Can US Cash in on Reshoring Manufacturing Opportunities?

Faced with an increasingly vulnerable global supply chain, manufacturers are building greater logistical resilience both through reshoring and nearshoring their operations, experts said.

The reshoring of manufacturing operations to the U.S. from overseas and foreign direct investment (FDI) created 160,649 manufacturing jobs during 2020, according to Harry Moser, president of the Reshoring Initiative, which tracks manufacturing jobs returning to the U.S.

"In 2020, quite a lot of jobs came back because of the need to fill the supply chain for goods such as gloves, gowns, gas masks [due mostly to the COVID pandemic]," Moser told FreightWaves. "We see the trend of more manufacturing jobs coming back continuing — reshoring of jobs could reach more than 200,000 [in 2022]."

The Reshoring Initiative is a nonprofit founded in 2010 and is a consulting firm aimed at bringing American manufacturers back to the U.S. 

Reshoring involves the return of the production and manufacturing of goods to the company's original country. It is the opposite of offshoring, which is the process of making goods overseas to try to reduce the cost of labor and manufacturing.

About 60% of the companies that decide to offshore base their decisions on comparing wage rates between the U.S. and other countries, along with factors such as free on board (FOB) prices or costs associated with shipping, according to data from the Reshoring Initiative.

The cost of shipping a standard container from Asia to the U.S. West Coast was as high as $20,000 in September. The Freightos Baltic Daily Index — which measures the daily price movements of 40-foot containers on 12 maritime lanes — put the Asia-West Coast spot rate at $14,487 per forty-foot equivalent unit as of Tuesday. 

Data: Freightos Baltic Daily Index. Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

The cost of shipping a truckload of goods from Mexico to the U.S. varies greatly depending on the commodity (produce, electronics, auto parts), type of truck (dry van, refrigerated), and origin and destination, but usually starts around $1,600 to $1,800.

"Now thinking about moving that freight is just as or more important as the FOB price," Moser said. "Now companies have to consider the freight's availability, about getting their products. Increasingly, companies also have to think about geopolitical risks with Taiwan, Hong Kong, etc. Supply chains closer to home can save money and reduce risk."

Taiwan, which is an island off the coast of China, sees itself as a separate nation from the Republic of China. The Chinese government views the island as part of its territory. U.S. officials have rejected any use of force from China to settle it's dispute with Taiwan. Likewise, Hong Kong, a city in southern China, has seen waves of demonstrations against the Chinese government over the last several years.

Reshoring of manufacturing operations back to the U.S. could inject as much as $443 billion into the economy over the next several years, according to Thomas, a sourcing, supplier selection and digital marketing company.

The findings from Thomas were part of the company's 2021 State of North American Manufacturing Report, which said 83% of manufacturers surveyed indicated they were "likely" to "extremely likely" to reshore, up from 54% in the 2020 survey. 

Manufacturers add an average of 11 suppliers to their supply chains on a yearly basis. If 83% of the 579,811 manufacturers in the U.S. bring on one new supplier — even a single contract — at an average of $921,247 per contract, it amounts to a potential $443 billion injection into the U.S. economy, according to the report.

Waterford, New York-based Soft-Tex International recently undertook a reshoring initiative that moved manufacturing operations from China to Texas. The company, which makes high-end pillows, mattresses, and mattress toppers, opened a 170,000-square foot manufacturing facility in the Houston area in 2021. The new factory created 150 jobs.

Ben Johnston, chief operating officer at Kapitus, said his firm has heard from companies considering bringing back manufacturing operations to the U.S.

New York-based Kapitus is a small business and industrial equipment financing company. It provides funding for everything from construction companies to health care providers to small manufacturers in the U.S.

"The manufacturing demand for funding — it sort of fits into our thesis at Kapitus around the repatriation of manufacturing to the U.S.," Johnston said. "With supply chains stretched thin, with backups at ports, with many of the factories overseas, it just makes sense that many retailers and other users of end product are looking to source products domestically to shorten the supply chain and give them more competence in their ability to procure the products that they need."

Johnston said one thing companies thinking of reshoring need to keep in mind is how complicated and expensive opening a new factory can be.

"It all depends on what you are manufacturing, but today most factories are highly mechanized and have very, very specific equipment designed to manufacture their specific product," Johnston said. "The way it really makes sense to manufacture in the U.S. is to have a highly automated manufacturing facility. That limits the amount of labor and human labor that needs to occur there."

One other thing companies thinking of moving operations back to the U.S. needs to consider is competition for the best locations, Johnston said.

"If you're building a new facility, I would imagine the lead times to build a major manufacturing facility are longer," Johnston said.

"If you are looking to retrofit an existing building, some of those areas may have already been taken by firms like Amazon, who has been doing so much in almost every major metropolitan area, sucking up all the excess warehousing facilities and building new ones. Finding the right location and finding property that was affordable is also likely to be a challenge."

Watch: FreightWaves' Anthony Smith and Zach Strickland break down how nearshoring will impact freight costs in the future.

It's not only the U.S. that is attracting manufacturers looking for more stable supply chains but also Mexico, according to David Eaton, vice president of sales and marketing at Kansas City Southern.

"We have seen a recent step up in the number of global manufacturers initiating site selection processes to establish operations in Mexico," Eaton told FreightWaves. "Recent delays in trans-Pacific supply chains are encouraging global manufacturers to look at Mexico."

Eaton said geography, demographics, and renewed protections under the United States-Mexico-Canada Agreement are creating interest from foreign manufacturers for nearshoring in Mexico.

Nearshoring happens when an organization decides to outsource work to companies that are less expensive and geographically closer to their end markets. 

Examples of American companies with nearshoring operations in Mexico include Boeing Co., Whirlpool Corp., Ford Motor Co., and General Motors.

Detroit-based General Motors GM announced in April that it plans to invest more than $1 billion in a plant in the Mexican city of Ramos Arizpe that will produce electric vehicles.

Michigan-based Whirlpool WHR announced in July it is investing $120 million to expand its factory in Ramos Arizpe, adding 1,000 jobs by 2024. The factory currently employs about 3,000.

"Mexico and the U.S. share an integrated 2,000-mile border that offers a unique geographic advantage for manufacturers who locate in Mexico," Eaton said. "Locating production much closer to the U.S. market reduces transit times and minimizes stress on supply chains."

Eaton said KCS has seen interest in Mexico from automotive, appliance and steel manufacturers.

"We also see growth in sectors such as food processing, mining, chemical inputs and refined products," Eaton said. "Global manufacturers are drawn to the young and competitive workforce in Mexico."

Moser said his preference is for American companies to bring back factories and jobs to the U.S., but nearshoring is a better alternative than outsourcing manufacturing to Asia or other overseas markets.

"The best solution for the United States is to be self-sufficient, and if not self-sufficient, then North America being self-sufficient, with Canada and Mexico," Moser said.

Johnston said 2022 could be a good year for manufacturers reshoring operations in North America.

"We're anticipating even greater application growth next year, as some of some of the aspects of this bill are fully realized," Johnston said. "I think as supply chain disruptions continue, people are starting to realize that this isn't as temporary as they probably initially assumed. As this goes on longer and longer, you're going to see more and more people starting to switch, financing domestic opportunities."

Not everyone is bullish that nearshoring and reshoring will occur in the near future.

According to London-based The Economist Group, companies are unlikely to reshore their supply chains from Asia to North America between now and 2025 due to high production costs and concerns about the business climate in Mexico.

The report was released in June by the Economist Intelligence Unit (EIU), the business intelligence operation of the Economist Group.

Andrew Viteritti, the EIU's commerce, and regulations lead said most multinational firms with long-standing Asian operations will return to their pre-pandemic behavior of basing supply chain decisions on operational cost-effectiveness and maximum revenue opportunities.

"This means, for the most part, a continued reliance on low-cost Asian production," Viteritti said. 

Moser said when supply chain disruptions eventually ease up, some momentum for reshoring may be lost, but the U.S.-China political tensions aren't going anywhere soon.

"I believe that the China-U.S. geopolitical situation will not subside, it's causing so much tension," Moser said. "We can't let China have Taiwan because of the [semiconductor] chip reasons, because of our promises to Taiwan. So that will be a major stumbling block to going back to normality, and going back to normality would be accepting a U.S. lack of self-sufficiency, or a trade deficit, or budget deficit, all these other things that go along with that. Our country and companies here are realizing that we have to be self-sufficient." 

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