The Reshoring Reality Check: There Whispers Of Manufacturing Coming Back To North America

You may have seen the news. Manufacturing is coming home. The vast majority of the conversation centers around the circle of politics and business. There is also a feeling of hope, especially in the business quarters, that America is in the middle of an industrial revolution with coffee-shop-style factories coming up and everything is being termed as “Made in America.”

Here is the twist in the plot: the truth is much more complicated than the ideas that are floated in the conversation. Far more complicated.

To be clear, there are some signs that reshoring is coming. There is some evidence that manufacturers are once more relocating to North America, and there are some signs that this is more than an occasional phenomenon. But it is far from the case that the last four decades of globalization is being reversed, in its entirety. If every category of a product could magically come flooding back across the Pacific, you would be disappointed.

We have to tackle the reality of the scenario that is being painted much better than it is, and begin to unpack what is actually happening. Which products are actually coming home? Which ones are being manufactured and remaining overseas? And honestly, why should any of this make any sense to you?

A New Focus On Reshoring

To begin with, it is critical to note that the pandemic upended some of the prescriptive thinking in global supply chains that is not up for debate.

Can you recall a time you saw someone riding a bike and wondered why you couldn’t own one? Then there was a time you couldn’t buy a car for six months because there was a shortage of semiconductors. These incidents were inconveniences. These were wake-up calls that revealed how complex and distant our supply networks are and how fragile they actually are.

There’s also geopolitical tensions. The U.S. and China relation, let’s say, hasn’t simplified. Countries, during a certain point of time, were suspending and reissuing tariffs. U.S. companies were nervously looking at their supply chains in China, contemplating how a second or even third plan might save their operations.

Over the years, many espoused the view that wages in China were far lower as compared to the rest of the world. This is undoubtedly true, but as you take shipping, control, and the chance of supply disruption into account, the more the less disrupted value chains seem.

Automation is the technology that is greater than anything else. The use of robots in the assembly of goods and services in a certain place makes offshoring far more appealing than before.

An Ohio factory may not cost much more than one in Shenzhen, as long as neither has much human workforce.

The Products That Are Actually Coming Back

Let’s get down to business, because this is where things get serious.

Electronics and Semiconductors

This industry is arguably one of the more popular industries. The CHIPS Act had invested 52 billion in the semiconductor industry and companies are reacting. Intel is building huge fabrication factories in Ohio. TSMC is constructing Arizona plants. And Samsung is spreading to Texas.

Here is reality though; these plants are producing the most sophisticated, advanced chips. The product semiconductors, the ones in the toy drone in your possession and your washing machine? They are still being manufactured outside the country and presumably so. A chip fabrication facility is an expensive endeavor that costs billions of dollars and is only reasonable when the production is of high value.

The trend is the same in the case of consumer electronics. The high-end products are starting to be assembled in North America especially on products that are costly to ship in relation to product value. However, the low-end products, e.g., a low-end smartphone or a low-end bluetooth speaker? You may be disappointed a long time.

Pharmaceuticals Supplies

Nothing illustrated our dependence on overseas manufacturing quite like the panic for masks, gloves, and basic medications during the COVID pandemic.

The various sectors of the economy have certainly felt the impact of the pandemic. Domestic production of pharmaceuticals is a major new focus of companies like Phlow which are building new facilities custom tailored for the production of critical drugs. The federal government provides incentives for the construction of these facilities through advance purchase agreements and grants.

The catch? The focus of these facilities is to serve the needs of public health and national security. The vitamins and supplements that you take? One will probably always be exported.

The pandemic has led to substantial reshoring. In addition to the new facilities, Whirlpool is adding to its existing facilities. Other manufacturers, such as Haier, are expanding production to Kentucky, alongside with the commercial appliances and HVAC systems.

Over the past few decades, North American manufacturers have spent heavily building their infrastructure and developing expertise. These heavily regulated industries have low profitability, are customizable, and offer dense bulk shipping.

The auto industry is perhaps the most devastating, with incredible movement with the production of electric vehicles and booming production of electric vehicle battery production across North America.

Ford and GM and Tesla are all constructing battery factories, sometimes partnering with Asian battery makers. Monetarily, it is quite an investment.

Reshoring is taking place with some automotive parts as well, albeit to a lesser extent. Efficiency factors and minimization of risk for distant suppliers are driving this trend. If parts for an assembly line are “just in time”, the optimal supplier would be within the US or Mexico.

Let us be clear, however – complete cars are manufactured in Mexico and a vast array of parts will be purchased from different countries. Globalization, for the purposes of the industry, is being rethought.

Home Fittings and Assorted Furniture

Reshoring furniture would be the primary example. Many companies are realizing the high costs of shipping these massive and lightweight pieces of furniture.

Many companies producing upholstered furniture, custom cabinetry, and high-end home goods find it is more cost effective to produce the item domestically in comparison to holding inventory, shipping, or responding to the current design trends.

The assembly and intricate packing of the furniture from big retail stores, however, is still purchased from foreign suppliers.

Even so, there is a revival in the production of furniture in the region, as in the case of North Carolina, which never lost its heritage of furniture making.

The Reality of Where Things Are Actually Going

You have likely seen this pattern: reshoring is not a straight line of “go back to America” or “stay in China.” The truth is, the situation is a bit more complex, and actually more interesting.

The Mexico Factor

A major portion of what is being termed “reshoring” is actually nearshoring to Mexico. For many companies, Mexico is a sweet spot because the country has low labor costs, is close enough to the U.S., and has trade agreements such as the USMCA that offer tariff-free trading.

Employment in the manufacturing sectors in Mexico has seen steady growth. There is considerable investment in the south of the border in auto parts, electronics assembly and components, and aerospace. From a North American perspective, this might count as “reshoring,” but “bringing back jobs to Michigan or Ohio” is a different ball game.

The Southeast Asia Shift

Vietnam has been the biggest beneficiary under the “Plus One Strategy” which aims to reduce overdependence on China as a manufacturing hub. In the last five years, Vietnam has seen a surge in the export of manufactured goods. Other countries like Indonesia, Thailand, and Malaysia also benefit from this.

Some of that assembly of the iPhone is likely to have been moved from China to either Vietnam or India, but definitely not to California.

It is clear that the supply chain might be undergoing some alterations, but the supply chain is far from being eliminated.

Definitely Not Coming Back

Now, let us examine some of the products that might never be reshored.

Apparel and Textiles

To be clear, the American textile industry is not going to return to its former glory, but sure, some high-end boutique fabrics are starting to be manufactured locally and due to the US federal laws, military uniforms are increasingly getting made in the US. But, as for what Americans wear on a daily basis, that will remain manufactured in Bangladesh, Vietnam, and China.

That is not the case economically. Even with high-tech machines, sewing cotton t-shirts is still a painstaking process. And buyers to seamstresses are looking for the best bargains, do not mind waiting for long periods, are okay with sub-par quality cotton, and are more than happy to buy a t-shirt.

Consumer Plastics and Toys

Consumer plastics, especially food containers, and children’s toys will remain foreign made. Virtually all cross-country supply chains are fairly advanced, there is a plethora of custom tooling equipment, and the value of labor still greatly favors foreign production.

Yes, there are a few domestic specialized toymakers and artisans that produce plastic goods, but the products that US citizens generally buy? Such products are not made in the US.

Electronics and Accessories

Charging cables, phone cases, Bluetooth earbuds with 49.99 price tags, and other smart home appliances will never leave Asia.

The boundaries of the ecosystems for these products have been developed for a while, and the margins are so low that production moving doesn’t make any profit.

A product that retails for twenty dollars and competes for price has a tight profit margin. Domestic manufacturing simply isn’t an option for these products.

The Middle Ground: Hybrid Strategies

Most firms are not making a decision on all or nothing. They are being pragmatic and creative with hybrid options that attempt to balance cost, risk, and customer satisfaction.

Other companies keep the final part of the manufacturing process, or high-value component to North America and source low-value components on a global scale. There are companies that outsource manufacturing of commodity products and construct local production to meet the tailor made and short delivery orders.

We also tend to see companies regionalized whereby they produce in the region where they are selling to North American customers but export to the Asian or European markets through their overseas factories. Why take the trip around the world to ship when it could be made nearer to demand?

The Economic Effect

The debate on reshoring is political, and it’s easy to get lost in the fog.

Will reshoring bring back millions of manufacturing jobs? The answer is no. Even the factories that return will be highly automated like the rest of the industry. A modern-day semiconductor fabrication plant will employ a mere few thousand people and generate billions of dollars worth of chips.

Labor dynamics remained bleak outside the US for decades, but its turning point came with China’s rapid growth and acceptance in the global market which coincided with the rise of the internet, thus offering a layered approach to boost global supply chains and augment the assembly plants with the assembly lines employed in the US. 1970s and 1980s manufacturing sector and provide a slipstream effect to the value chains to trade the manufacturing efficiencies for the growing competition in the selling.

Adding to the competitive advantages of the firms was the adoption of the polymer and elastic core techniques for one-piece soles and the site in the late 1970s in Massachusetts. Supplementary growth in polymer assembly techniques has shifted to balance from separate polymers with increasing global vertical integration.

Shifting focus from resource and market proximity to reclaim the autonomy stagnated the countries however lured the focus for proximity advantages balance trade and proximity to the largest digitally operated trading block. Foster Garrett’s shift to a construction ecosystem reinforced the borders unlike the vertical block patterns around the US to balance with lean firms supporting Dell, Cisco and wave in China.

Tomorrow’s Orders, New Trade Vectors

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Although it might seem out of place, when it comes to responding to particular trends, we still see “fast fashion” companies relocating production closer to their market.

Manufacturing high-tech goods needing strong IP protection is more suited to the domestic context, as it is more manageable to keep control of sensitive information when it is produced within your factories, under your legal jurisdiction.

Where is the money, there is the incentive. The areas of most pronounced activity are those that are receiving serious government assistance, through purchase guarantees, tax credits, or direct grants. Presently, that is semiconductors, EVs and parts, and pharmaceuticals.

What Should You Actually Expect?

First, reshorcing is not total; it is not going to make every industry reshore and revive the manufacturing economy of 1964. In other words, what we are seeing is more complex and risk-balanced supply chains.

You will see more and more labels Made in North America in the categories of some consumer electronics, some pharmaceuticals, automotive parts and some consumer goods, but you will still have items in your kitchen drawers and closets that were made in all parts of the world.

The factory jobs that are being reintroduced are not the same jobs that were lost.

It is also packed with such tasks which need additional education and facilitates the adoption of new technology. A factory floor is now very much like a control room as compared to the assembly lines of the old days.

In their minds that is where it ends, the strategy of the supply chain has never been as important as it is currently. Perhaps the most successful companies are not the ones that are totally global or those that are highly reshoring-oriented. Instead, the ones that thrive are the companies, which have a varied and dynamic supply network, and can adapt itself to the changing circumstances nimbly.

Reshoring is occurring. Not everywhere, not at the same time and not in the very sense implied by the headlines. Like most things in economics, there are many layers to the truth, and it is far more interesting than a pop story that we tend to hear often enough.

However, reshoring is not the question, but where it makes the most sense is. Both enthusiastic supporters and self-proclaimed cynics of the new world order argue on the wrong end. Since at the end of the day it will be decided by the economic fact and not by the wishful thinking or speeches.