Concept vs. reality: Reshoring U.S. manufacturing operations

The potential of reshoring manufacturing jobs and operations to the United States has long been a topic of conversation in the industry and among politicians, but such conversations have for years been largely theoretical. The pandemic has boosted the visibility and potential benefits of reshoring by exposing supply chain fragilities, and the Biden administration has put a spotlight on this issue. But for most companies, the prospect of actually moving operations back to the United States is still laden with complex considerations and nuances.

For starters, many of the factors that led to the offshoring of U.S. jobs and operations in the first place are still at play, such as other countries’ lower labor costs, investment incentives and more lax regulations. China, the greatest beneficiary of U.S. offshoring, saw its GDP surge from 6% of U.S. GDP in 1991 to 70% by the end of 2020. Although GDP doesn’t correlate directly with offshoring or reshoring, the indicator sheds some light on just how much growth China has experienced over the same time frame that U.S. manufacturing jobs dropped.

The pandemic has exacerbated what was already a long-term U.S. trade deficit. From 1992 to 2020, the United States averaged an annual trade deficit of $36 billion. So far in 2021, however, the deficit has grown as high as $75 billion. Historically, economic downturns and recessions tend to narrow trade deficits due to reduced spending, as seen in 2009. But the current deficit was driven further by U.S. government spending on stimulus payments to Americans.

This trade imbalance is driven in part by wage differentials in China and other low-cost countries, a factor that remains a major hurdle for companies weighing the prospect of reshoring. In 2019, the average hourly manufacturing wages in China were about $5.25 per hour, according to the latest available data from the Chinese Bureau of Statistics. The comparable U.S. average manufacturing wage in 2019 was nearly four times that, at $21.38 per hour. We believe the acute labor shortage in the United States will continue to apply upward pressure on hourly wages, making wage differentials an ongoing significant obstacle to reshoring.

Cost-benefit analysis

In addition to wage differentials, a major, multifaceted headwind to reshoring is the difficulty of unwinding global supply chains. Complex offshore manufacturing clusters that took 25 to 30 years to build in lower-cost countries are not simple or cheap to unwind, nor is the impact of decades of offshoring on the labor force.

For context, the number of manufacturing employees on nonfarm payrolls in the United States has declined by about 25% since 1992, down from 16.7 million to 12.3 million as of July 2021. The figure bottomed out at 11.4 million in 2009, then gradually rose to 12.8 million employees in 2019 before the pandemic. In today’s tight labor market, there isn’t enough skilled labor available to support a significant increase in reshoring. 

Another factor is that reshoring as a strategy to improve supply chain resiliency works against the efficiency offshoring provides. Once supply and demand mismatches are stabilized and the immediate pain is over, businesses will have less incentive to reshore.

Many businesses that benefit from offshoring will likely use reshoring as a last resort, and may determine the added cost and disruption of growing domestic operations isn’t worth the effort. For example, cost increases in raw materials and transport due to COVID-19 have not yet driven significant numbers of companies to reshore operations. The same goes for increases in customs duties and tariffs due to economic policies. The prevailing view is that the raw material and transport cost increases are isolated to specific sectors and likely transitory, and that current economic trade policies may not last indefinitely.

As the pandemic increasingly disrupted supply chains, businesses first responded by renegotiating contracts and accepting reduced margins, and then more and more by raising prices rather than reshoring in significant numbers. Once the supply and demand mismatches due to COVID-19 subside, we may see most companies go back to business as usual.  

The path forward

Given all the factors at play, actual movement around reshoring manufacturing operations will require significant U.S. government policy interventions, some of which are already in the works.

On June 8, the White House issued its 100-day review of the nation’s supply chains, an assessment President Biden ordered in February to address the nation’s overreliance on overseas manufacturing and the pandemic’s impact on supply chains. The risks and vulnerabilities highlighted in the report underscore issues that manufacturing companies have grappled with for years as outsourcing has proliferated.

Here’s a sector-by-sector look at some of the key takeaways from the White House report, with a focus on the areas pertinent to industrial manufacturing and energy:

• Semiconductors: In recent decades, “the United States has outsourced and offshored too much semiconductor manufacturing,” the White House report said. “The United States has fallen from 37% of global semiconductor production to just 12% over the last 20 years. … Our reliance on imported chips introduces new vulnerabilities into the critical semiconductor supply chain."
  
  The White House called for proactively investing in domestic production and research and development, building a pipeline of workers who can benefit from well-paying semiconductor jobs, and taking defensive actions to protect the country’s technological advantages.
  
  On June 8, the Senate approved the U.S. Innovation and Competition Act, a $250 billion dollar bill intended to boost the country’s ability to compete with China’s technological prowess. The bill would provide $52 billion for research, design and manufacturing of semiconductors and increased “buy American” provisions.
  
  In addition, the House passed two bills in late June focused on bolstering U.S. competitiveness with China by funding additional research and development that will likely include funds for semiconductor research, design and manufacturing initiatives. Negotiations to sort out differences are expected to start in September or October of this year, but a bipartisan solution is likely based on the wide margin by which each bill passed in its respective chamber.
   

• High-capacity batteries: The United States “relies heavily on importing the inputs for fabricated advanced battery packs from abroad, exposing the nation to supply chain vulnerabilities that threaten to disrupt the availability and cost of the critical technologies that rely on them and the workforce that manufactures them,” according to the report.
  
  “With the global lithium battery market expected to grow by a factor of five to ten by 2030, it is imperative that the United States invest immediately in scaling up a secure, diversified supply chain for high-capacity batteries here at home that supports good-paying, quality jobs with a free and fair choice to join a union and bargain collectively,” the report added. The latest version of the infrastructure bill includes $2.5 billion investment in zero-emission buses, which will further drive demand for high-capacity batteries and provide additional incentive for the United States to manufacture them.
   

• Critical minerals and materials: As demand for clean energy technology grows, the White House report said, “an increased supply of critical minerals and materials will be necessary to meet national and global climate goals.”
  
  It also noted the impact of China, which, “using state-led, non-market interventions, captured large portions of value chains in several critical minerals and materials necessary for national and economic security.”
  
  In order to have a reliable, sustainable supply of such minerals and materials, the report concluded, the U.S. needs to “diversify supply chains away from adversarial nations and sources with unacceptable environmental and labor standards,” and “U.S. investments abroad must incentivize environmentally and socially responsible production.”

Government interventions in these sectors will provide a boost to businesses seeking to reshore, and serve as a meaningful catalyst to U.S. manufacturing investment in these sectors.

The takeaway

For most companies, in the short term reshoring will not make economic or competitive sense. Governmental intervention in the form of investment and made-in-America mandates will drive some operations back to the U.S. but is unlikely to increase U.S. manufacturing employees to the levels seen before offshoring proliferated.

Manufacturers should conduct deep assessments of their supply chains to make them more transparent and flexible, and seek out other regions and sources for supply in the near term. To address the lack of skilled labor, whenever practical businesses must also rapidly harness available technological capabilities to increase productivity and efficiency.