As manufacturing returns from overseas, where will it land?
One of the surest methods for equitably reinforcing the U.S. economy is through the repatriation of overseas manufacturing jobs. Long desired, reshoring actually started in earnest prior to the pandemic, though it certainly gained momentum last year. There are many considerations that companies need to look at when deciding where to locate.
First, why is reshoring occurring now? It began in earnest as corporations reexamined the cost analyses of manufacturing in Asia and shipping to North America following the recent U.S.-China tariff war. Reduced federal tax rates on corporate income and repatriation earnings as a result of the 2017 tax rewrite were another catalyst.
While the reshoring ball was already rolling prior to 2020, the biggest impetus came when COVID-19 laid bare many of the inefficiencies and sub-surface fractures in the global supply chain. Pharmaceuticals and other medical supplies hit roadblocks, but virtually every industry saw stalls as evidenced by Apple, Microsoft and other companies deferring product launches due to delays at offshore manufacturing plants.
As companies look to bring their operations back across the ocean, there are a number of factors they should consider before relocating. A new report from Savills identifies the primary issues that businesses should focus on when creating a relocation strategy.
When determining which space will best serve a user’s manufacturing, warehousing, logistics and/or fulfillment needs, the first question is whether to lease or buy. Many industrial users are opting to enter into sale-leasebacks right now as a way to free up capital in a tight lending environment; depending on the user’s needs, however, now may be the time to buy.
Industrial real estate was an attractive investment prior to the pandemic and has been one of the few stable asset classes throughout the crisis. While owning rather than leasing may be a better long-term investment, viable properties in the right locations are in short supply.
The Savills report recommends “middle-mile” properties as a good manufacturing base and investment vehicle. Locating close to but not deep within primary logistics routes avoids the headache of breaking into a crowded infill market and may come with lower labor costs.
Access to labor is a motivator—if not the primary criterion—for where a business may want to relocate manufacturing operations. Prospective locations should have a robust and sustainable workforce within a commutable radius.
Automation is the other side of the coin here. Access to low-cost labor is what drove manufacturers overseas in the first place, but that cost competitiveness has eroded, with China’s unit wage costs rising 285 percent over the past 20 years, per Savills research. Domestically, the opposite has been true as robotics and artificial intelligence have been on the rise.
Opening an automated factory on U.S. soil will require a significant upfront capital expenditure, but it may pencil out for some manufacturers. There are political considerations of going this route as municipalities and local populations may be resistant to a manufacturer setting up shop without offering new jobs.
Assembling widgets thousands of miles away from the end consumer made financial sense when the costs for labor and transport were lower than if those operations were in North America. Rising wages in China—as well as the stress points that the pandemic revealed along this attenuated supply chain—has shifted this dynamic.
While reshoring manufacturers will find relief from headaches such as poor quality control, intellectual property theft and the slower responsiveness inherent in doing business across multiple time zones, they still need to examine the best strategy for tapping into our ever-more-sophisticated logistical infrastructure. Whether moving raw materials to manufacture/assembly or distributing finished products to the consumer, efficiency in freight operations is a top factor when sourcing a site.
Businesses should examine how a North America-based manufacturing operation will impact just-in-time inventory levels. How can the road, rail, barge, intermodal and other points along the transportation infrastructure best help their efforts?
State governments are fully aware that the long-awaited return of manufacturing jobs has begun and most now offer incentive programs to attract these users to locate within their borders. These can take the form of infrastructure offsets and grants, as well as relief from sales, property and/or income taxes.
Additionally, there are numerous state and federal initiatives that address energy and waste management. This includes, for example, access to competitively priced utility sources that come with a level of reliability that was perhaps lacking in their previous overseas location.
Energy sustainability has also grown more robust in the years since these corporations first decided to move their operations overseas. Wind and solar have both become more widespread and cost competitive. Since many factories can be energy hogs, this is sure to be a key concern for businesses looking to relocate.
The road to reshoring has widened in recent years and the COVID-19 pandemic has put many more companies onto that path. But before they commit to a new, North American location, these manufacturers should carefully consider all the elements that will drive their future success for years to come.
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