Why US firms are reshoring their business

When Johnson & Johnson got rid of him, James Wyner was deeply hurt. His company, textile finisher Shawmut Corporation, had made many a buck in the past thanks to bilateral supply contracts. But in the mid-1990s, Johnson & Johnson decided to relocate its protective equipment production to Asia in a bid to cut costs.

As a result, Wyner had to let go 250 employees, with his plant in Massachusetts standing empty all of a sudden. "We saw that business go out of the door," he told the business magazine Fortune.

Johnson & Johnson is not an exception. For decades on end, US firms have been shifting their production facilities abroad in pursuit of cheaper materials and labor. Globalization has pushed down costs and widened profit margins considerably for many enterprises, with supply chains becoming the target of fierce competition as firms seek greater efficiency.

Systemic flaws?

As the pandemic rages on, people are now realizing what a strange arrangement that has been. The fast upswing of the US economy, in general, is causing problems for many domestic firms who complain about a severe shortage of raw materials and suppliers. Intermediate products are not available, and microchips are extremely hard to get by. The coronavirus crisis shows that the optimization drive of corporate executives has its flaws.

Dysfunctional supply chains are increasingly becoming a headache especially for small and medium-sized companies which have little clout to set prices. Wherever goods are scarce, prices explode. Producer prices rose by 8.6% in the US in October alone, marking the biggest monthly jump ever recorded. Even bigger enterprises are facing massive hurdles which according to analysts may not go away before 2024.

Consumer electronics giant Apple's revenues tanked by $6 billion (€5.3 billion) in the third quarter. Sports equipment firm Nike reported production stoppages in Vietnam, meaning it will produce 160 million fewer shoes. Toy company Hasbro is complaining about the rapid rise in freight costs, so is meat substitute producer Beyond Meat which has seen its shares falling considerably in recent months.

Homeward-bound

More and more firms are therefore cutting their costs and are reshoring their production to the US. As early as 2019, when the trade spat between China and the US was in full swing, American firms sought to decrease their dependence on the Asian market.

In March of this year, Intel announced it would pump some $20 billion into two new semiconductor plants in Arizona. General Motors is reshoring its battery production to Michigan where a new hub for lithium-based products is to emerge soon. As steel prices have skyrocketed lately, producer US Steel has decided not to build its new $3 billion factory abroad, but in Alabama or Arkansas. Reshoring activities are also being considered by Lockheed, General Electric and Thermo Fisher.

According to industry organization Reshoring Initiative, some 1,800 US firms are intending to reshore their whole business or at least parts of it this year. Some 220,000 new jobs are to be created in the US this way. Over a decade ago, only 6,000 new jobs were created in the country as a result of reshoring activities.

US administration aware of the problem

US President Joe Biden knows there's no time to waste. The White House has identified the current supply bottlenecks as a security risk. Shortly after his inauguration, Biden ordered scrutiny of supply chain dependencies. His infrastructure package in support of domestic producers finally passed the Congress a couple of days ago.

However, reshoring expert Harry Moser thinks the US administration needs to do even more. "Our manufacturing costs are about 15% higher than Germany's and 40% higher than China's," said Moser who headed a medium-sized engineering company for 22 years.

The 53-year old insisted that costs had to be reduced to increase competitiveness, perhaps via tax incentives or long-term investments in the training of skilled workers. "If we do not address the underlying problems, we will not be producing enough electronic products and EVs [electric vehicles] to absorb our subsidized chips and batteries."

Nevertheless, Moser believes the reshoring trend will continue, boosting the domestic labor market. The Economic Policy Institute, a Washington-based think tank, estimates that every new job in the manufacturing industry eventually creates five to seven more jobs, especially in the durable consumer goods industry.

Lack of skilled labor

But many firms may find it hard to get employees. Many Americans have recently turned their backs on their companies amid attempts to rethink their working lives. Many are no longer willing to accept any job, especially assembly line jobs. In September alone, 4.4 million US workers quit their jobs — a nationwide trend that's come to be called "the great resignation."

But Wyner's Shawmut Corporation is bucking the trend. Thanks to extensive government aid for the production of face masks in the US, the firm has succeeded in bringing its overseas production back home. Wyner will soon have 300 employees, 50 more than back in the 1990s. The materials he needs for production are now coming from domestic suppliers only.

"This supply chain won't cross borders," Wyner promised.

This article has been translated from the original German.