Homebound Winners: Who will Benefit from the Reshoring Mega-Trend?
In the past several years, the secular trends of deglobalization and “reshoring,” aka bringing manufacturing production home, have been gaining in popularity. Now, this trend is accelerating, spurred by the Biden administration’s investments and tax initiatives, as well as by its increasingly negative stance towards China’s advanced technology ambitions. As with all trends, reshoring is also expected to have its winners and losers. While the losers are mainly the offshore production sites, the winners – apart from the U.S. economy – can be found in almost all key industries. Globalization Rewind Starting in the seventies, the opening of the developing markets (and China in particular) to international trade and finance led to a strong move to the globalization of production and supply chain. U.S. manufacturers strongly benefitted from offshoring – the outsourcing of production to other countries – in terms of cutting costs, improving efficiency, and reaching new markets. However, as nothing is perfect, so, too, was globalization. Outsourcing harmed the U.S. economy, leading to the massive loss of manufacturing jobs, the deterioration of domestic capabilities, and the expansion of trade and budget deficits. The offshoring companies themselves became dependent on foreign suppliers and were exposed to risks such as intellectual property theft, exchange rate fluctuations, political instability, natural catastrophes, and others. These harms and risks became apparent after the 2008 financial crisis and particularly during and after the Covid-19 pandemic, which underscored the grave vulnerability of globalized supply chains. In between the two global disasters, trade disputes between the U.S. and China led to increased trade barriers, creating adverse conditions for globalized supply chains; the pandemic as much as severed these chains. Source: Capital Group It is now apparent that geopolitical tensions, natural disasters, and economic uncertainties will continue to pose a constant threat to globalization. Meanwhile, as the clash between the U.S. and China over access to cutting-edge technology continues to heat up, the Biden administration is increasing efforts at keeping the intellectual property and jobs on the home shore, whether by limiting Chinese access to tech or by supporting reshoring companies economically. Homebound Production There are obvious benefits of reshoring for the U.S. economy, such as reducing unemployment, increasing skilled workforce ranks, fostering productive communities, and cutting U.S. trade deficits. To give just one example, 38% of new jobs created in 2022 were attributable to reshoring operations. But reshoring also has many advantages for the companies that bring their operations home. Source: ETF Stream These companies can now actually cut costs by producing in the U.S. While a decade or two ago, much lower wages in the offshore production countries outweighed many other considerations, since then, employee costs abroad have risen dramatically, as well as the costs of transportation, quality controls, protecting intellectual property rights, and more. At the same time, shorter delivery times, skilled labor availability, and reduced carbon footprint become more and more important. Basically, offshore production has become much less justified economically than a decade ago, while the risks of long and complex supply chains have become substantially more acute. Reshoring is a costly process, and policymakers are aware that most businesses need support in navigating its complexities. The government’s tax and investment support of American businesses is becoming increasingly more pronounced, with the introduction of the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the Chips Act, as well as other domestic manufacturing initiatives, which are expected to continue to stand as long-term, secular drivers of reshoring. According to the latest CEO survey by Kearney, a leading global management consulting firm, “96% of CEOs are evaluating reshoring their operations, have decided to reshore, or have already reshored, an increase from 78% in 2022.” Moreover, Bank of America analysts have noticed that mentions of “reshoring” in companies’ earnings transcripts are rising faster than mentions of “Artificial Intelligence (AI).” And the Winners are… Thousands of U.S. businesses from various industries are investing in opening or expanding their domestic production and sourcing of supplies and inputs. They are finding support from the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the Chips Act, which together will introduce over $2 trillion in new federal spending over the next ten years, intended to improve U.S. economic competitiveness, innovation, and industrial productivity. Source: TEMA ETFs Technology firms like Intel ( INTC ), Micron ( MU ), Texas Instruments ( TXN ), Taiwan Semiconductor ( TSM ), and others, are the direct beneficiaries of the Chips Act, which offers grants to companies expanding their semiconductor-producing […]
