The confluence of political measures and current world events is creating an environment in which manufacturing is moving from China to the United States.
American companies are starting to bring manufacturing back to the United States. While there is no by no means a stampede back home, the rate of return or the “reshoring” of American companies is increasing. There are several reasons behind this trend. Some of them are surprising.
The Trump Effect
Without regard for personal political preferences, the tax cut and deregulation activities engaged in by the administration of President Donald Trump deserve some of the credit for luring manufacturing companies back to American shores.
Additionally, Trump’s trade war with China, which has levied significant tariffs on Chinese goods, is another partial reason that manufacturing is moving from China to the United States. Although it is debatable to what extent this additional taxation on commercial trade has had on this trend, it’s impact on companies’ reluctance to continue to outsource production to the Asian powerhouse is significant.
Manufacturing is moving from China to the United States not just because of the cost
In addition to the fact that Chinese wages have risen significantly over the last decade, China is geographically distant from major US and European consumer markets. It has been made clear in recent times that companies that are currently, and are considering, manufacturing in China face supply chain risk. Disruption in the shipment of goods across the ocean from the Far East have become more the rule than the exception.
In addition to this consideration, companies that have supply chains that are far removed from their markets often under deliver when it comes to customer service, satisfaction, and product response agility. Companies that are thousands of miles away are slow to react to customers’ needs or adjust to changing market demands. Big companies such as Caterpillar, GE, Intel, Under Armour and others are beginning to realize the tangible benefits of being close to their markets.
Another reason why manufacturing is moving from China to the United States is the loss of intellectual property (IP) through theft. Goods produced by American firms have lost significant percentages of their market share due to Chinese imitations that have made their way to consumers. In addition to this, in the telecommunications industry, China’s use and exploitation of spyware through Huawei and other industry vendors has highlighted the commercial and cyber threat risks posed by relying on Chinese-supplied technology. Predatory practices that were a small problem only two decades ago have become major problems today.
Moral and Environmental Concerns
When considering the fact that manufacturing is moving from China to the United States, it is also necessary to take the increasingly important concept of social responsibility into consideration. At last January’s Golden Globe awards, comedian Ricky Gervais pointed out the hypocrisy of Apple CEO Tim Cook exploiting cheap labor in Chinese factories, while earning billions of dollars for himself, his company, and his shareholders. These days American firms can face more than just jokes at awards shows, but also can face rapid social media-driven financial retribution from their “woke” social justice warrior customer base.
Environmental concerns are also behind why manufacturing is moving from China to the United States. The issue of Chinese domestic production and its pollution and sustainability have come into question as of late. It is a well-known fact that China is at the top of the list of the world’s worst polluters. Non-economic factors such as this one now play a major role in how environmentally conscious US manufacturers choose to reorient their production facilities.
Automation makes it possible
In addition to a more friendly business environment in the United States under the Trump Administration, the concept of “local to local” (according to which products are manufactured in or near their main market) is gaining ground among many US companies. For example, Under Armour was an early adopter of this trend when it opened its Manufacturing Innovation Center in Baltimore, Maryland in 2016.
Despite the fact that China has become a less attractive manufacturing venue, the cost to produce goods remains a key site selection criterion for companies. It is difficult for labor-intensive industries, such as footwear and clothing, to return to the United States (where labor costs are comparatively high) without being able to make their required profitability margins. The steady advancement of automated manufacturing technologies, however, will help to make “local to local” production more commonplace.
Moving manufacturing back to the US is a strategic imperative
The trade war between the United States and China did more than just reveal the asymmetry in trade relations between the two countries. It also showed the strategic risk of relying on a geopolitical adversary for 80 percent of the materials that are deemed to be strategically critical. Among these items, for instance, are rare earth elements that are used in the manufacture of aircraft and missile guidance systems, cellphones, and batteries for electric cars. As a result of this state of affairs, mining of rare earth minerals is now taking place in the state of Wyoming. According to mining experts, Bear Lodge Mountain is home to one of the richest and highest-grade rare earth deposits in the U.S., with an estimated 18 million tons of rare earth inside.
Recently, vital drugs and protective masks that have been imported into the United States from China could not be used for the fear that they were manufactured by workers that were infected by the Covid-19 virus. Like the continuing trade war with China, the global Covid-19 pandemic has highlighted the high risk and myopia of the trade policies of the last several decades. Given this consideration, it is speculated that critical drug and medical supply companies will move their manufacturing activities from China to the United States in greater numbers.
Walmart also returns
Among the US companies that led the rush to purchase Chinese manufactured merchandise was Walmart, the world’s largest retailer. As a result of its power in the marketplace and its access to products made with cheap Chinese labor, the Arkansas-based superstore instigated the destruction of small family businesses throughout the United States. Walmart was able to offer consumers prices that no one could compete with.
Ironically, the tide has now turned. For Walmart, bringing labor-intensive jobs back to the United States in the textile, clothing, and consumer products industries is a top priority. The retail giant is actively evaluating plans to motivate the manufacturing is moving from China to the United States to access resources from the US Manufacturing Innovation Fund that it established in 2013. Walmart plans to support domestic manufacturers by purchasing domestically made goods totaling US $250 billion by 2023.
Manufacturers have questions on how big and sustainable is the restructuring trend that is currently taking place?
The answer to this question depends upon which companies’ executives you talk to. Some companies plan on moving some (but not all) of their production from China to the United States, while others are looking to move factories to nearby countries in the region such as Vietnam and Malaysia. Doing this is pursuing a strategy called “regional localism”. That is, factories will not necessarily be repatriated, but may be relocated to or near major markets, whenever it is possible. Still other companies plan to open new factories in China after the Covid-19 pandemic ends.
These things, however, can be subject to change. Political stability is also a major factor in the business decision making process of manufacturing companies. As the epidemic continues to have recurrences in China, unrest among the population may be an important issue to consider. Political unrest that has been currently plaguing major US cities may dissuade companies from locating facilities in the affected areas.