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Home Business Analysis | If Factories Don’t Return to US Now, They Never Will
Analysis | If Factories Don’t Return to US Now, They Never Will

Analysis | If Factories Don’t Return to US Now, They Never Will

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The Chips and Science Act that President Biden signed earlier this month is just the latest indication that the planets are aligning for a return of manufacturing to the US. Proponents have pushed for so-called reshoring for years, but it has never quite panned out. With the supply chain crisis still fresh in people’s memories, this time is different. If reshoring doesn’t become a significant trend over the next decade, it never will. To ensure this return of production isn’t haphazard and doesn’t leave gaping holes in the supply chain, there needs to be some coordination — and it doesn’t have to be by the government.

“Resiliency” is the buzzword making the rounds at corporate boards. This is a direct reaction to supply chains that broke down during the pandemic and injected a nasty bout of inflation into worldwide economies. When examining the root causes of the breakdown, it should lead to the conclusion that industrial production — just like the food at a restaurant — is much better when it’s made locally for the local market.

“Making your product closer to your customer is a very good thing in terms of removing some of the unknowns from your supply chain,” said Daniel Swan, co-leader of McKinsey & Co.’s operations practice. “I think this is going to be something very real.”

The advantages of bringing back production goes beyond just diversifying the source of component parts and shortening supply chains, a key ingredient for making supply lines more resilient. There are significant benefits for the environment — every environmental group and proponent of ESG should be beating the drum loudly to encourage this trend of local production for local consumption — and even an argument for national security: computer chips and health-care equipment come to mind.

In the 1980s, the globalism idea seemed to make sense: Build one huge factory where a gazillion widgets could be made at the lowest cost, which at the time usually meant China, and then ship them around the world. Empty industrial parks weren’t a problem, the thinking went, because the US could just import those cheap goods and pay for them with a combination of service-economy salaries and debt. And then there was this drumbeat: Everybody needs to send their children to college because the new-economy jobs will render blue-collar work obsolete. The tedious, repetitive, sometimes dirty work of factories would be done by other countries with lower skills and cheap labor.

The number of manufacturing jobs reflects this school of thought. They peaked in 1979 at nearly 20 million and dropped to just north of 11 million in 2010 before stabilizing at just above 12 million. In 2000, the year before China entered the World Trade Organization, the US imported $100 billion of Chinese goods. That jumped fivefold to $500 billion last year, and the trade deficit with China surpassed $350 billion.

It took a global virus to wake everybody up to the fact that the US doesn’t make enough products at home. And the big lesson learned from the pandemic and the scramble for supplies that ensued was that the weakest link in the chain is maritime shipping. These huge vessels are mostly controlled by a few large companies and, because it takes years to build a container ship, it’s impossible to ramp up capacity in the short term. That leaves price as the only market mechanism to manage a surge in volume, and that became a stark reality quickly. The cost to ship a 40-foot maritime container from China to the US West Coast jumped fivefold to more than $20,000 during the worst of the shipping crisis last fall, according to Freightos, an online shipping marketplace. Not to mention that the huge container ships that ply the oceans spew a trail of carbon and garbage in their wakes.

Once the ships reached their destinations, the US ports and the supporting transportation systems weren’t nimble enough to handle a surge of imported goods. The delays caused companies to put in extra orders to ensure they received supplies and introduced the average person to an obscure logistics term called the bullwhip effect. This is a reason that inventories are now so mismatched.

Making the supply chain more resilient is a chief motivating factor for relocating production close to the end market. This is no easy task. China is now the world’s factory, and the base of low-cost suppliers that has been built up over the decades to support manufacturing in Asia has no equal.Still, the Chips Act is incentivizing companies like Intel Corp. and Taiwan Semiconductor Manufacturing Co., which are planning to build huge semiconductor factories in Arizona. Texas Instruments Inc. already broke ground in May on a chip plant in Texas. The Inflation Reduction Act will spur investment in electric vehicles and the parts to supply those. While government subsidies can spur action, the move to manufacture in the US must be profitable to sustain the trend.

Generac Holdings Inc., a power generator maker, has shifted some production to its factory in Wisconsin and opened a small plant in Georgia that it’s planning to expand. Premier Inc. teamed up with DeRoyal Industries Inc. to make hospital gowns in Tennessee in a plant that Premier CFO Craig McKasson called “the most automated gown manufacturing capability in the world” during a Raymond James conference earlier this year.  The alignment of the planets wouldn’t be complete without automation. This shift of production back to the US won’t work without keeping labor costs in check. The solution isn’t to drive down US wages or to erode health and retirement benefits, which was the corporate playbook for decades. The answer is to employ robots to perform the repetitive and mundane work at a low cost while paying well the people that will always be needed in a factory. This hasn’t been possible before because the technology was limited mostly to automating heavy assembly processes.

That has changed. Robots can do many more tasks (although most people overestimate what machines can do) with advances in vision, mobility, dexterity of end-of-arm tooling and machine-learning software. With robotics and tools like 3D printing, production is more nimble, allowing shorter runs and a larger variety of designs. Add it all up (and toss in savings on freight expense and time), the cost should be similar whether a product is made in Vietnam or Virginia.

It’s important to note that this will be new production and a net gain of jobs. The real challenge will be having enough trained people to work in these new factories.

A manufacturing renaissance isn’t guaranteed. It’s just that the field has been tilled, fertilized and watered to create the perfect conditions for this to grow. But this potential manufacturing garden must be seeded with hundreds of projects from companies making that difficult decision to build a redundant factory in North America. This will take time and money to germinate.

There’s always the risk that as the pandemic fades and shipping costs trend downward, the memory of the supply chain pain will also recede. That’s less likely, though, with the continuing disruption from Russia’s war on Ukraine and the harsh lockdowns in China as its leaders doggedly pursue a zero Covid policy.The reshoring activity shouldn’t be haphazard. Although individual companies must make the final decisions on their moves, having clusters of suppliers around manufacturers makes sense. Companies will need to work with community colleges and high schools to secure workers with the skills they need. It will take some coordination to ensure the region’s not left without key components in the supply chain. Trade groups, such as the National Association of Manufacturing, could take the lead for identifying those gaps or bottlenecks in the supply chain and lobby manufacturing to invest to meet that demand.

Regionalization is also a word that should be buzzing at company board meetings. Mexico has certainly become a hot spot of late for locating factories to meet US demand. The Americas as a region can benefit from a move toward more local production. Most of the ingredients exist — from technology to low-cost labor to the raw materials – for producing widgets with content mostly from within the Americas. For cross-border issues, the federal government obviously would have to play a role. What is lacking is coordination, stable governments and steady currencies.

The pandemic, supply chain snarls, government action and automation have all lined up to give reshoring its best opportunity. If US companies miss this window, it will most likely close for good.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government.

More stories like this are available on bloomberg.com/opinion

#Analysis #Factories #Dont #Return

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