The second half of the 20th century saw globalization thrive. Supply chains expanded across the globe, pursuing cheap and labor as shipping costs plummeted. China’s ascent flooded the market with low cost goods and global shipping volumes exploded. However, a new era of geopolitical competition has seen globalization become less compelling. Costs abroad have risen as goods have become more complex and supply chains have become more sensitive to disruption. Furthermore, a need for manufacturing reliability in an increasingly uncertain geopolitical environment is pushing more companies to examine manufacturing closer to home.
Unfortunately, bringing manufacturing back to the United States is easier said than done. Companies looking to do it have a whole host of problems to tackle from finding suitable manufacturing sites to finding the labor to man the factories. Companies who solve those problems efficiently will be reshoring winners. However, while it’s tempting to try to pick winners and losers in the reshoring race, we prefer to look upstream with companies enabling the transition. Think picks and shovels during the gold rush. Navigating higher costs of labor and capital are the first steps in bringing manufacturing back from overseas, and challenges like labor shortages and implementing smart technologies are opportunities for enabling firms.
The Need for a Resilient Manufacturing Sector
Calls to reshore manufacturing to the United States are not new, but recent events have amplified their urgency. The COVID-19 pandemic highlighted the nation’s heavy reliance on widespread just-in-time supply chains. The ripple effects of singular components being delayed or unavailable lead to assembly lines coming to a stand still. Critical component shortages and supply chain disruptions, particularly in China, fueled historic inflation and exposed how dependent largely domestic industries were on seemingly simple or generic foreign parts. Low value components, comprising a fraction of the overall good’s value, were putting a whole manufacturing process at risk.
Said another way, the Covid-19 supply chain disruptions were a wake-up call. Of particular concern are goods that are essential to national security like semiconductors or components for power generation. Understanding the critical nature of some of these components, the Federal Government has been enticing companies to bring more manufacturing home. This has been done both with incentives, and by putting tariff pressure on goods manufactured abroad. In particular, programs like the CHIPS and Science Act and the Inflation Reduction Act use subsidies, grants, and tax credits to promote manufacturing and R&D in areas critical to domestic security.
Semiconductors in particular are worth calling out. With semiconductors being essential components for advanced weapon systems, quantum computing, and artificial intelligence, manufacturing domestically means the U.S. can better protect supply chains and intellectual property. Semiconductors are the backbone of the technology economy; the United States can’t be the global technological powerhouse and be dependent on foreign chips over any significant time frame. Manufacturing at home is essential to protect intellectual property from reverse engineering and ensure we build critical human capital in the sector. Furthermore, while nobody wants to think about war with China as being a realistic possibility, being too reliant on Taiwanese or South Korean manufacturing would critically expose the US if any conflict were to occur.
Incoming President Donald Trump is likely to continue pushing for manufacturing to come home. In his first term, he introduced sweeping tariffs on Chinese goods, and he’s likely to ratchet those tariffs higher when he takes office in 2025. It’s important to note that tariffs on Chinese goods are not necessarily a partisan policy – most of Trump’s tariffs on China were maintained during Biden’s presidency, particularly on semiconductors, steel, and electrical appliances. The government as a whole has a broad pro-US stance when it comes to manufacturing, especially manufacturing goods critical to national security. However, while rhetoric and pro-US trade policies are encouraging, there are other issues that companies looking to manufacture in the US have to recon with.
Navigating the Labor Shortage In Manufacturing
Promoting US manufacturing is appealing, but there’s an inherent conflict with the current limited labor supply. On the manufacturing front, estimates from Deloitte and the Manufacturing Institute point to 3.8 million new jobs being created by 2033 and more than half of those going unfilled if labor gaps don’t get solved. Half of those jobs will be created because of retirements in the manufacturing industry, not because of new manufacturing growth. Just sustaining the industry is going to require an influx of new labor, and any expansion will require even more skilled workers. Attracting and retaining talent has become a significant business challenge.
And the shortage of labor isn’t just for factory jobs – the US Chamber of Commerce reported that we currently have 8 million job openings in the US, and only 6.8 million unemployed workers. Even if every single unemployed worker found a job, we’d still have openings that need to get filled! Poaching workers from other industries just won’t be an option for manufacturers. That’s where immigration comes into play. Legal immigration programs are going to be critical for companies to grow their operations. That doesn’t mean companies shouldn’t look to hire and train domestic talent – they absolutely should – but we will need legal immigration as well. This need for labor is going to be even more acute if President Trump’s deportation efforts end up being far reaching. Illegal immigrants are a meaningful part of the current domestic workforce and it’s not clear where labor to replace the current illegal workforce would come from.
A temporary solution to some staffing problems may be for manufacturers to try to retain experienced workers in the field longer. Unfortunately, this is at best a temporary measure. Furthermore, while retaining experienced employees may be beneficial over the short term, the new era of manufacturing is going to require new sets of skills. Companies who wish to bring manufacturing back to the US are going to need to build educational pipelines and on the job training programs for people entering the industry. Non-traditional education programs and on the job training will also become important for existing employees as becomes more automated and technologically productive. It’s essential that the US invest in these training programs. Automation is essential to productive modern manufacturing. It’s imperative that automation shouldn’t be seen as a threat to manufacturing but rather as an opportunity. Shifting to automation should give workers opportunity to learn new skills, become more valuable to their operation, and for everyone within the manufacturing community to prosper.
Manufacturing With Capital or Labor?
The current labor situation in the United States may demand capital intensive businesses with lower labor requirements, but that doesn’t mean setting up a factory is easy. Rather, factories with automation and robots woven into their operations have huge upfront costs and are inherently riskier than operations where labor is the primary expense. If something goes wrong with a labor oriented factory, there are layoffs and cost cuts. In a capital intensive model with significant up front expenses, those cost cuts are harder to come by as a majority of the expense is on equipment and other fixed expenses. Furthermore, the labor for a modern factory is also more expensive. These capital-intensive models need skilled operators, technicians, and engineers who take longer to train and will demand higher wages.
Lenders and capital providers with long time frames and a deep understanding of the markets they’re dealing in will be required to make the capital-intensive, automated models work. Manufacturers will need to access private credit markets to secure loans backed by hard assets and partner up with firms offering deep expertise in their respective industries. Larger corporations can access syndicated bank loans, but the average US manufacturing business is substantially smaller and will need more help. The average US manufacturing business generates just $5.4 million in annual revenue according to the U.S. Small Business Administration – a far cry from Big Tech’s revenue levels. There are about 600,000 small manufacturers in the United States that will need the capital to innovate and improve upon their operations in the coming years as they look to upgrade to modern manufacturing processes or expand their operations to accommodate orders that used to be sent overseas. These capital demands suggest there will be a large opportunity for specialized lenders in the mid market space.
Investing in Manufacturing 4.0
The intersection of automation and industrial labor is set to continue making massive strides, especially as technology investment becomes a larger and larger part of operating budgets. Rockwell Automation published its 9th annual State of Smart Manufacturing report, with over 1,500 global manufacturers, showing technology investment up 30% in 2024 from the year before. These capital expenditures can serve to expand and improve upon quality management systems, automate assembly, and even manage energy usage across a firm’s manufacturing plants. We are in the midst of the fourth industrial revolution, and production processes will inevitably be taken over by or supplemented with smart technology. We believe the companies enabling streamlined production processes are where the investment opportunity is at, regardless of whether or not the factories in a specific industry end up hitting the jackpot.
Take inventory management for example – identifying and storing goods coming into a plant each day is critical to ensuring customers receive shipments correctly and on time and can be easily outsourced to integrated robot systems. Similarly industrial robot applications, originally adopted by automotive companies, are another technology that is being scaled down to be more available to smaller factories. Their deployment across smaller factories across the US will mean workers can be reallocated to more value-added roles in organizations. Firms like Rockwell Automation (ROK) and Teradyne (TER) are at the forefront of industrial automation and aiding the transition to smart factories, while bringing solutions to markets that help factory employees coexist with new automations.
Similarly, smart devices implemented across factory operations are collecting an immense amount of data that needs to be harnessed into actionable insights across all levels of the organization. Major players like General Electric (GE) and Honeywell International Inc (HON) are leading the charge in integrating sensors to monitor equipment health and safety of facilities. Think about industrial IoT sensors that help to monitor changes in the physical environment for ultra-sensitive manufacturing processes, or pressure and vibration sensors used to ensure machinery is operating optimally. Being able to predict when machines likely will need maintenance with these sensors helps to minimize downtime and improve product quality over time. The data from these sensors is even used to produce digital twins of factories to enable manufacturers to simulate and optimize their operations in real time, in turn enhancing product quality for the end consumer.
Above the factory level there will be opportunities for companies to help factories streamline their labor processes. For example, firms like Workday (WDAY) use AI to help human resources departments make sure new hires will have the right skills necessary to make an impact on day one. Efficient allocation of resources starts with making sure you have the right resources to work with in the first place! Ultimately, think beyond just the actual manufacturers – enabling firms that offer the picks and shovels have substantial long-term tailwinds from reshoring’s effect on manufacturing processes.
Look Beyond The Manufacturers
Reshoring manufacturing to the United States presents a complex yet promising opportunity for economic growth and further expansion of our nation’s manufacturing output. While the challenges of labor shortages and initial investments in smart technologies are significant, they are well worth the upfront costs to boost the security of our nation’s manufacturing sector and to protect against future foreign disruption. Automation and advanced technologies will play a critical role in bridging these gaps, enabling factories to operate more efficiently and with higher productivity. We believe investors should explore how technology will supplement the industrial labor force and why automation is essential for continued GDP growth. Ultimately, investment opportunities are immense with companies that are positioned upstream of the actual manufacturers and can benefit from the retooling of the U.S. workforce.