How Manufacturers Can Harness the Power of Reshoring to Combat Inflation
The choice to return jobs to the U.S. makes sense for certain industries, but not for others. In some cases, businesses are reshoring only certain portions of their manufacturing. The pros and cons that must be taken into consideration are immense.
One of the most enticing options for owners and executives that want to curb the negative effects of inflation and an injured supply chain is reshoring.
This is because inflationary pressures and constant supply chain disruptions have presented business executives around the world with challenges that pose a risk to any notion of consistent growth. How can successful companies expect to manage liquidity and cash flow when the market environment is constantly changing?
One factor affecting the world economy is the contraction of the global trade volume overall. According to Euler Hermes economists, 75% of the current contraction is a result of production shortfalls. The remaining 25% appears due to logistic bottlenecks in the supply chain.
On top of this, worldwide inflation is making life difficult for consumers and businesses alike. From November 2020 to November 2021, the consumer price index increased by 6.2%—the highest yearly increase in thirty years. While the Federal Reserve insists this is simply a result of a decimated supply chain, some experts believe this level of inflation to be the new standard.
Even if inflation slows to 3.4% this summer, as some economists predict, that still eclipses a pre-pandemic average of 1.8%. With consumer demand likely to increase again in October for the holidays, seasonal sky-high inflation could be the new standard.
However, it’s far from determined that this will be the case. As shipping capacity gradually grows to meet supply chain needs and consumer demand shifts to a more goods-and-services balanced, pre-pandemic approach, more opportunities for investment and revenue growth will appear.
Experienced stakeholders in the manufacturing industry will know that anticipating problems—and preparing adequate solutions—is crucial in order to not only survive but to grow their business as well.
Enter reshoring, and the ability to curb the negative effects of inflation and an injured supply chain.
Uncertainty Remains as Supply Chain Issues and Inflation Get Worse
Aside from high prices, the pandemic has exposed other problems with our approach to logistics.
Last December, the Institute for Supply Management (ISM) published a 2022 Semiannual Economic Forecast that attempted to anticipate what the new year would look like for American manufacturing. During the thick of the pandemic, U.S. manufacturing was plagued with supply chain congestion and declining revenue. The good news is that rising profits are again on the horizon. But the idea of both the manufacturing sector and supply chain returning to their pre-Covid states is unlikely, if not impossible.
After an industry-wide 1.3% decline for manufacturers in 2020, ISM predicts revenue will rise in 15 of 18 observed sectors in 2022. Leather, machinery, electronics, and transportation equipment may see a return to booming business.
However, the diminished labor market may pose another problem. Over 80% of manufacturers reported problems with acquiring qualified employees to meet production standards.
An infamous example of production shortfalls over the past two years is the semiconductor shortage that hamstrung the electronics and technology sectors.
According to the Semiconductor Industry Association, almost 80% of the world’s semiconductor factories and test facilities are located in Asia. U.S.-Chinese trade tensions were already strained before the pandemic; Covid-19 has only further complicated the issue.
With the semiconductor shortage unlikely to subside anytime soon, a bipartisan effort has emerged in D.C. to bring semiconductor production back to America. Tax credits, research and development funding, and other financial incentive proposals have presented firms with a reshoring opportunity that could resurrect semiconductor production within the US, and open up exciting opportunities across many sectors.
Reshoring: The Potential Answer to the Current Inflation and Supply Chain Woes
The process of transferring a company’s production and manufacturing capabilities back to its home country from is known as reshoring.
Sometimes also referred to as onshoring, inshoring, or backshoring, this is direct opposite of now-infamous “offshoring,” wherein production jobs are shipped overseas to keep expenses low.
The offshore model dominated American business for decades, with companies transferring jobs to China and Vietnam, where the cost of employee wages lowered overall production costs.
However, since the 2008 Great Recession, politicians across the political divide have prioritized bringing these jobs back to American workers. Alternative cost-cutting methods and federal financial incentives have sought to create a more manufacturing-friendly environment in the U.S. Meanwhile, global economic shifts have lessened the benefits of manufacturing abroad, providing further outside incentives to return home.
Reshoring is not a straightforward process. While certainly achievable, balancing international job transfer with the maintenance of a positive cash flow is no easy task. Any financial partner must be acutely aware of external and internal factors affecting a manufacturing company (and the industry as a whole).
This is why a partnership between manufacturing businesses and experts in financial solutions is crucial for the American economy’s continued recovery.
Advantages of Reshoring
The economic development of a country like China has created a new global superpower for the U.S. to compete with.
But this economic progress comes at a cost for China as well. As China’s middle class continues to grow, so does the average pay for Chinese workers. As the main advantage of offshoring—cheap labor—continues to vanish, then returning those jobs to the U.S. only appears more enticing.
While offshoring initially proliferated to maximize profits, the advent of AI and automation technology actually provides American companies with the ability to expand earnings potential by onshoring and bolstering their force of automation equipment. Of course, companies considering this option should not expect a “lights-out” (all-robot) manufacturing model overnight (or anytime soon). But identifying the most labor-intensive, repetitive tasks and then finding automated replacements is a great way manufacturers can begin harnessing automation for increased efficiency—while being less reliant upon labor.
Relocating production hubs to America also drastically reduces the cost of inbound and outbound deliveries. The cost of shipping freight around the world has been on the rise in recent years; the pandemic has only exacerbated these costs.
Currently, shipping a cargo container from Shanghai to Los Angeles costs approximately $3,500. This is significantly higher than transporting goods anywhere within North America!
If production is located domestically, then the shipping of those products can occur domestically as well. This serves to keep overhead costs nearly as low as outsourced, offshore manufacturing—if not lower.
Reshoring presents the ability to avoid international taxes, customs fees, and other expenses arising from a complex global supply chain.
Bringing production processes back stateside could inject up to $443 billion into the U.S. economy over the next several years. In 2018, the number of American companies participating in reshoring was the highest since records began. The following year, the importing of manufactured goods from Asia saw its first decrease in five years.
As demand for locally-made goods continues to rise, reshoring manufacturing will give American businesses an advantage over their competitors. On the surface, this trend of bringing jobs back home has been facilitated through corporate tax incentives and deregulation.
A deeper analysis, however, conveys that these business opportunities have come from political change: Americans want to buy American-made products. It’s up to manufacturing executives to give consumers what they want in order to stay competitive.
Potential Challenges of Reshoring
While bringing production home offers are many benefits, there are also financial challenges that pose a risk to revenue growth.
Take the semiconductor example. Establishing a new semiconductor plant in the U.S. would cost nearly $10 billion in total fees, not to mention the specialized labor force required to maintain it. These significant investments require financial incentives and cooperation from the federal government—and partners who understand how to navigate these financial, legal, and regulatory complexities.
Another possible pitfall of reshoring is the American skilled labor shortage. As an example, 60% of young German workers participate in apprenticeship programs—a rate far above their American counterparts. This creates a skilled labor proficiency gap between American workers and those of countries with robust trade education like Germany, Japan, and Switzerland.
There are many factors, both positive and negative, to consider making a large-scale transfer of production processes stateside.
Key Considerations Before Reshoring
Reshoring doesn’t have to be a complete and total transformation.
Locating at least some manufacturing processes domestically can mitigate the risk of over-dependence on one foreign market. When navigating an uncertain business landscape, manufacturers will find it easier to maintain adapt to unforeseen market factors if production is at least partially shifted stateside.
The choice to return jobs to the U.S. may be more feasible for some industries than others. Industries that require greater control over their acquisition process or end products—such as pharmaceuticals, medical devices, and construction materials—would benefit from a more locally-based supply chain.
Meanwhile, a microchip producer will find it nearly impossible to move all of production to North America. Too much of the electronics supply chain originates in Asia for reshoring to be an easily affordable solution.
Cost increases aren’t the only factor to consider when debating the relocation of manufacturing, though. Always remember to consider final-buyer demands with equal weight. For example, consumers’ shifting stances toward foreign-made products can have serious and negative effects on a manufacturing company’s bottom line if left unheeded.
Assess What Strategies Can Work for You
A complicated process like reshoring, from the planning stage to its execution, involves many financial considerations.
In order to prepare, you must conduct accurate forecasts of possible revenue opportunities and understand the full cost of the investments required. Assessing the potential impact to your full balance sheet requires a reliable financial partner with deep expertise in the industry. Reach out to FirstBank & Trust today to find a commercial banking team with the right industry expertise to help you accomplish your financial goals.