Hard lessons learned from the 2020 pandemic taught us that we needed to rebuild and re-establish our U.S. supply-chain ecosystem. The systemic shock to our global supply chains left us with bottlenecks, shortages and an acute awareness of our overdependence on imports.
It is essential to understand how we got to this weakened condition so that we can restore self-sufficiency, re-establish supply-chain resilience and increase competitiveness. Doing so will provide opportunities for in-house and commercial heat treaters since many products now imported are in heat-treating-intense industries. For example, 35% of reshoring has been of transportation equipment.
Just after World War II, the U.S. dominated world manufacturing. In 2020, we were unable to produce the personal protection equipment (PPE) needed to deal in a timely manner with the COVID-19 pandemic.
In the mid-to-late 1940s, the nation produced half of the world’s manufacturing output. That is much higher than the 28% China – the “world’s factory” – produces today. Currently, the U.S. imports at least half of what we consume. We have major supply-chain gaps like PPE, pharmaceuticals, electronics and rare-earth minerals.
How did this trend occur?
After WWII, U.S. dominance was based on a huge buildup for the war and on other industrial countries having their production capabilities destroyed. Our trade surplus declined to zero by 1979.
Initially, the U.S. sacrificed its healthy manufacturing economy to help the world recover from the war and, later, to aid low-income nations in achieving democracy and middle-class status. However, we failed to establish a clear industrial policy. We instead effectively have had a de-industrialization policy that undermines the strength of U.S. manufacturing. Consequently, our trade deficits have been increasing since 1979, recently averaging about $800 billion per year.
A Lack of Competitiveness
The driving force behind the ballooning trade deficits is high U.S. manufacturing cost. U.S. Free On Board (FOB)¹ price is too often 20% higher than in other developed countries and 40% higher than in developing countries. This lack of competiveness led to companies sourcing offshore to meet demand for low-priced goods.
How can we re-establish resilient U.S. supply chains?
Current conditions warrant shortening supply chains to reduce risk and increase resilience. Fortunately, the rate of reshoring by U.S. companies and Foreign Direct Investment (FDI) by foreign companies has soared from 6,000 jobs per year in 2010 to 190,000 in 2017.
For example, power-tool maker Stanley Black & Decker began reshoring manufacturing from China in 2017.
“When we purchased Craftsman in 2017, we were determined to revitalize this iconic U.S. brand and bring back its American manufacturing heritage,” Stanley Black & Decker President and CEO Jim Loree said.
With a $31 million investment, they opened a new manufacturing plant in Fort Mill, S.C., creating 500 new jobs. In 2019, they opened a 425,000-square-foot manufacturing plant in North Fort Worth, Texas, creating an additional 500 jobs and producing a variety of Craftsman-brand mechanics’ tools. On Nov. 4, 2020, Stanley Black & Decker announced it would permanently close a factory in China that had been operating for 25 years. The report cited “changes in the overall market environment.”
Coronavirus Accelerated the Trend
A recent report by the United Nations Conference on Trade and Development (UNCTAD) said, “The COVID-19 outbreak will potentially accelerate existing trends of decoupling and reshoring driven by the desire … to make supply chains more resilient.”
According to a February 2020 Thomas study, 60% of U.S. manufacturers said business was impacted by the coronavirus and 28% were seeking alternative domestic sources of supply to increase resiliency. A May 2020 follow-up study showed 64% of respondents were likely to reshore to North America, a 10% increase from March. A key finding from a separate June 2020 study showed 75% of respondents expected a significant or moderate increase in U.S. components.
In November 2020, Schneider Electric announced a $40 million investment to strengthen its U.S. supply chain with new technologies, new production lines and workforce development. The company cited critical vulnerabilities that were revealed by the unprecedented COVID-19 disruption. The U.S. investment is part of a larger strategic approach to increase resilience and flexibility and reduce risk.
Quantifying the Costs and Risks
This positive trend has been driven by rising Chinese wages, U.S. automation and lean efforts, and companies revising their sourcing decision metrics. The revision is often to use total cost of ownership (TCO) instead of FOB or landed cost (typically FOB price plus duty and freight). The TCO Estimator is free to use online.
TCO analysis helps companies objectively quantify, forecast and minimize total cost. It takes into account: freight and duty; travel expense and time; inventory carrying cost; warranty; intellectual-property (IP) risk; impact on product innovation from having manufacturing distant from engineering; and the losses from stock-outs due to long delivery times.
TCO quantifies many other factors, such as those associated with the risk of supply-chain shocks or disruptions caused by natural disasters, political unrest or even a pandemic. Using this information, companies can better evaluate sourcing, identify alternatives and even make a case when selling against offshore competitors.
Fig. 1. Chinese price (% of U.S.)
Figures 1, 2 and 3 are based on the first 200 TCO Estimator users who, from 2010 to 2017, compared a Chinese source to a U.S. source for a product. In Figure 1, the horizontal axis is Chinese price as a percentage of U.S. price. The vertical axis is the percentage of cases. For cases to the left of the vertical 100% line, China has the lower price. To the right, the U.S. has the lower price. Chinese FOB price averages about 70% of U.S. price. Looking at this graph one might conclude that reshoring is rarely feasible.
About 8% of imports from China were more profitably sourced here, based on FOB price. The 8% rises to 32% if the decision is based on TCO, the red curve. With 15% Trump tariffs also added, the share rises to 46%, the yellow curve (Fig. 2). Reshoring is feasible.
Fig. 2. Chinese price and TCO (% of U.S.)
How large are the hidden costs?
Various studies (Fig. 3) show the magnitude of the “hidden costs,” which are the difference between FOB price and TCO (average about 20%) and are consistent with how much the TCO curve is to the right of the price curve in figure 2.
Universal use of TCO, alone, would gradually reshore 20-30% percent of what is now imported. The reshoring trend has been strong enough to offset slowed but continued offshoring and thus limit the trade deficit’s growth. If the U.S. manufacturing industry eliminated the trade deficit, it would result in a 40% increase in manufacturing and add 5 million more manufacturing employees.
The U.S. needs to double the rate of reshoring and FDI to achieve that goal in 20 to 30 years. Our biggest obstacle is workforce development. There is a mismatch between the skills workers have and the skills that are needed by industry. Some experts predict shortfalls of 2 million or more due to weak recruiting, relative to high rates of Baby Boomer retirement. We need to reskill and upskill the manufacturing workforce, but achieving that goal will take decades.
Engaging the Whole Team
To reach a much higher level of self-sufficiency, all segments of society must re-engage.
- Consumers: Seek out and demand made-in-USA products.
- Educators: Encourage STEM studies and programs that prepare young people for careers in advanced manufacturing, including high-tech skills like toolmaking, heat treating, programming, engineering and digital competencies. Work closely with manufacturers to develop the skilled workforce needed by industry.
- Retailers: Make made-in-USA products easily accessible.
- OEMs and brands: Use U.S.-made branding to connect emotionally with consumers. Re-evaluate offshoring by using TCO, and invest in skilled workforce and agile manufacturing.
- Contract manufacturers: Use TCO as a sales tool to compete with imports. Invest in workforce and automation to boost competitiveness.
- Technology suppliers: Identify your products that can make U.S. manufacturers competitive. Sell more by helping customers reshore.
- Communities and states: Drive economic growth by attracting foreign suppliers to fill supply-chain gaps.
- The U.S. government: Implement an aggressive industrial policy. Shift educational resources and promotional efforts from producing liberal-arts graduates to apprentices and engineers. Lower the U.S. dollar 20-30%, and implement a VAT (value-added tax). Promote innovation, and require that the innovated products be produced here if the research and development was subsidized by the government (e.g., R&D tax credit).
Here’s an example of how government can implement change. Recently, the government used guaranteed contracting as a catalyst to encourage PPE reshoring. For instance, 3M tripled monthly production of N95 masks after winning two contracts from the Department of Defense. A $75.5 million contract with the federal government motivated test-swab maker S.D. Puritan Medical Products to renovate a factory in Maine to produce foam swabs. The investment led to 150 new jobs.
A $2.5 million government incentive and skilled-workforce availability/training were two of the reasons Nova Steel USA Inc. decided to locate an automotive-parts manufacturing facility in Bowling Green, Ky. The project is expected to create 110 full-time jobs.
The industrial heating industry can help society recognize that we also have shortages in a broad range of metallic products. In-house heat treaters can share this article with plant management and procurement.
See if reshoring makes economic sense for your company. If you or your customer has an opportunity to reshore or wants to find opportunities, contact us.
Check out our podcast with Harry Moser, president of the Reshoring Initiative, to learn more about their efforts and how your business can take advantage of reshoring: https://www.industrialheating.com/media/podcasts