Perks and Pitfalls of Friendshoring

Estimated reading time: 4 minutes, 30 seconds

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Published April 5, 2024

There’s a strategic shift buzzing among industry leaders and policymakers. It’s called friendshoring, and it has the potential to significantly impact global supply chains and manufacturing dynamics. For procurement professionals navigating international trade, understanding the implications of friendshoring is vital.

According to the World Economic Forum, friendshoring is the act of "rerouting … supply chains to countries perceived as politically and economically safe or low-risk, to avoid disruption to the flow of business."^[1]

Let’s explore what friendshoring means for procurement professionals, highlighting its advantages, challenges, and the strategic considerations essential for the role.

Unlocking Strategic Advantages in Procurement

Friendshoring presents several opportunities for procurement professionals to enhance supply chain security, reliability, and alignment with strategic goals. Here are several ways it can positively impact procurement strategies.

Enhanced Security and Trust

Friendshoring nurtures a higher level of trust and cooperation between trading partners, mitigating risks related to intellectual property theft, espionage, and geopolitical tensions. The United States, for instance, has sought to friendshore critical components like semiconductors by encouraging partnerships with countries such as South Korea and Japan.

Stability and Reliability

By reducing dependency on countries with volatile political climates or those prone to trade disputes, friendshoring leads to more stable and reliable supply chains. For example, the European Union's move to decrease reliance on Russian energy by increasing imports from Norway and other allied countries underscores a broader strategy toward sourcing from politically stable and reliable partners.

Strengthening Alliances

Friendshoring not only promotes closer collaboration and mutual economic growth among allied countries, but also supports strategic objectives like enhancing the technological capabilities of allies. The U.S. CHIPS and Science Act, aimed at revitalizing domestic semiconductor manufacturing, includes provisions to strengthen collaboration with allies in semiconductor research, development, and supply chain security.

Improved Compliance and Standards

Aligning with countries that share similar regulatory standards can simplify compliance with environmental, labor, and safety regulations. The transition to sourcing from countries with stringent environmental regulations, like those in the European Union or Canada, ensures a higher standard of environmental compliance, which is increasingly critical in electronics manufacturing processes.

Resilience to Geopolitical Risks

One of the primary benefits of friendshoring is its ability to mitigate risks associated with geopolitical tensions and dependencies. An exemplary case of this strategy in action is Japan's efforts to diversify its supply chain for rare earth metals. Historically, Japan depended heavily on China for these critical materials. However, in a bid to reduce geopolitical risks and ensure a more stable supply, Japan has increased its imports of rare earth metals from Vietnam and Australia. This move underscores the importance of friendshoring in creating more resilient and secure supply chains.

Navigating Obstacles

While friendshoring offers significant benefits, it also comes with a set of challenges that require careful navigation. Understanding these obstacles is key to leveraging friendshoring effectively.

Increased Costs

Sourcing from countries with higher labor costs, stricter environmental regulations, or more expensive materials can significantly raise procurement costs. Apple's exploration of moving some iPhone production from China to India and Vietnam highlights the possibility of increased costs due to higher labor rates and the initial investment required to establish new manufacturing facilities.

Limited Diversification

Overreliance on a few countries for procurement can create vulnerabilities. The U.S.'s dependence on Taiwan for a significant portion of its advanced semiconductor needs exemplifies the risk of disruption due to natural disasters or geopolitical tensions.

Potential for Retaliation and Trade Wars

Friendshoring can be perceived as exclusionary, potentially leading to economic retaliation from countries that have been cut out of supply chains. The U.S.–China trade war, marked by increased tariffs on billions of dollars worth of goods, illustrates the danger of further disrupting global trade and supply chains.

Reduced Global Efficiency

The strategy of friendshoring can sometimes lead to a decrease in global supply chain efficiency. A prime example of this is the automotive industry, which has struggled with sourcing semiconductors during the global chip shortage. This issue has been exacerbated by friendshoring efforts that, while aiming to secure supply chains, have sometimes overlooked more efficient, albeit politically complex, sourcing options. From this example, we see the critical balance that must be struck between securing supply chains through friendshoring and maintaining the global efficiency that comes from a diversified sourcing strategy.

The Strategic Perspective

For procurement professionals, the decision to adopt a friendshoring strategy must be informed by a comprehensive analysis of its implications for security, cost, supply chain resilience, and long-term goals. While friendshoring offers a pathway to more secure and aligned procurement practices, it also necessitates a nuanced understanding of the global trade environment and the potential for increased costs and supply chain complexities.

As electronics procurement continues to evolve amid shifting geopolitical landscapes and technological advancements, friendshoring emerges as a compelling strategy for professionals looking to navigate these challenges effectively. By carefully weighing the benefits of enhanced security and trust, stability and reliability, and improved compliance and standards against the realities of higher costs and the need for diversification, procurement professionals can make informed decisions that align with their organizational objectives and the broader dynamics of the global electronics industry. In doing so, they contribute not only to the resilience and success of their supply chains but also to the advancement of strategic partnerships and collaborations that define the future of international trade and manufacturing.

Sources

[1]

Stefan Ellerbeck, “What’s the Difference between ‘friendshoring’ and Other Global Trade Buzzwords?,” World Economic Forum, February 17, 2023, https://www.weforum.org/agenda/2023/02/friendshoring-global-trade-buzzwords/.