FOMO on Reshoring? 5 Reasons Behind the Recent Reshoring Spike in the U.S.
For decades, companies have looked abroad, mainly to Asia, to lower labor and operational expenses. The additional costs for shipping, tariffs, and logistics were thought by many, to be outweighed by the operational flexibility and operational cost reductions that outsourcing provided. That trend, however, has slowed to a snail’s pace post-pandemic, and for many, holds more risk than benefit. Being a one-stop-shop has a nice ring to it. But it hasn’t always been the most cost effective until now. The Ukraine War, supply chain resiliency, and sustainability are just of few of the many factors U.S. executives are turning to reshoring now more than ever and bringing production stateside.
1. Maintain Competitiveness
Contract manufacturing has grown significantly in recent years because of reshoring. One of Summit Advisory’s former clients has a tremendous amount of diverse equipment to manipulate metal. They can bend, weld, cut, shape, power coat, and perform assembly all under roof. They have two facilities with extraordinary capacity to do a “long-run,” meaning they can easily manufacture 100,000 parts as opposed to a smaller shop’s capabilities. They also have the capacity to do multiple parts in one spot or construct the entire piece and assemble it. The number of companies able to do this have been shrinking. They are being bought up by private equity groups and other strategics in the industry. The expectation is this consolidation trend will continue through reshoring. There are going to be a few key players with the financial wherewithal to be able to identify where the market is and what is the demand for right now. Businesses who typically may not have been acquisition targets in the past are potentially holding more value because there’s not many options. This is where contract manufacturing brings so much valuable in maintaining competitiveness. Or even others, like co-packers, who might produce parts for other companies but who also might produce one and sell it as their own brand.
2. Issues in Sourcing Components
This is not an unfamiliar reality. Businesses who normally have their products manufactured in China or overseas or from different companies are experiencing the negative domino effect supply chain issues are triggering. Apple is just one of many companies adding manufacturing operations domestically. According to an article in the Wall Street Journal, “Of Apple’s more than 180 suppliers, 48 had manufacturing sites in the U.S. as of September 2021, up from 25 a year earlier.” When we look at contract manufacturers, they tend to be smaller in size or limited to the scope of what they can do. One might specialize in press work, but not stamping. If a company needs a part made, they must go to three, four, or five different manufacturers to make the one piece of equipment they’re looking for. And with rising shipping costs and product delays, the once inexpensive price tag associated with doing business this way is losing its luster. Another company might have nine out of the ten parts it needs for a product. But since time is certainly money, waiting for the last part from the supplier who is experiencing delays is a bigger risk to the business than paying to have it made domestically. Yes, some margin might be lost, and customers might be charged more in the short term, but having a finished product to put forth is always better than potentially none at all. Hence, the emergence of reshoring – to be a one-stop-shop with a process not entirely dependent on other entities – is gaining momentum.
Companies are reshoring to the US not only because of supply chain issues, but also because it is logical to set up house where your demand is. And that’s in the US. We see this especially in the car industry. Tesla, Ford, General Motors, and others are moving their manufacturing operations to the US to be amid their demand. In fact, as of October 2022, “Schneider Electric and Deere & Co announced they will be investing $76 million to expand factories and some production work to the United States from China.” Senior Vice President Ken Engle, states, “To keep pace with the near and long-term demand for our products and to plan for the future we must invest in our supply chain capabilities.” For these companies to lead and sustain the rise of electric vehicles with their respective rebates, they must secure local suppliers. There are large scale contract manufacturers who do work for the “Big Three” car companies out of Detroit. Historically, they don’t make all their own parts – just like Harley Davidson. They are using other companies – in some cases multiple tiers of other companies – to produce the parts needed to then assemble the final product of their vehicles. This as an opportunity for anyone who wants to buy. We predict it’s only going to get more expensive to operate in this way. Especially with rising interest rates.
In the contract manufacturing world, companies are acquiring other businesses simply for labor through reshoring. Machinists are an aging population who are either entering or already in retirement, making them harder to find. They are a group with tremendous skill, and it takes time to acquire those skillsets. So, in some cases acquisitions with these roles already staffed are a better option. It saves companies the time needed to individually recruit for these positions and/or train people for them. Supporting American jobs is one of the driving forces behind Walmart’s reshoring initiatives as well. Their “$350 billion investment in 2022 to have products made, grown or assembled in America will support over 750,000 U.S. jobs as well as assure supply, meet customer expectations, spur innovation and develop small and diverse suppliers.”
Real estate is currently expensive to purchase. So, if a company can acquire another business through reshoring with an already existing footprint to expand and in turn can also utilize their equipment, labor and new customer lists, it would be a logical decision than trying to build from scratch. Everything can then be under one roof. Entry level and smaller machine shops normally have reduced capacity, which impacts their capabilities. They haven’t grown or expanded because they either don’t have the capital to do so on their own or haven’t had the forethought on how additional pieces of equipment and square footage could solve more needs. This is where we’re seeing more and more focus on private equity groups gobbling up this middle ground of competitor and who are now looking for add ons – what other needs can the operation fulfill? If the need is copper fabrication, then they will expand by incorporating that specialized shop and learning how to grow them, financially support their work, and as a result take advantage of that. Accelerated acquisitions are forecasted for these reasons even if interest rates go up. Reshoring is just a smarter and more effective move all around.
This article was written by Summit Advisory, a Lower Middle Market Investment Bank, based in Pennsylvania. Summit advises businesses through growth challenges and guides those looking to buy or sell.