The costs associated with outsourcing manufacturing to China have been steadily climbing over the last decade. Wages for Chinese industrial workers have risen more than 2000 percent in the past 40 years. As a consequence, the cost of using a China-based contract manufacturer has climbed steadily as well. Coupled with the rising costs of international logistics, many U.S. companies have pursued reshoring as a cost-effective production option. The COVID-19 pandemic has accelerated the reshoring trend, with 69 percent of manufacturing and industrial respondents to an August 2020 Thomas Industrial survey stating that they were likely to bring manufacturing production and sourcing back to North America.
Industries That Will Lead Reshoring
While reshoring may not be feasible for all American companies, some industries stand to gain significant benefits by moving manufacturing operations back to the United States.
The aerospace sector has no room for cutting corners. Substandard components used in aircraft and spacecraft may result in severe injury or loss of life. Many major aerospace players have already been reshoring operations to the United States for the past several years to ensure better quality. The stringent American regulatory environment helps to mitigate the risk of quality issues in aerospace parts.
Many original equipment manufacturers (OEMs) in the automotive sector have imported metal-stamped components for years, blurring the lines surrounding what constitutes an American-made vehicle. In 2018-19, American automakers closed factories and laid off workers due to rapid decline in U.S. sedan sales. The U.S.-Mexico-Canada Agreement (USMCA) has since incentivized the automotive OEMs to use suppliers located in North America. COVID-19 supply chain disruption has also highlighted the benefits of using suppliers closer to home.
The pandemic revealed limitations in the chemical supply chain as manufacturers of cleaning products and hygiene items quickly ran out of raw materials. The chemical sector has long had a heavy dependence on China, which has caused cost increases due to tariffs and COVID-19. While the chemical industry may never be able to fully move operations to the United States, chemical stakeholders will definitely focus on alternative sourcing opportunities in the near future in response to continued shortages and stockouts.
From circuit boards to semiconductors, the U.S. electronics supply chain experienced significant delays as COVID-19 shuttered suppliers across Asia. For instance, even though the company has been slowly reshoring various assets since 2012, Apple had to postpone the release of the iPhone 12 due to pandemic-related disruptions in Asia. More generally, the U.S. electronics supply chain has struggled with dependence on Asian electronics manufacturing for years, including quality concerns every year surrounding the Chinese New Year. These reasons, coupled with rising production costs, have many electronics manufacturers exploring reshoring as an option.
U.S.-based ventilator manufacturers rely on components imported from China. N95 respirators have a similar problem, with most of the materials and components to make them sourced outside of the United States. Critical shortages of personal protective equipment (PPE), ventilators, and other critical medical equipment caused U.S. businesses in these sectors to reexamine their dependence on foreign manufacturing.
Large U.S. PPE manufacturers have significantly ramped up production on U.S. soil to meet the increased demand caused by the pandemic, though it’s likely many components and materials for these products still get sourced from overseas for the time being. Most of the PPE response thus far has been reactive in the face of current events, but medical and pharmaceutical manufacturers will undoubtedly look at reshoring at least some of their assets in response to political pressure and ongoing domestic demand.
Military and Defense
Even before the pandemic, the Pentagon has expressed ongoing concern about the security risks involved with sourcing military and defense hardware from China. The Trump administration’s “Buy America” initiative already shifted much of U.S. defense spending toward American-based manufacturers. Supply chain disruptions caused by the pandemic have further accelerated this trend.
Pharmaceutical manufacturers currently source about 80 percent of their raw materials from China and India. COVID-19 has highlighted the risks posed by this dependence on outside actors for the chemicals and ingredients used in pharmaceuticals. The pharmaceutical sector will undoubtedly begin to retool and diversify its supply chain to avoid more massive disruptions that risk patient lives.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.