North American Re-Shoring Manufacturing Renaissance?

December 7, 2020

Could there be a manufacturing boom looming for the United States over the next five years?  And could it collectively be as large as any other period in more than 80 years, affecting everything from raw material and component sourcing to energy consumption, hiring, and U.S. distribution patterns?

Over the past 22 months, 5 trends have set the stage for a ‘re-shoring’ of manufacturing into the United States.  Re-shoring is the process of bringing manufacturing and sourcing of products back to the U.S. (partially or in full).

According to Gartner, up to 45% of US companies that source or manufacture products in China are considering moving a portion or all of their operations out of China over the next 3 years. Of the 45% considering changing their sourcing or manufacturing strategy, 37% said they would move a portion of those operations back to the United States (53% also mentioned Mexico).  Some estimates suggest companies will spend nearly $1 trillion on re-shoring efforts over the next 3 to 5 years.

Changing global sourcing and manufacturing strategies is not a simple decision and is not made on a whim.  A wave of factors has accelerated the desire and urgency with which companies are considering these changes. Here are 5 prominent ones.

Tariffs and Taxes

Beginning in the spring of 2019, the U.S. and China began a trade war leading to tariffs across a wide variety of products. The Trump Administration took a hard line on negotiations with Chinese authorities that created a volatile and uncertain trade environment.  Given that President-elect Biden and the Democratic Party have also shown a history of taking a tough stance on China, many executives assume that difficult trade conditions will continue well into the future.

Beyond China, Biden’s proposed tax plan includes offshoring penalties. It includes a 10% Offshoring Penalty surtax on profits of overseas production by U.S. companies for sales back to the U.S., equating to a 30.8% tax rate on these profits. The plan also includes zero deductions and expense write-offs for moving jobs or production overseas when those jobs could have been given to workers located within the U.S.

Volatile Chinese Economic Activity

Although generally growing at a steady state over the past decade, China’s economy is forecast to face difficult pressures over time. Many analysts expect Chinese growth to slow. Given volatile economic conditions and challenging supply chain dynamics in the country, manufacturers have a difficult time stabilizing profitability, forecasting Chinese domestic demand, and keeping pace with a changing operating environment.

Some emerging studies are also revealing increasing costs for Chinese operations.  Wages in China continue to rise, and some studies have shown that labor costs in Mexico are now lower than they are in certain areas of China.  When considering total operating costs, total landed cost calculations for many companies show that they can operate more cost effectively in a near-shoring (U.S., Mexico, Canada Trade Agreement - USMCA markets) or re-shoring environment.  

Controlling Data, Intellectual Property, and Supply Chain Transparency

Approximately 20% of companies discussing re-shoring mentioned intellectual property risk and supply chain transparency as a reason why they are considering making a strategic move.

Companies have fought the protection and storage of data and intellectual property for decades. The risk of protecting data and intellectual property is just one more checkmark on the list of reasons why companies are thinking about re-shoring.

Perhaps even more so, supply chain transparency and visibility into supplier risk is just as important. Although the flow of data and transparency has improved with multi-national operations over the past 5 years, it is not as strong as U.S. domestic operations. Being able to link suppliers end-to-end with full data visibility allows companies to streamline costs, improve efficiencies, reduce inventory carrying costs, reduce overall transportation costs, and reduce stockouts.  The impact to the bottom line is often large enough to make re-shoring advantageous over lower-cost sourcing from certain foreign markets.   

Supply Chain Continuity

The pandemic highlighted supply chain vulnerabilities across many global sourcing partners and diverse product categories. Major key producers from China to India, Vietnam, Mexico, Japan, the UK, Germany, and more were shut down for long durations of time. Supply shortages of raw materials and component parts created stockouts for many multi-national corporations. This was enough of a problem that a survey in July found that 85% of global sourcing managers were “rethinking” their supply chains and would likely make substantive changes during the post-pandemic phase in 2021 and 2022.

Government regulatory activity could also take place for items deemed to be in national interest.  Pharmaceuticals, medical equipment, supplies, and even consumer staples (toilet paper, food, personal care items, etc.) could the target of Federal action to safeguard supplies during future global supply disruptions.  The pandemic even forced the Department of Defense to reconsider how it sources and procures equipment and supplies for military purposes.

Timing and Impact

Many executives have said that they are pausing their final decisions on re-shoring activities pending the final outcome of the U.S. election, the winter/spring experience with the pandemic, and the time it takes to make longer-term decisions such as site location studies and regulatory reviews.

However, if forecasts for re-shoring activity over the next 5 years are even partially accurate, it could have a large impact on a variety of factors.

U.S. freight distribution patterns could change if less freight is being inbounded into U.S. ports but moves domestically.  Decisions on where manufacturing could be located is also a factor that would drive changing distribution patterns. Areas that have favorable cost of living, tax advantages, access to raw materials, energy, and good distribution systems will likely pull more of this activity. 

Areas in the Midwest are expected to be big winners in this trend.  Energy supplies are consistent and readily available (including many renewable sources of energy like wind and solar).  The cost of living throughout the Midwest is generally more competitive against east or west coast regions.  The availability of labor is also plentiful in the Midwest and companies can provide a better standard of living wage at lower total cost to the company.

From a technology perspective, the Midwest also offers good access to national fiberoptic networks for high speed communications and data processing.

And given strong access to national highway and rail systems, intermodal facilities, and cargo airports, distribution out of the region is timely and generally operates at a lower cost.

If there is anything that the pandemic has taught us, it’s that conditions change, and it is wise to expect the unexpected.  Conditions supporting re-shoring could change. But for now, long-term planners are working on strategies that would create a manufacturing renaissance of sorts in the U.S.; and the Midwest stands to be a big winner.

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