• Sun. Sep 20th, 2020

Dimancherouge

Technology

Why Reshoring U.S. Manufacturing Could Be The Wave Of The Future

Independent SEC-registered investment advisor at Stonnington Group, a wealth management and investment planning firm based in Pasadena, CA.

Covid-19 has undoubtedly had the most acute impact on global manufacturing and supply chains in modern history. In the ensuing months and years, amid ongoing shortages of raw materials and lifesaving pharmaceuticals, the U.S. will likely undergo significant shifts, not just in its policy, but in its fundamental business philosophy. 

Because the pandemic has been so monumentally disruptive, many countries, including the U.S., will need to recalibrate the delicate balance between onshoring and offshoring to maintain the autonomy needed to survive future crises while supporting a consumer-driven economy and sustainable resources.

We’ve reached a pivotal crossroads. As we chart a path forward, it’s important to take a step back and examine our history.

American Onshoring

Our roots as English colonies in an international trading network laid the foundation for our post-revolution move to become one of the world’s biggest manufacturing hubs. By the onset of World War II, the U.S. had generated such a huge manufacturing build-up that it was relatively quick to flip the switch between manufacturing millions of automobiles to manufacturing half of the world’s wartime industrial output. 

Americans realized the strategic benefit of onshore manufacturing – especially during a global crisis when there is limited access to foreign goods, services and materials – so that we, as a country with vast resources, can be self-reliant and not have to shut down our industries.

American Offshoring

In the late 1970s, America’s most prominent public companies began offshoring manufacturing in order to maximize profits for their shareholders. By offshoring to countries with fewer labor and environmental regulations, the U.S. was able to generate enough profit to mitigate the enormous cost of shipping finished goods and even raw materials internationally. 

At this point, it made economic sense to offshore a lot of U.S. manufacturing because we had become a consumer-led society, supercharged by big box retailers that provided easy access to the inexpensive goods Americans love. With our essential supply demands so cheaply and easily met, the U.S. became a service economy full of consultants, lawyers, doctors and accountants.

American Reshoring

In recent decades, offshoring has not only been seen as beneficial to the global economy; it was also believed to promote world peace. But the pandemic has the potential to change that. For example, countries with dramatically different success rates in terms of managing Covid-19 are much more likely to prioritize their own access to essential PPE and pharmaceuticals.

The U.S. is starting to rethink the value of reshoring some of its essential manufacturing. But there are several hurdles to overcome. Companies will need to figure out how to employ more U.S. workers at higher living wages while staying competitive economically. 

This might mean adding additional tariffs to foreign imports in order to pay local employees more. But there is another, potentially better solution on the horizon: new AI and robotics technologies that reduce the amount of human labor required to manufacture a product.

Benefits Of Reshoring

Reshoring U.S. manufacturing would not only save enormous transportation costs; it would tie up less capital for less time. When you manufacture your product 5,000 miles away, you must spend extra time specializing your process to each market. In contrast, localized production facilitates just-in-time manufacturing, which optimizes workflow to more quickly produce a more specialized product for less capital investment. 

The U.S. has the potential to be one of the few countries in the world that is essentially self-contained from a manufacturing standpoint. Technology and automation has a huge role to play in this future. Before Covid-19, many workers were afraid that automated technology would cost them their jobs. But since 40 million people have lost their jobs in the pandemic, we have the opportunity to reimagine our workforce with this technology from the ground-up. 

Impacting The Bottom Line

Ultimately, reshoring could be good for Americans investing in stocks. The pandemic has demanded that companies become much more efficient with their labor cost, which is almost every company’s biggest expense. And while many in the service industry have lost their jobs, the U.S. is extremely well-positioned to redeploy that labor in novel ways using the latest technology.

Today, investors should understand the opportunity in American businesses using this technology to reshore manufacturing. Even in the middle of a pandemic, the potential for earnings growth is great.

The old notion of positioning yourself to sell picks and shovels to miners instead of being the guy who’s looking for gold still holds true. Today’s picks and shovels are 3D manufacturing technologies, enterprise software and software as a service (SaaS) apps.

Covid-19 has forced almost every American to pause and reflect on our tendency to accept the status quo. We like to believe that because of our past success, we still have the best way of doing things. This is our opportunity to question the efficiency of our existing workforce and offshore business model. Either we struggle to recapture the old strategy, which left us vulnerable to Covid-19, or we take advantage of technology to fortify ourselves for the future.


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