“Resilience” is the buzzword that’s making the rounds on corporate boards. This is a direct reaction to supply chains that collapsed during the pandemic and injected bad inflation into global economies. When examining the root causes of the outage, this should lead to the conclusion that industrial production – much like food in a restaurant – is much better when produced locally for the local market.
“Bringing your product closer to your customer is a really good thing to take some of the unknowns out of your supply chain,” said Daniel Swan, co-head of operations practice at McKinsey & Co. “I think it’s going to be something very real.”
The benefits of resuming production go beyond simply diversifying the source of components and shortening supply chains, a key ingredient in making supply chains more resilient. There are significant environmental benefits – every environmental group and ESG supporter should beat a loud drum to encourage this trend of local production for local consumption – and even a national security argument: computer chips. and healthcare equipment come to mind.
In the 1980s, the idea of globalism seemed to make sense: to build a huge factory where a billion gadgets could be manufactured at the lowest cost, which at the time usually meant China, and then ship them around the world. Empty industrial parks were no problem, it was thought, because the United States could simply import these cheap goods and pay for them with a combination of wages and debt from the service economy. And then there was this drumbeat: everyone needs to send their kids to college because new economy jobs will make blue-collar work obsolete. The tedious, repetitive and sometimes dirty work of factories would be done by other countries with less skills and cheap labour.
The number of manufacturing jobs reflects this school of thought. They peaked in 1979 at nearly 20 million and fell to just north of 11 million in 2010 before stabilizing at just over 12 million. In 2000, the year before China joined the World Trade Organization, the United States imported $100 billion worth of Chinese goods. That quintupled to $500 billion last year, and the trade deficit with China topped $350 billion.
It took a global virus to wake everyone up to the fact that the United States isn’t making enough products at home. And the big lesson learned from the pandemic and the ensuing rush for supplies is that the weakest link in the chain is shipping. These huge ships are mainly controlled by a few large companies and since it takes years to build a container ship, it is impossible to increase capacity in the short term. This leaves price as the only market mechanism to manage an increase in volume, and it quickly became a stark reality. The cost of shipping a 40ft shipping container from China to the West Coast of the United States increased fivefold to more than $20,000 at the height of the shipping crisis last fall, according to Freightos, a market in online shipping. Not to mention that the huge container ships criss-crossing the oceans spit a trail of carbon and waste in their wake.
Once the ships reached their destinations, American ports and supporting transportation systems were not nimble enough to handle a surge of imported cargo. The delays caused businesses to place additional orders to ensure they received supplies and introduced the average person to an obscure logistical term called the bullwhip effect. This is the reason why inventories are now so unbalanced.
Making the supply chain more resilient is a major motivator to relocate production near the end market. It is not an easy task. China is now the factory of the world, and the low-cost supplier base that has built up over decades to support manufacturing in Asia is unmatched. Yet the Chip Act encourages companies like Intel Corp. and Taiwan Semiconductor Manufacturing Co., which plan to build huge semiconductor factories in Arizona. Texas Instruments Inc. already inaugurated a chip factory in Texas in May. The Cut Inflation Act will boost investment in electric vehicles and the parts needed to supply them. Although government subsidies can incentivize action, the shift to US manufacturing must be profitable to maintain the trend.
Generac Holdings Inc., a generator set maker, moved some production to its Wisconsin plant and opened a small plant in Georgia that it plans to expand. Premier Inc. has partnered with DeRoyal Industries Inc. to manufacture hospital gowns in Tennessee at a facility that Chief Financial Officer Craig McKasson called “the most automated gown manufacturing capability in the world” during a Raymond James lecture earlier this year. The alignment of the planets would not be complete without automation. This shift of production to the United States will not work without controlling labor costs. The solution is not to drive down wages in the United States or erode health and retirement benefits, which has been corporate strategy for decades. The answer is to employ robots to do repetitive, mundane work at low cost while paying well for the people who will always be needed in a factory. This was not possible before because the technology was mostly limited to automating heavy assembly processes.
This has changed. Robots can perform many more tasks (although most people overestimate what machines can do) thanks to advances in vision, mobility, dexterity of arm’s length tools and machine learning software . With robotics and tools like 3D printing, production is more agile, allowing for shorter runs and greater variety of designs. Add it all up (and save on freight and time), the cost should be similar whether a product is made in Vietnam or Virginia.
It is important to note that this will be new production and a net gain in jobs. The real challenge will be to have enough people trained to work in these new factories.
A manufacturing revival is not guaranteed. It’s just that the field has been plowed, fertilized and watered to create the perfect conditions for it to grow. But this potential manufacturing garden must be seeded with hundreds of projects from companies making the difficult decision to build a redundant plant in North America. It will take time and money to germinate.
There is always the risk that as the pandemic fades and shipping costs come down, the memory of supply chain pain will also fade. It is less likely, however, with the continued disruptions of Russia’s war on Ukraine and the severe lockdowns in China as its rulers stubbornly pursue a zero Covid policy. Relocation activity should not be random. Although individual companies must make the final decisions on their moves, it makes sense to have supplier groups around manufacturers. Companies will need to work with community colleges and high schools to find workers with the skills they need. It will take some coordination to ensure the region is not left without key components in the supply chain. Trade groups, such as the National Association of Manufacturing, could take the lead in identifying these gaps or bottlenecks in the supply chain and press manufacturing to invest in meeting this demand.
Regionalization is also a word that should be buzzing around corporate boards. Mexico has certainly become a hot spot lately for setting up factories to meet US demand. The Americas as a region can benefit from a move towards more local production. Most of the ingredients exist – from technology to low-cost labor to raw materials – to produce widgets with content mostly sourced from the Americas. For cross-border issues, the federal government would obviously have a role to play. What is missing is coordination, stable governments and stable currencies.
The pandemic, supply chain issues, government action, and automation have all aligned to give relocation its best opportunity. If American companies miss this window, it will most likely close for good.
More writers at Bloomberg Opinion:
• Robots are key to winning the productivity war: Thomas Black
• Factory extensions are not written in stone: Brooke Sutherland
• Consumers are the losers in a booming industrial economy: Conor Sen
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, it covered US industrial and transportation companies as well as Mexican industry, economy and government.
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