It’s time for U.S. factories to return

The Chips and Science Act that President Joe Biden signed earlier this month is the latest indication the planets are aligning for a return of manufacturing to the United States.

Proponents have pushed for so-called reshoring for years, but it has never panned out. With the supply chain crisis still fresh in people's memories, this time is different. If reshoring doesn't become a significant trend over the next decade, it never will.

To ensure this return of production isn't haphazard, there needs to be some coordination, and it doesn't have to be by the government.

"Resiliency" is the buzzword making the rounds at corporate boards. This is a direct reaction to supply chains that broke down during the pandemic and injected a nasty bout of inflation into worldwide economies. Industrial production--just like food at a restaurant--is much better when it's made locally for the local market.

"Making your product closer to your customer is a very good thing in terms of removing some of the unknowns from your supply chain," said Daniel Swan, co-leader of Mc-Kinsey & Co.'s operations practice. "I think this is going to be something very real."

The advantages of bringing back production include significant benefits for the environment--every environmental group should be beating the drum loudly to encourage local production for local consumption--and even an argument for national security: computer chips and health-care equipment come to mind.

In the 1980s, the globalism idea seemed to make sense: Build one huge factory where a gazillion widgets could be made at the lowest cost, which at the time usually meant China, and then ship them around the world.

Then there was this drumbeat: Everybody needs to send their children to college because the new-economy jobs will render blue-collar work obsolete. The tedious, repetitive, sometimes dirty work of factories would be done by other countries with lower skills and cheap labor.

The number of manufacturing jobs reflects this school of thought. They peaked in 1979 at nearly 20 million and dropped to just north of 11 million in 2010 before stabilizing at just above 12 million. In 2000, the year before China entered the World Trade Organization, the U.S. imported $100 billion of Chinese goods. That jumped to $500 billion last year, and the trade deficit with China surpassed $350 billion.

It took a global virus to wake everybody up to the fact that the U.S. doesn't make enough products at home. The big lesson learned from the pandemic and the scramble for supplies that ensued was that the weakest link in the chain is maritime shipping. These huge vessels are mostly controlled by a few large companies, and because it takes years to build a container ship, it's impossible to ramp up capacity in the short term. That leaves price as the only market mechanism to manage a surge in volume.

The cost to ship a 40-foot maritime container from China to the U.S. West Coast jumped fivefold to more than $20,000 during the worst of the shipping crisis last fall, according to Freightos, an online shipping marketplace.

Once the ships reached their destinations, the U.S. ports and the supporting transportation systems weren't nimble enough to handle a surge of imported goods. The delays caused companies to put in extra orders to ensure they received supplies and introduced the average person to an obscure logistics term called the bullwhip effect. This is why inventories are so mismatched.

Making the supply chain more resilient is a motivating factor for relocating production close to the end market. China is now the world's factory, and the base of low-cost suppliers that has been built up over the decades to support manufacturing in Asia has no equal.

Still, the Chips Act is incentivizing companies like Intel Corp. and Taiwan Semiconductor Manufacturing Co., which are planning to build huge semiconductor factories in Arizona. Texas Instruments Inc. already broke ground in May on a chip plant in Texas. The Inflation Reduction Act will spur investment in electric vehicles and the parts to supply those.

Generac Holdings Inc., a power generator maker, has shifted some production to its factory in Wisconsin and opened a small plant in Georgia that it's planning to expand. Premier Inc. teamed up with DeRoyal Industries Inc. to make hospital gowns in Tennessee in a plant that Premier CFO Craig McKasson called "the most automated gown manufacturing capability in the world" during a Raymond James conference earlier this year.

This shift of production back to the U.S. won't work without keeping labor costs in check. The solution isn't to drive down U.S. wages or to erode health and retirement benefits, which was the corporate playbook for decades. The answer is to employ robots to perform the repetitive and mundane work at a low cost while paying well the people that will always be needed in a factory.

Robots can do many more tasks (although most people overestimate what machines can do) with advances in vision, mobility, dexterity of end-of-arm tooling and machine-learning software. With robotics and tools like 3D printing, production is more nimble, allowing shorter runs and a larger variety of designs. Adding it all up (and toss in savings on freight expense and time), the cost should be similar whether a product is made in Vietnam or Virginia.

This will be new production and a net gain of jobs. The real challenge will be having enough trained people to work in these new factories.

A manufacturing renaissance isn't guaranteed. It's just that the field has been tilled, fertilized and watered to create the perfect conditions for this to grow. But this potential manufacturing garden must be seeded with hundreds of projects from companies making that difficult decision to build a redundant factory in North America. This will take time and money to germinate.

There's always the risk that as the pandemic fades and shipping costs trend downward, the memory of the supply chain pain will also recede. That's less likely, though, with continuing disruption from Russia's war on Ukraine and harsh lockdowns in China as its leaders doggedly pursue a zero covid policy.

Companies will need to work with community colleges and high schools to secure workers with the skills they need. It will take coordination to ensure the region's not left without key components in the supply chain. Trade groups, such as the National Association of Manufacturing, could take the lead for identifying those gaps or bottlenecks in the supply chain and lobby manufacturing to invest to meet that demand.

Regionalization is also a word that should be buzzing at company board meetings. Mexico has become a hot spot of late for locating factories to meet U.S. demand. The Americas as a region can benefit from a move toward more local production. Most of the ingredients exist--from technology to low-cost labor to the raw materials--for producing widgets with content mostly from within the Americas. For cross-border issues, the federal government obviously would have to play a role. What is lacking is coordination, stable governments and steady currencies.

The pandemic, supply chain snarls, government action and automation have lined up to give reshoring its best opportunity. If U.S. companies miss this window, it will most likely close for good.

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