asked for anonymity because the board discussions aren’t yet public. 

Money from the EU’s post-pandemic 750 billion-euro ($811 billion) NextGeneration fund is available to companies for projects with a green or digital emphasis. Maia & Borges has applied for funding in part because it uses robotics to manufacture products.

Those funds have had their effect: spurring investment in a European semiconductor industry, and battery cell production.  Some 24 battery gigafactories have been announced in Europe with enough annual production capacity to equip 9 million electric vehicles per year, according to Erik Nielsen, chief economics advisor at UniCredit SpA. Strategically, that hops over supply and political problems with China — a powerhouse of EVs and batteries — as well as provides a smaller carbon footprint. Frank Pisch, professor of microeconomics at the Technical University of Darmstadt, argues in a recent research paper that perceived uncertainty will make localized “just-in-time” production more attractive.

But bringing the supply chain to Europe also poses fresh problems. Two hours by car from Porto is Tras-os-Montes in the Barroso region, a mountainous region of stunning beauty in Portugal. Local energy company Galp Energia SGPS SA and Swedish electric vehicle battery maker Northvolt AB on Dec. 14 announced a joint venture to build there what they say will be Europe’s largest lithium conversion plant. The project includes a mine, Portugal apparently having the largest spudemene lithium reserves in the continent. The goal is for the plant to deliver enough lithium hydroxide for batteries in about 700,000 EVs starting in 2026. Environmental groups argue the mines with destroy a lush countryside and community. The project, called Savannah Resources, has applied for NextGeneration funding. The Portuguese government will decide on approval for the enterprise later this year.

Some small companies just throw up their hands. Asked what he plans to do now that the war in Ukraine has botched his supply chain, the CEO for Manuli Rubber says, “We are going to India.”

More From Bloomberg Opinion:

Supply Chain Worries Are Finally Going Viral: Tim Culpan

Ukraine War Makes Supply Problems Seem Quaint: Brooke Sutherland

• Iron Curtain Comes Down on Energy: Liam Denning

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Rachel Sanderson was Milan correspondent for the Financial Times from 2010 to 2020. She has also written about Italy for the Economist and reported for Reuters and Reuters TV from Rome, Paris and London.

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