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Will COVID-19 Drive the Reshoring of U.S. Manufacturing Supply Chains?

Posted by Kevin Harris, CPA on Sep 14, 2020 10:00:00 AM

If disruptive tariff wars of the past few years haven’t already caused manufacturers to reevaluate their supply chains, COVID-19 delivered the sucker punch to the industry. As China became the original epicenter of the pandemic, all manufacturing production came to a sudden halt under mandated shutdowns.

According to a February Thomas Industrial survey, roughly 60% of manufacturers reported disruptions in supply chains and production facilities. As a result, some began to seek closer international supply sources, typically in Mexico or Canada (nearshoring), while others were seeking alternative U.S. sources of supplies (reshoring). The balance reported they were turning down or delaying orders.

There has been plenty of buzz about reshoring over the past decade. Still, few manufacturers wanted to take on the expenditures required to bring back operations to the U.S. Keep in mind that offshoring took root in the late 1990s and early 2000s to tap into an inexpensive labor force. Low labor costs in China have been the leading driver in achieving cost-effectiveness in manufacturing, so much so that the country controls one-third of global manufacturing. However, tariffs have taken a bite out of these cost savings. As the trade wars escalated, many U.S. manufacturers paid the price, which reduced previous cost savings and raised concerns that their customers would have to foot the bill. U.S. trade policy shifts imposed by the current administration also favor reshoring.

Along came COVID-19, and reshoring and nearshoring are becoming more realistic considerations for manufacturers. Even when supply chains gain cost efficiencies by operating in Asia, the pandemic has underscored the risks of having all production offshore. According to some reports, by February, 28% of suppliers were seeking alternative supply sources in other countries and within the U.S.

According to the Reshoring Initiative, the total number of manufacturing jobs brought back to the U.S. from overseas between January 2010 and December 2018 totaled 749,000.

Chinese suppliers eventually returned to work, but the shutdown has caused U.S. manufacturers to rethink their long-term strategies. No one can be certain there won’t be another shutdown. Thomas’ March survey revealed that 54% of North American manufacturers were considering domestic sourcing. You might think that this number would have dropped as Chinese operations resumed, but that’s not the case. The May/June Thomas survey shows that the number actually spiked to 69% of manufacturers who are looking into reshoring.

A domestic supply chain can mitigate customer delays by ensuring that parts are easily accessible in times of crisis. U.S. manufacturers will need to determine whether the cost savings

 

that come with offshoring are worth the loss of quality control. Another factor is the steady increase in overseas wages, which translates to fewer cost savings for U.S. manufacturers. Add to that the time and cost of overseas shipping versus being able to provide customers with a quick turnaround. Localized supply chains also provide the opportunity to increase employment, if manufacturers can find skilled labor needed to keep up with demand. It’s more likely that manufacturing companies planning to reshore will increasingly turn to automation and robots.

Which manufacturing sectors will be most likely to reshore? In a recent analysis of 28 manufacturing sectors, Duff & Phelps lists eight most likely candidates to reshore according to certain metrics. Together, they feature some of the most advanced automation and robotics. They have relatively low labor and high transportation costs, and their profit margins and global demand offset reshoring investment costs. They include:

  • Automobiles, bodies, trailers, and parts
  • Other transportation equipment (e.g., boats, rail)
  • Navigational, measuring, electromedical and control instruments
  • Basic chemicals
  • Semiconductor and electronic components
  • Medical equipment and supplies
  • Communications equipment
  • Aerospace products and parts

Manufacturers in these sectors will need to reevaluate their supply chain reliability, manufacturing costs, and their risks associated with business interruption. The right answer will vary from manufacturer to manufacturer. Some manufacturers will rely on a blend of national and international suppliers, and many large U.S. manufacturers will continue to offshore to China.

For those who want to reshore, the most recent impetus for reshoring is also a detriment; it is difficult to initiate these changes while the pandemic continues. Manufacturers need to locate facilities, and they must provide an environment that meets safety protocols, especially when it comes to personal protective equipment (PPE). They must also work with their advisors to overcome competitive costing that probably led to offshoring a long time ago. Now that companies have seen how easily their supply chains can be disrupted and identified supply chain weaknesses, many will be reevaluating their operations overseas.

Do you have questions about reshoring your manufacturing operations, or other manufacturing and distribution topics? Our manufacturing team can help. Please contact Kevin Harris, 214-635-2473.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Manufacturing, supply chain, reshoring, COVID-19