Companies are rethinking their preferred “shoring” prefix. For years, “offshoring” meant minimizing costs and maximizing profit. Then trade tensions and tariffs heightened supply chain anxieties—which were in turn exacerbated by pandemic disruptions.
Combined, those factors have prompted U.S. companies to consider bringing parts of their supply chains home, a process known as reshoring. They’ve also spurred more discussion about nearshoring, which places suppliers in neighboring countries, like Mexico. Both moves reflect companies’ reluctance to depend on suppliers an ocean away.
For manufacturers and their investors, reshoring is not a new idea, but problems caused by COVID-19 have renewed—and amplified—their supply chain concerns. As companies strike a balance between domestic suppliers and low-cost countries, some are questioning the emphasis on reducing cost, at the expense of mitigating risk. Although price still matters, reliability has become a bigger differentiator, and it’s generating new business for some U.S. manufacturers.
At Incline Equity Partners, a private equity firm headquartered in Pittsburgh, reshoring and nearshoring discussions began about three years ago. The pandemic added to Incline’s supply chain concerns—the firm was already “increasingly nervous” about U.S. relations with China, says Jack Glover, managing partner at Incline. “As the owner of these businesses, we want to have control over our supply chain. Our customers feel the same way,” he says, noting that many of Incline’s portfolio companies sell to large U.S.-based customers.
Although trade tensions increased companies’ focus on supply chain risks, the pandemic forced them to rethink their solutions. That’s what Larry Naughton, a corporate attorney at law firm Mintz, has observed while working with private equity firms and other investors. As the U.S.-China trade war heated up, companies considered moving their supply chains from China to other Asian countries with good trade relations. With COVID-19, says Naughton, that analysis prompted business leaders to ask themselves, “OK, we don’t want to trade with a key supplier that’s on the other side of any ocean. Can we find one in the United States?”
At Fifth Third Bank, Chief Investment Strategist Jeff Korzenik sees a resurgence in reshoring discussions among middle-market manufacturers. “We’ve been talking about [reshoring] for a decade, but the interest level today is much higher than it has been the last 10 years,” he says.
TURNING THE TIDE
Incline is among the firms translating that interest into action as it helps one of its portfolio companies, a manufacturer of electrical products, shift production from 100% in China to a minimum of 50% in Mexico.