A Reshoring Renaissance Is Underway

Companies are building manufacturing facilities in the U.S. at a pace not seen in decades. A confluence of factors is driving this trend: Amid supply chain bottlenecks, rising labor and transportation costs, U.S. tariffs on China, and geopolitical tensions, companies recognize the value of reshoring production. U.S. industrial policies favoring domestic manufacturing are also informing these decisions, including new laws seeking to address national security threats, economic disruptions, and dwindling access to key technological components. The result is an early-stage U.S. reshoring renaissance.

The question for executives is whether their companies should follow this trend. But first, it’s important to understand the trend’s scope and what’s driving it.

There have been calls for reshoring since manufacturing began sharply declining in the late 1970s, but COVID-19 marked a turning point for the C-suite. Between the first quarter of 2020 and the third quarter of 2023, executives started talking about onshoring, reshoring, and nearshoring during earnings calls and conferences much more frequently than they had previously, according to an analysis by The Conference Board.

Such talk started significantly increasing in the second quarter of 2020, as the pandemic set in globally. In the second quarter of 2022, as supply chain pressures again surged, Russia invaded Ukraine, and new federal industrial policies were enacted. Overall, instances of executives mentioning these ideas increased nearly 3,000% in just three years.

New laws also helped drive this onshoring resurgence, including the 2021 Bipartisan Infrastructure Law, the 2022 CHIPS and Science Act, and the 2022 Inflation Reduction Act. Each contains stipulations regarding the production and procurement of U.S.-made products and components that benefit companies that manufacture domestically.

Reshoring is now driving a dramatic rise in manufacturing construction activity. Companies are constructing U.S. manufacturing facilities at a higher rate than any other property type. Such spending rose to an annual rate of $114.7 billion in 2022, according to the U.S. Census Bureau — a 40% increase year over year and a 62% increase over the past five years.

This made manufacturing the fastest-growing asset category in 2022, as the average growth rate for all nonresidential buildings and infrastructure increased just 7.4% compared with 2021. And the building continues: Manufacturing spending was 74% higher in July 2023 than in the same month the previous year.

The reshoring renaissance does not apply universally. Sectors requiring large amounts of manual labor, including shoes and apparel, furniture, and home decorative items, are less likely to reshore. Industries with more complex and expensive products, and those that can use automation and robotics in manufacturing, are leading the U.S. resurgence. The five industries experiencing the greatest U.S. employment growth as a result of reshoring and direct investment are electrical equipment, appliances, and components; computer and electronic products; chemicals; transportation equipment; and medical equipment and supplies.

Our analysis shows that North America (the U.S., Canada, and Mexico) has the existing supplier base to support more manufacturing activity than it currently has. In fact, for electrical equipment, North America has 15% of the global supplier base and 7% of global output. Twenty-one percent of the pharmaceutical industry’s global supplier base is in North America, but its share of global output is just 18%, according to The Conference Board Global Supplier Index.

Is Reshoring Right for Your Company?

Reshoring results from executives and senior managers reorienting from a “low cost” to a “best cost” supply chain strategy by prioritizing factors such as supply chain resiliency, sustainability, and geopolitical stability over cheap foreign labor. Although onshoring can entail higher costs from building new facilities and paying higher wages, the benefits of minimizing external risks and creating long-term efficiencies might outweigh keeping near-term costs low.

Business leaders should consider six key factors in deciding whether to adopt this model.

1. Labor costs. Global labor shortages and cost increases — including in China, where wages are rising — make it relatively more affordable to locate manufacturing in the U.S. than it once was. China outpaced G20 countries in real wage growth from 2008 to 2022, according to the International Labour Organization’s “Global Wage Report 2022-2023.” China’s real monthly wages in 2022 were equivalent to about 2.6 times their real 2008 value.

2. Advanced manufacturing. New automated “smart factories,” which require more engineers and skilled technicians but often far fewer workers overall, including traditional assembly-line workers, make the U.S. labor pool attractive due to its well-educated workforce. Demand for robotics and the advanced technology that supports smart facilities is also surging. North American robot sales set a record in 2021, with 39,708 units sold, for $2 billion — a 14% increase over the previous high in 2017, and 28% more than the number sold in 2020, according to the Association for Advancing Automation. Plex’s “7th Annual State of Smart Manufacturing Report” notes that smart-manufacturing adoption rates increased 50% in 2022 year-over-year and 83% of manufacturers reported that smart factories are key to their future success.

3. Risk mitigation. The longer and more complex the supply chain, the greater the risks it faces, especially in terms of potential geopolitical instability. There is also renewed scrutiny by the federal government of its own reliance on other economies for critical public health and national defense supplies and components, such as personal protective equipment and semiconductors used in military vehicles and weaponry.

4. Sustainability With companies increasingly needing to meet sustainability goals and reduce their carbon footprints, localizing manufacturing offers several benefits. Constructing new, green facilities domestically can greatly reduce Scope 1 operating emissions from company-owned facilities and vehicles. The U.S. has the world’s largest sustainable-building market, with more than 511 million square feet certified under the Leadership in Energy and Environmental Design rating system, compared with 180 million square feet in China. Plus, manufacturing a product closer to its end customer reduces emissions from transportation.

5. Stakeholder sentiment. Many companies’ stakeholders — including employees, corporate boards, industry organizations, government officials, and other companies connected within a supply chain — want executives to consider localizing manufacturing operations. Walmart — the largest retailer in the United States — vowed in 2021 to spend an additional $350 billion through 2030 on items made, grown, or assembled in the U.S., for example.

6. Transportation costs. When deciding whether to onshore manufacturing operations, executives should weigh the benefits of lower international labor and operating costs against the greater cost of ocean freight shipping. Trans-Pacific shipping costs increased fifteenfold in 2021 from January 2020 levels, and while transportation costs have declined as the economy has slowed, the supply chain volatility of the last few years is front of mind for managers.

The growth in U.S. manufacturing-facility construction will continue as businesses see value in focusing on aspects of risk mitigation, using automation to offset labor challenges, and even building new facilities that emit less carbon. This reshoring renaissance is just beginning; it takes a few years to plan, permit, and acquire property for new-facility construction.

Now is the time for manufacturing executives to understand how their businesses fit into this renaissance and determine whether reshoring is right for them. Using the factors above as a framework, executives should consider these five key questions:

1. Can a new facility for my products that uses advanced automation offset higher labor costs?
2. Does my current supply chain involve countries that present uncertainty due to geopolitics?
3. Will the carbon emissions from my company’s current supply chain improve significantly if we build a new facility powered by renewable energy and localize production?
4. Are my stakeholders, especially customers, asking for domestically manufactured products?
5. Is the cost savings that comes with eliminating transoceanic shipping enough to balance out a likely increase in labor and new-facility construction costs?

By seeking answers to questions such as these, the C-suite can better navigate their company’s operations through a changing global production landscape.