Successfully Navigating the Shift to Reshoring Manufacturing Production Can Be Tricky

Kirsch CPA Group

Aug 13, 2023

For decades, products that were made in America were synonymous with high quality and were manufactured in great abundance. Comparable products from other countries were often viewed as cheaper knockoffs.

However, in the late 20th century and early 21st century, offshoring, where goods are manufactured overseas at reduced costs, changed the outlook. Companies found they could produce their products at lower costs in China and other foreign countries without sacrificing market share. Now the tide is turning again. Indeed, for various reasons, reshoring is spiking as manufacturers bring production back to the United States. But the road home isn’t without potential pitfalls.

Positives and Negatives of Reshoring

Reshoring, also known as onshoring, is the practice of returning the manufacturing of goods back to a company’s original country. Partially due to reshoring, the number of manufacturing jobs in the United States has been increasing, thereby strengthening the economy and reducing unemployment.

Generally, U.S. manufacturers find that the positives of reshoring outweigh the negatives. In addition, they may be able to avoid the tangential costs of producing goods overseas, such as customs issues, tariffs and shipping costs.

But reshoring may also have adverse consequences. For example, if reshoring actions aren’t carefully coordinated, manufacturers may experience a chaotic transition. Also, some products may have to continue to be manufactured overseas because of various factors, including a significant difference in costs. This can occur when certain materials are indigenous to a particular area.

Current Manufacturing Environment

It seems as though the stars have aligned for a resurgence in reshoring as global supply chains shift away from China and other Pacific Rim nations back to the United States. This has been evidenced in clothing and computer chips, to name two prime examples. Consider the following:

China has dominated global manufacturing for more than a decade. But its factory output has slowed recently, with declining production in April and May of 2023.
After the pandemic caused havoc with the supply chain, Russia’s invasion of Ukraine caused further disruptions.
The United States is moving forward with incentives for manufacturing electric vehicle components and computer chips.
In an analysis of S&P 500 earnings call transcripts, Bank of America noted that mentions of reshoring were up 128% in the first quarter of 2023 compared to 2022.
According to the independent Reshoring Initiative, U.S. manufacturing jobs were up 11% in the first quarter of 2023. If this trendline continues, 406,000 jobs may be created by the end of 2023.

Bear in mind that while the concept of reshoring is generally being embraced by manufacturing companies, it’s not a simple process and isn’t right for all manufacturers.

3 Challenges to Reshoring

There are three main challenges facing U.S. manufacturers as reshoring regains a foothold:

Cost efficiency. Despite recent inroads, there’s no denying that it can be cheaper — sometimes much cheaper — to produce goods in China or other foreign countries. Costs remain a key factor and could deter the reshoring efforts of U.S. manufacturers. Other potential side effects of a shift toward U.S. manufacturing — including inflation and rising labor costs — add to the uncertainty.
Skills gap. The lack of skilled manufacturing workers has been well documented. A recent study conducted in association with the National Association of Manufacturers revealed that 2.1 million jobs could go unfulfilled by 2030. The problem has only been exacerbated as many workers approach retirement.
Manufacturing infrastructure. It will take time to rebuild an infrastructure that’s been slowly decaying since the peak of U.S. manufacturing midway through the 20th century. The trend toward service jobs in the United States has contributed to the deterioration in areas like supporting railways and power generation. Even in regions where a strong commitment to manufacturing is being made, cracks in the infrastructure will likely slow progress.

Long, but Promising, Road Ahead

Manufacturers that want to reshore are counting on help from the federal government. The Infrastructure Investment and Jobs Act (IIJA), enacted in 2021, is a start. The IIJA authorized nearly $550 billion to be used to improve, among other things, roads and bridges, water infrastructure, energy production, and high-speed internet. But improvements won’t happen overnight.

If your manufacturing company is considering reshoring its production, contact us. Kirsch CPA Group can help you navigate any rough waters on your journey home.

We can help you tackle business challenges like these – schedule an appointment today.