While North American manufacturing has declined in the past few months, the broad trend of domestic decline and offshoring production has reversed. The cyclical pullback we are seeing in manufacturing today is normal and may represent a great opportunity to find entry points in a dynamic and growing part of the American economy. The past few years have seen a combination of economic incentives, political incentives, and advances in automation making it possible for many companies to bring jobs back to the United States and its neighbors that formerly were abroad. This renaissance brings with it a host of benefits, including bolstered economic growth, job creation, and strengthened national security by way of stabilized supply chains. This transition is especially important as we view a world that is ever more divided when it comes to free trade – the situation evolving around Taiwan and China in particular is noteworthy.
Economic Factors:
North American manufacturing is becoming more economically viable every day. Yes, wages are rising in the United States and labor is hard to find, but wages abroad are rising as well. Rising wages in once low-cost manufacturing hubs, most notably China, have diminished the cost advantage of offshore production. This is true both when considering wages for high skill manufacturing, and when considering low skill manufacturing relative to the countries like Mexico where labor is inexpensive. The diminishing advantage of China is especially apparent when uncertainties around domestic policies are taken into account in addition to wages– China’s hard crack down on Covid-19 disrupted global supply chains and there was little a US based firm could do about it.
The shrinking wage advantage and lack of stability and transparency is further compounded by escalating transportation costs, security concerns around trade, currency fluctuations, and domestic issues like west coast port capacity. This has prompted companies to reevaluate the feasibility of domestic manufacturing and supply chains contained within NAFTA more broadly. The relatively stable U.S. economy and its skilled work force and the large low cost workforce in Mexico has further cemented the attractiveness of producing goods on this side of the Pacific.
Reshoring Initiatives:
Economic reasoning is further amplified by a significant acceleration in politically driven reshoring initiatives. These initiatives are broad based, but the ones most immediately obvious are initiatives to move the manufacture of many technological staples closer to home by providing cheap funding, grants, and other financial stimulus. Semiconductor chips are a great example. Taiwan Semiconductor had become one of the largest foundries in the world, manufacturing high end chips for companies like Nvidia and AMD. Their dominance in the manufacturing of chips, essential to the modern economy, was geographically concentrated in Taiwan.
The United States has subsequently pumped billions and billions of dollars into subsidies and incentives designed to bring chip manufacturing back to the United States. Companies like Intel
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The same kind of political incentive structure is amplified by bans on foreign products or bans on technology transfers to some foreign countries. We can again use semiconductors as an example in this scenario. The United States has banned the sale of high-end graphics chips to Chinese companies due to security concerns – the manufacture of those chips in China is similarly going to be restricted and assembly of products using complex components will be restricted. The whole advanced chip supply chain and goods made with those components are being moved out of the Chinese sphere of influence – that’s a huge transition!
Finally, the United States has also put a series of tariffs on trade partners to protect and stimulate American manufacturing. The goods impacted by tariffs range from basic materials like steel to solar panels and more complex products like semiconductor equipment or communications equipment. The protective tariffs make it more attractive for companies to manufacture in the United States without the government having to spend money on subsidies or grants or other incentives.
It is important to note however that the imposition of tariffs is not a risk-free enterprise. While it does encourage domestic production of goods for domestic consumption, it also tends to encourage other countries to impose tariffs of their own in an effort to “level the playing field.” The implication here is that while tariffs may improve domestic production for goods consumed locally, it can also negatively impact exports as other countries retaliate to protect their own industries. Continuous imposition of tariffs is broadly negative for trade and theoretically increases the cost of trade which in turn leads to an overall net loss in consumption capacity on a global scale. Consequently, while tariffs can be effective, they are generally frowned on and only used to protect sensitive industries with structural disadvantages. In most situations, the policy of subsidies and incentives is preferred.
Technological Advancements:
If increasing costs overseas and domestic incentives are two of the pillars for onshoring or nearshoring, then technological advancement is the third. Automation and robotics are an absolute game changer for manufacturing. Over time the cost of robotic assembly has been coming down while the productivity of the machines has increased such that the economics for machine enabled manufacturing have substantially improved. However, for many years it’s been difficult for a company to justify a change. The money to build a plant in China had already been paid, relationships with workforces were already in place, shipping contracts were on autopilot. Nobody wanted to change their practices and mess around with a complex supply chain that was working properly.
However, the Covid-19 disruptions, increasing U.S. China tensions, and rising domestic wages have necessitated change. In that situation – one where change is obligatory, the set-up is not just going to be for today’s environment, but for the environment for the next 20 years. And the next 20 years are resoundingly in favor of technology enabled manufacturing. 3D printing, fully robotic assembly lines, artificial intelligence running quality control, completely automated warehouse experiences, self-driving trucks doing long haul shipping – a technology enabled manufacturing economy is the future.
Investing In A Resurgent North America:
There are a few different ways to invest in a resurgent North American manufacturing economy. You can either try to invest in the companies who are enabling manufacturing to become more efficient, or you can invest in the companies who are shifting their manufacturing to the US to take advantage of the subsidies and protections on offer.
The former group may seem narrow, but there are a lot of components associated with setting up new factory systems. First, you have companies like Rockwell Automation
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On the other hand, you could look at companies who are taking advantage of subsidies and incentives to move production back to the United States. While some of these are small manufacturers, many of them are large companies in spaces important to national security. Think about the semiconductor companies for example – we absolutely need to have chips and we’re determined to have an American manufacturing base for them, just in case anything ever happens overseas. Those are the Intel and the Taiwan Semiconductor Co’s of the world. Other companies in this vein would be the manufacturers of emergent complex technologies like solar panels or aerospace components for rocketry.
Regardless of how you want to approach the space, increased domestic manufacturing activity is important to broader economic growth. Whether it’s the company doing the manufacturing, the people selling the parts, the banks financing the jobs, or the companies moving the goods – that’s all local economic activity.
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