MARKET COMMENTARY

Are US Companies Shifting Their Factories Back Home?

04.28.2021 - Chip Sheppard, Director of Equity Research & Strategy, Pennsylvania Region

In late March 2021, the world was captivated by Egypt’s efforts to dislodge a huge container ship stuck in the Suez Canal, with the stoppage in maritime traffic affecting roughly 10% of global trade.[1] In reaction to the accident, a shipping company CEO noted that a number of corporations had already reduced their overseas dependencies to avoid the impact of disruptions to their supply chains.[2]

This event has shone further light on “onshoring,” the idea of moving manufacturing back to its home country. In a bid to try to shorten delivery times, lower shipping costs and reduce offshore dependencies, some US companies have embraced this practice. Although data surrounding onshoring is limited, the pandemic’s shutdowns may help speed up wider adoption. This would be a reversal of a trend that started in the late 1980s/early 1990s when many US manufacturers shifted operations offshore, largely to take advantage of cheap overseas labor.

Below, Chip Sheppard, Director of Equity Research & Strategy, Pennsylvania Region, answers a few of the questions surrounding onshoring.

How Has Offshoring Helped Some US Companies?

Chip: We think that offshoring has provided several benefits over the years. In particular, it has allowed many US companies to allocate their capital more efficiently, to where either labor, resources or customers may be located. It has also permitted a number of US businesses to expand from existing to new markets around the world.

What’s the Downside to Offshoring?

Chip: While some businesses may have seen heightened profits by shifting a portion of production overseas, employment levels within the domestic manufacturing sector have suffered. Specifically, many manufacturers have closed locations and laid off US employees.[3] As one example, the semiconductor production industry has lost over 340,000 US workers since 2000 (see Figure 1).[4]

Figure 1: US Manufacturing Jobs Since 1990

Number of employees from 1990 to 2020 (SA, thousands)

Source: Bureau of Labor Statistics. Yearend data shown from 1990 to 2020.

Why Would a Company Consider Relocating Its Factories Back Home?

Chip: We see four main drivers for an increase in onshoring.

  • With rising labor costs in Asia, the savings that once incentivized offshoring may have largely been reduced.
  • Some companies may choose to locate their manufacturing closer to their customers in an effort to reduce transportation time and costs. In fact, a large multinational technology firm, citing a desire to be nearer to its clients, recently announced its intention to build two new semiconductor factories worth roughly $20 billion in the western US. In addition, reshoring may increase efficiencies in production by allowing some companies to innovate and adapt early (and all along the supply chain) to changing demand.
  • Unstable trade relationships and political unrest may have made the cost of doing business overseas less appealing.
  • And finally, COVID-19 demonstrated that severe interruptions could occur, with a potentially large impact to US companies and their supply chains.
How Does the US Government View Onshoring?

Chip: The pandemic exposed significant supply chain vulnerabilities due to US dependence on China for strategically important supplies, especially those in the IT, semiconductor, pharmaceutical, and aluminum and steel sectors. In our opinion, a notable shift has occurred among US policymakers and regulators, demonstrated by stepped-up measures to protect technology, intellectual property and data from theft by China. This process began during the previous administration and has continued under President Biden who, along with recent Congressional relief legislation that discouraged offshoring, has sought to shift production of critical products homeward and protect US supply chains against national security threats.[5]

Would Onshoring Increase Costs for US Manufacturers?

Chip: Many retail, medical supply and high-tech companies have relied on overseas materials for some time. While the case for onshoring may be appealing, additional costs for businesses should be considered. For instance, US companies will likely need to pay more for domestic labor. Adding technology to help offset those higher wages—while staying competitive—would likely be a key corporate goal. Also helping to potentially mitigate employment costs will be a large labor pool as, unfortunately, over 10 million Americans remain out of work and in search of jobs.  

What Areas Do We Find Attractive Should Onshoring Pick Up Steam?

Chip: If onshoring was to gain momentum, companies with high margins, (i.e., pharmaceuticals, medical supplies, semiconductors, and IT) as well as those with established local demand (i.e., restaurants, food services, apparel and furniture) would likely benefit. In addition, firms that focus on factory automation, logistics, transportation and supporting software also seem attractive as part of a widening return-to-the-US trend. As always, our focus is on quality companies that possess competitive advantages coupled with attractive pricing.

 

 

[1] Source: Associated Press, “Suez Canal blockage adds to pressure points in global trade”, Veiga, Alex; 3/29/2021.

[2] Source: Financial Times, “Suez blockage will accelerate global supply chain shift, says Maersk chief”,

Milne, Richard and Harry Dempsey; 3/29/2021.

[3] Source: Bureau of Labor Statistics, as of 12/31/2020.

[4] Source: Bureau of Labor Statistics. Period shown is December 2002 compared to December 2020.

[5] Source: Joe Biden campaign website, “The Biden Plan to Rebuild U.S. Supply Chains and Ensure the US Does Not Face Future Shortage of Critical Equipment.”




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