Why is nearshoring important for Serbia as well?, News
With the acceleration of globalization, there was a great dislocation of the production of primarily labor-intensive industries, from developed to developing countries. The reasons are simple. Significantly lower labor costs justified the shift of production from countries such as Italy, Germany or the United States to Mexico, Senegal, China or Bangladesh. This has enabled customers to significantly lower the prices of many products, but also higher profits for companies that are successful in this practice. Why does this matter?
The global consequences of the funniest virus
It turned out that the economic consequences of “the funniest virus in the world” are not funny at all. First there were various closures and restrictions on movement, with compulsory work from home wherever possible, then there were various shortages (including very important components such as microchips, which dragged down the whole industry), but and transportation problems. Production chains have been broken and it is very difficult to re-establish rational just-in-time management of goods and raw materials. There are simply no free transport capacities, so the price of transport has jumped terribly: the price of transporting one container of goods from China to Europe before the pandemic was 1,200-1,500 USD, and now it is an incredible 10,000-15,000 USD.
One of the ways in which companies could reduce their exposure to such and similar risks, such as the emergence of a new pandemic in the future, is “nearshoring” – locating production capacities closer to their main markets, bringing to their current locations across Asia, but also Africa and Latin America. But where would that be possible? There are significant reasons, from environmental regulations to the high cost of labor, due to which the entire labor-intensive industries were transferred from Europe and North America a couple of decades ago, so their return “home” is impossible. So the right address for these existences can only be countries with lower wages that are geographically closer to Europe: the countries of the Western Balkans (Serbia, Bosnia and Herzegovina, Northern Macedonia, Albania, Montenegro), Eastern Europe (Ukraine, Belarus, Moldova and maybe Russia), the Southern Mediterranean (Tunisia, Egypt, Algeria) and only in the end the poorer EU member states (Croatia, Bulgaria, Romania).
The Benetton case: good news for Serbia?
That these are not just academic considerations is shown by the example of Benetton, who as a global giant in the textile industry decided to solve his problems of growing transport costs, delays in transportation, but also rising wages in Southeast Asia. Massimo Renon, CEO of Benetton, announced that the company will move part of its production from Asia to countries closer to Europe such as Egypt, Tunisia, Turkey, but also Serbia and Croatia, with the aim of reducing their production in Asia by the end of next year. This is just a continuation of the already existing processes, as Benetton has already moved 10% of its global production from countries such as India, Bangladesh, China and Vietnam this year.
On the other hand, transport problems have led other companies in the industry, such as Lululemon, Gap and Kohl, to start using air transport instead of ocean transport, which is up to 8 times more expensive. This means a significantly higher CO2 footprint, which does not help these companies not only financially but also in view of the “green fashion” trends that try to present the textile industry as a branch that cares about the environment and reduces CO2 emissions.
Benetton’s production in the Mediterranean countries is still 20% more expensive than in Asia, but that is the price the company is willing to pay for delivery within the normal timeframe – while the delivery time for production in Egypt is 2-2.5 months, and for countries such as Serbia or Croatia 4-5 weeks, delivery from Asian countries can take as long as 7-8 months. Bentton is planning to expand its production in Serbia and Croatia, as well as in Tunisia, while in Turkey and Egypt it would work with domestic suppliers. One of the factors is certainly the growth of wages in East Asia, which has rather melted the once great difference that existed in relation to countries somewhat closer to Europe. An additional factor is the low retention of workers in China – with economic growth, new opportunities appear, so a large number of workers leave these factories and are employed in other branches or in the growing service sector, due to better wages and working conditions. It also increases costs for manufacturers, and reduces uniformity of quality. That is why the trend of moving factories from China to Vietnam or Cambodia has been noticeable for years, while in Africa, Ethiopia has become known as “Chinese China”.
For our country, this would mean new investments, and probably the growth of rather low salaries in this industry as the supply of jobs grows. This may not comfort Geox workers who recently lost their jobs when the company was picked up and left after subsidies expired, but it may still be good news, at least for less developed parts of the country that once had a developed textile industry, Talas reports.