Bringing manufacturing back to America

This story originally appeared in FreightWaves’ Supply Chain Playbook. Read more from the magazine here.

By Rosemary Coates

Supply chains are headline news. It seems that every delay, shortage or inventory inconsistency is now blamed on their difficulties.

Many companies suffered from shortages of supplies coming from overseas during the pandemic, mostly due to Chinese factories closing, opening and then closing again as COVID-19 outbreaks were happening everywhere. Long global supply chains and the exposure to risk started company executives thinking through their global sourcing and manufacturing strategies. Now they are considering nearshoring and reshoring.

Reshoring is no longer just a nice idea: It is really happening. According to Reuters, more than 80% of manufacturers are considering reshoring some or all of their production.

Reshoring is not a new concept

Companies started considering reshoring in 2012 during the Barack Obama-Mitt Romney presidential campaign when both candidates were bashing China. This was the ignition point for conversations about the possibility of bringing back production to America. But when seriously considering reshoring, companies based their decisions purely on costs. It was still far cheaper to manufacture in China than America.

Over the next few years, there was small but steady growth in U.S. manufacturing, as some companies were able to make an economic case for reshoring. But severe supply chain disruptions during the pandemic exposed risk as an important component in the decision on where to manufacture. This resulted in a burgeoning interest in bringing back manufacturing to the U.S.

More decision variables

Instead of a purely economic decision based on the total cost of ownership (TCO), decision-makers have started to factor in the risks of long global supply chains, order fulfillment times and geopolitical risk.

The process to determine where in the world to manufacture has become more complex with more variables to consider. Companies now are taking steps to source more component parts and raw materials domestically that will eventually support full manufacturing in America.

The good news is that reshoring manufacturing has been steadily increasing. Some estimates suggest as many as 300,000 jobs per year are coming back to the U.S., although these statistics cannot be verified, partly because reshoring is defined as more than just returning from overseas and reestablishing new factories in the U.S.

Reshoring is defined more broadly to include:

• Manufacturing returned to America.
• New sourcing of raw materials and parts in the U.S.
• Expanding operations in America vs. overseas.
• Foreign direct investment in American manufacturing.

All of these categories are good news for rebuilding a robust American economy.

Increasing domestic sourcing

One startling number was recently published by product-sourcing platform Thomasnet. Surveying over 500 industrial buyers, Thomasnet found 83% said they intended to find and place 10%-12% more orders with domestic suppliers this year. Based on Thomasnet’s collected buying data from past years, as compared with projections for this year, that simple change — buying 10%-12% more U.S.-made products — could inject $443 billion into the U.S. economy. 

If these numbers are anywhere near correct, we are in for a wild ride. Although these stats are a projection based on a survey, they are likely to be directionally correct. Since we define the placement of new orders in the U.S. as part of reshoring, that big number made us sit up and take notice. The trend is indeed positive. Anecdotally, recent work at the Reshoring Institute includes numerous domestic sourcing projects for companies in electronics, chemicals, consumer products, water treatment and medical equipment.

China is no longer the low-cost labor country

The Reshoring Institute recently published a study on comparative global labor rates. The research investigated how manufacturing wages have risen in China and what this means for companies going forward. Wages and salaries of production workers, machine operators, manufacturing supervisors and managers were compared, drawing the conclusion that China can no longer be considered a low-cost country, as its labor rates have significantly increased.

The lowest-cost countries in the study are now India, Mexico and Vietnam. While there are even lower-cost areas of the world, such as Myanmar, Bangladesh and Africa, the Reshoring Institute focused its study on where most manufacturers are moving now after leaving China.

The rapid increase in Chinese labor rates over the past few years is also an incentive to consider manufacturing in America. With reengineered processes and the introduction of automation to reduce labor costs, manufacturers can now make the economic case for returning to America, which is more good news.

New laws and incentives

With new funding and tax incentives now available through the CHIPS and Science Act, the Inflation Reduction Act and the Build Back Better Infrastructure Act, reshoring and expanding operations in America have rapidly become popular and positive economic choices for U.S. manufacturers.

Improved roads, ports, bridges, rail lines and airports all contribute to the efficiency and viability of manufacturing and will make a major impact on the transportation industry. New investments in automation, mining, green energy and STEM education hold the promise of the future of competitive manufacturing in the U.S.

Impact of reshoring on the transportation industry

There is a magnifier effect when new jobs are added in the manufacturing sector. Based on the Bureau of Economic Analysis (BEA), annual input-output tables have calculated that a dollar’s worth of final demand for manufacturers generates $1.48 in other services and production. Other economists put the number higher — as much as $2 for every $1 spent on manufacturing.

Increases in manufacturing result in higher demand for domestic transportation in every mode. In addition, companies that choose to relocate (nearshore) to Mexico will also create demand for cross-border trucking and warehousing. With nationwide driver shortages, this increase in demand will put additional pressure on an already difficult shortage situation.

What industries are reshoring?

We have seen interest in reshoring from many industries, but a few are the most prominent.

Semiconductors are roaring back, supported by funding and special treatment under the CHIPS and Sciences Act passed in 2022. New production facilities are being built in New York, Ohio, Texas, New Mexico and Arizona.

Pharmaceutical production is also seeing a rebound, especially after the pandemic exposed major risks in that supply chain. Plastics manufacturing is experiencing a return to American manufacturing, particularly products that require a rapid customer response time. 

Executives across many industries are exploring the possibilities of reshoring or at least increasing domestic parts sourcing.

Backbone of a robust economy

Manufacturing is the backbone of a robust economy. In the 1960s, it accounted for about 25% of the U.S. gross domestic product. In recent years, that percentage has dwindled to less than 12% and the manufacturing sector employs only 9% of the workforce.

There is a lot of room for renewed growth in American manufacturing if we can make the economic case for bringing it back. To compete for global manufacturing in the U.S., we must focus on automation, advanced manufacturing techniques and reduction of labor to reduce overall costs and increase productivity.

China’s robust growth over the past 25 years can be attributed to a manufacturing economy that is nearly 40% of the country’s GDP. China makes and sells more manufactured goods than any other nation on the planet.

It is time we focus on rebuilding manufacturing in America.

About the author

Rosemary Coates serves as the executive director of the Reshoring Institute and president of Blue Silk Consulting, a global supply chain consulting firm. Coates is a bestselling author of five books on global supply chain management, including “42 Rules for Sourcing and Manufacturing in China” and “Legal Blacksmith — How to Avoid and Defend Supply Chain Disputes.” She earned a Bachelor of Science degree in transportation and logistics from Arizona StateS University and a Master of Business Administration from the University of San Diego. A resident of California’s Silicon Valley, she has worked with over 80 clients worldwide. She is also an expert witness for legal cases involving global supply chain matters.

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