August 4, 2023 | Article | 3 min
The future looks bright for American manufacturing, and this rings especially true for companies planning to reshore or nearshore their manufacturing facilities. Reshoring manufacturing can help rebuild America’s once-buzzing industry. Learn more on what you can expect and what reshoring can do for your bottom line.
US manufacturing fell off a cliff between the 60s and 70s. Industry leaders saw the financial benefits of cheap labor in foreign countries and exploited it quickly. Take a quick look around your office. Most of those items likely stem from offshoring practices. Now, in 2023, reshoring manufacturing is gaining significant traction. But what is it?
Reshoring is the opposite of offshoring. It’s bringing manufacturing/production jobs back to the US (or any company's country of origin). You may also hear the terms ‘back shoring’ or ‘inshoring’ used interchangeably; they all mean the same thing.
The Covid-19 pandemic exposed the volatility of global supply chains and just-in-time manufacturing practices. Strict lockdowns in China shuttered production between 2020 and 2021. And as most of the world returned to normalcy in 2022, Chinese restrictions remained among the most stringent worldwide.
Covid wasn’t the only roadblock, either. We all remember the Suez Canal catastrophe and the billions of dollars it cost the global economy. Reshoring attempts to solve for these concerns.
The Manufacturing Industry by Numbers and Trends in 2023
As 2023 unfolds, we see several new industry trends emerge—and reshoring manufacturing appears to be leading the charge.
We’re also watching more manufacturing firms move toward smart technology, like AI and the Internet of Things (IoT). The CHIPS Act has also sparked significant investment in the future of American manufacturing.
All of these trends aim to curb several problems. Inflation is improving, but material costs are still high, fuel perhaps the most costly and unstable among them. Supply chain bottlenecks also revealed the ugly side of just-in-time manufacturing practices.
Pandemics aside, East Asia is highly prone to natural disasters like earthquakes, flooding, and typhoons. Such disasters are out of the company's control. What happens when an earthquake halts production at a critical offshore supplier?
Reshoring manufacturing gained significant traction in 2022 for these reasons. According to a report from BCI Global, more than 60% of US and European manufacturing companies planned on reshoring part of their supply chains by 2025. In the US alone, reshored jobs increased by 25% compared to 2022. Deloitte's 2023 Manufacturing Industry Outlook report expects those trends to continue in 2023 and beyond.
Further research discovered that 80% of manufacturing executives experienced significant disruptions to their supply chains in recent years.
According to Deloitte, critical material shortages and continued supply chain issues will be key pain points in the coming years. Many firms are leveraging digital technology and reshoring manufacturing practices to mitigate these risks and strengthen their supply chains.
Reshoring Means More Opportunities
Employee retention is also a primary concern for many US manufacturing businesses. Once they bring back these critical jobs, they must find dedicated talent to fill the positions. But talent models are shifting.
Navigating the tight labor market will remain among the top priorities for manufacturing firms in 2023. While hires surged in 2022, current openings are still hovering around 800,000.
Scarce talent is pushing more manufacturers to consider wage increases for production workers. They’re also leaning on upskilling their current workforce to keep pace with emerging technology. Diversity, Equity, and Inclusion (DEI) strategies also remain paramount, as manufacturers want to attract more diverse people to the workforce. Doing so widens the available talent pool significantly.
The CHIPS and Science Act of 2022 aims to fortify US’s weakest supply chain link.Data from the Boston Consulting Group found that Taiwan is home to 92% of advanced semiconductor production. These tiny chips power our very way of life; thus, the CHIPS act aims to break our reliance on foreign semiconductors and related chips.
While we’re still years away from the new laws taking effect, we’re already seeing large-scale private investments that will bolster supply chain resilience, the economy, and job creation.
According to the Semiconductor Industry Association, we’ve seen the following:
- More than 40 new domestic semiconductor ecosystem projects (these include the construction of new semiconductor manufacturing facilities, also known as fabs
- Sixteen states announce over $200 billion in private investment
- Around 40,000 high-quality jobs announced across the industry, with more to come
Benefits of Reshoring Manufacturing Jobs: The Power of “Made in America”
In President Biden’s most recent State of the Union address, he leaned heavily on the concept of “Made in America.”
With significant funding allocated toward the Inflation Reduction Act, the CHIPS Act, and the Infrastructure Investment and Jobs Act (IIJA), the intent is to ensure that money goes toward American jobs, products, and services. Reshoring manufacturing jobs is the first step toward building a self-reliant country.
According to McKinsey, the US manufacturing sector is positioned for a profitable rebound. As it stands, US manufacturing accounts for $2.3 trillion in GDP (11%), supports hundreds of local economies, and employs roughly 12 million people (20% of direct employment).
Those numbers may seem high, but they’re disproportionate compared to manufacturing’s overall economic contribution. They're responsible for 20% of American investment capital, 35% of productivity growth, 70% of business R&D spending, and 60% of exports.
The Value of Manufacturing to the United States
Manufacturing is the primary economic engine and employer in roughly 500 US counties. Within those communities, manufacturing firms employ people from all walks of life.
Most manufacturing jobs don’t require a four-year degree, yet workers can earn twice as much as equivalent service sector jobs. They learn on the job through reskilling and upskilling practices.
McKinsey analytics suggest reviving and reshoring manufacturing could add 1.5 million jobs to the American labor market. Primarily middle-skill/middle-class workers will benefit from this job influx. According to the Reshoring Initiative, US manufacturing should skyrocket with a growth rate of 38% year-over-year. Reshoring, or even just nearshoring production, gives American companies more control over their supply chains. Owners also have heightened visibility into their operations.
A Reshoring Institute survey uncovered several key benefits of returning manufacturing jobs to the United States. Americans are willing to pay 20 to 25% more for American-made products.
It’s a simple fact that offshore production (thanks to cheap labor) is highly attractive to business owners. While production inputs will increase, the desire for more American-made products can offset increased labor costs.
There’s also more trust in American-made products. Survey results found that 46% of buyers believe products made in the US are of better quality. It’s important to note that 31% said they’re unsure of the quality difference—likely because they spent most of their purchasing lives buying foreign-made products. 15% of those buyers would likely swing toward American-made products with more exposure.
Drawbacks to Calculate
Reshoring manufacturing doesn’t come without some downsides to consider. Firms that reshore production will likely take on extra operational complexity; maintaining control over one’s suppliers and their supplier’s suppliers adds more people and processes to manage.
The most glaring issue with reshoring is the reason manufacturing jobs went overseas in the first place—input costs increase significantly, mostly from increased wages for American workers.
Sourcing domestic supplies will also cost more for similar reasons. Owners must also invest significantly in new infrastructure to bring these jobs back home. The ROI may not be as swift as they’d like.
According to Rahul Kapoor, VP of S&P Global Market Intelligence, the idea of removing Asia from US supply chains should be taken “with a pinch of salt.” Rising labor costs in China are pushing away lost-cost products at the margins; however, not all of those jobs are coming back stateside.
Vietnam was a large beneficiary, especially after former President Trump’s tariffs against China. Vietnamese imports grew 28.9% year-over-year in 2021, and have since doubled since 2017.
Some American economists look at reshoring manufacturing with a even more cynicism. In an email to S&P Global Market Intelligence, Paul Ashworth, chief North America economist at Capital Economics, said, "Reshoring is mostly a make-believe story told by politicians of both parties."
Ashworth pointed to Foxconn Technology’s abandonment of a $10 billion investment in a Wisconsin plant, poised to add 13,000 American jobs. Others believe that while reshoring will bring some high-end jobs back home, most initiatives will be at the margins.
How to Prepare Financially for Big Staffing Moves
American manufacturing firms can’t just wake up one day and reshore their operations. It takes time, strategy, and considerable investment to kickstart the processes.
Companies must develop long-term financial plans to manage costs, optimize supply chain arrangements, and navigate potential disruptions. Building stable relationships with your trusted financial partners is key.
According to Bloomberg, we’re unlikely to see a mass manufacturing exodus from East Asia in 2023. Separate reports indicate that costs and logistical considerations dictate the decisions to diversify the supply chain. It’s not just about reshoring manufacturing jobs back to America. Some firms may consider ‘friend-shoring’ to countries with better US relations, like Mexico or India.
A Citigroup report from the same source on supply finance determined that “The ultimate extent of how much production will be reshored or moved closer to home remains an open issue and will depend heavily on the relative costs of production in various parts of the world.”
Manufacturers must also consider economic health in 2023 before moving on reshoring initiatives. Container xChange, a logistics services platform, surveyed over 2,600 industry professionals regarding their economic concerns. Of them, 88% said inflation and recessionary fears would impede business in 2023.
Reshoring manufacturing will help minimize shipping costs, which proved highly volatile between 2020 and 2022. For example, shipping a standard container from Asia to the US cost about $20,000 in September 2021.
While these costs have fallen, there’s no denying the risk of the market. Furthermore, Covid lockdowns may no longer be at the forefront—but the Russo-Ukrainian war quickly filled the volatility void.
The Bigger Economics of Reshoring
The geopolitical risks don’t start and end in eastern Europe either. Tensions between China and Taiwan should also have US manufacturers on edge. According to Harry Moser, president of the Reshoring Initiative, “Supply chains closer to home can save money and reduce risk” in these uncertain times.
Of course, opening a new factory can be complicated and expensive. Depending on what you’re manufacturing, you may need specialized equipment. To keep it cost-effective, automation is the name of the game. A tech-heavy facility limits the amount of human labor required, thus saving money on labor costs.
Companies must also consider how and where they want to build domestic facilities. Do they want to start from the ground up or retrofit existing infrastructure? The former will require more capital and longer lead times. The latter will leave some scrounging for profitable real estate.
Companies like Amazon have bought up many existing buildings and warehouses in nearly every major metro area. Finding the right location for an affordable price will prove challenging for those who are late to the game.
But Forbes believes that reshoring trends could be good news for American investors—specifically those investing in stocks. The Covid-19 pandemic forced companies to rethink labor to find more cost-efficient strategies as many customer-facing workers lost their jobs.
Furthermore, the latest technologies provided manufacturers with a path to redeploy that labor in unique ways. Companies leveraging these trends to bolster their reshoring initiatives can expect potential earnings growth. For investors, earnings growth means better returns.
Protect Your Business From Volatility By Reshoring
The future looks bright for American manufacturing, and this rings especially true for companies planning to reshore or nearshore their manufacturing facilities. Doing so will inject billions of dollars into the American economy, create tens of thousands of jobs, and bolster domestic supply chains.
The pandemic opened our eyes to the fragility of relying on cheap East Asian labor and materials. We're poised to see significant strides in domestic materials sourcing and production thanks to the CHIPS Act, the Inflation Reduction Act, and IIJA.
Companies won’t be able to reshore their operations overnight. It’ll likely take years of hearty investment and financial planning. Thankfully, manufacturers can lean on trusted financial partners, like Citywide Banks, a division of HTLF Bank, to navigate evolving industry trends.
Get in touch with Citywide Banks, a division of HTLF Bank today to speak with a commercial banker with deep industry insight. Together, you can build a robust financial strategy to kickstart your reshoring manufacturing strategies in 2023.