Fresh government support will boost some US industries, but deep macroeconomic forces will keep US manufacturing expensive, making it difficult for most industries to substantially reshore
US manufacturing is likely to experience only a partial revival, contained to strategically important sectors such as semiconductors, EVs, energy, and communication. US B2Bs should pay attention to opportunities arising from the new government support in these areas.
Nearshoring and supply chain diversification are also alternatives to evaluate, likely offering better value than reshoring production directly to the US and Europe. The costs of this shift will nonetheless drive elevated global inflation in coming years.
Overview
Since the US-China trade war began in 2018, talks of decoupling and moving production back to the US have grown. In recent months, these discussions have become more salient and more urgent, as the Ukraine war and China’s zero-COVID lockdowns highlighted the political risks to Chinese production. More broadly, the shortages of 2021 demonstrated the risks of long, overstretched supply chains. A UBS survey in January 2022 found that 90% of C-suite executives surveyed were planning or in the process of moving operations out of China, and a Bloomberg analysis found mentions of reshoring, friendshoring, or nearshoring in corporate presentations have tripled since Q3 2021.
Until recently, it was unclear if this was just talk. US factory construction spending growth remained weak up to June, with the recent increase driven almost solely by construction cost inflation. However, more forward-looking measures such as nonresidential building starts shot up an incredible 79% in July, driven by megaprojects such as the US$ 10 billion Intel plant in Ohio and a number of Liquid Natural Gas (LNG) facilities. The CHIPS and Science bill and the Inflation Reduction Act, both passed by the US Congress in August, have encouraged a wave of further investment plans, including chip plants from Micron (US$ 40 billion) and Qualcomm (US$ 4.2 billion), and new factories from Honda/LG (US$ 4.4 billion), FirstSolar (US$ 1 billion) and Corning/AT&T (US$ 500 million).
Our View
There are some strategic gains to be had from reshoring. Relocating production to the US will, in some cases, allow MNCs to benefit from lucrative, new policy support. The US’s world-beating R&D capabilities also give it an edge over China in capital-intensive, cutting-edge technology. In a highly uncertain demand environment with high shipping costs and unpredictable shortages, keeping production close to end markets could also allow businesses to be more agile in responding to disruptions and shifts in demand.
However, the US will not be the only beneficiary of the supply chain rethink in coming years. Alternative ASEAN markets, such as Vietnam, offer a more stable and business-friendly geopolitical environment than China, leading to what some have dubbed the “China Plus One” strategy. Elevated shipping costs going forward will also make nearshoring desirable (i.e., moving production closer to end markets, such as to Mexico).
Still, costs remain relatively low in China, making it expensive for MNCs to relocate production. We are forecasting further renminbi depreciation, which could exaggerate this cost advantage. If China’s current high savings growth model continues, its labor costs will remain disproportionately low. Meanwhile, the US dollar’s role as the world’s reserve currency is deepening, with the EU and China unlikely to present a viable alternative for the foreseeable future. This will continue to drive a strong dollar, making it disproportionately costly to produce tradable goods in the US. These pressures will be compounded by tight labor markets and tighter monetary policy in the US, which we expect to last, as the labor force shortfall creates inflation, forcing the US Federal Reserve into a more hawkish position.
For these reasons, the revival in US industry will be partial, contained to strategic industries supported by policy—primarily semiconductors, EVs, energy, and communication. Outside of these industries, there are no easy answers on supply chain strategy. While there are clear benefits to diversification and nearshoring, at every stage, gains in resiliency and shipping costs need to be carefully weighed against the tradeoffs on labor and operating costs. FrontierView clients can review our research framework on thinking through these questions here.
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