The U.S. manufacturing sector is undergoing a profound revitalization, marked by a significant shift in global supply chains. Economic shifts and geopolitical shocks have brought about a reversal of the decades-long trend of American industrial capacity moving overseas.
Reviving American Industrial Power
Manufacturing firms began relocating their operations from the U.S. to countries with lower labor costs many years ago. However, recent events such as the COVID-19 pandemic, the Ukrainian conflict, and concerns about China’s intentions with Taiwan have led to a surge in efforts to reshore manufacturing. Government incentives and rising labor costs overseas have further fueled this trend.
A Long-Awaited Reindustrialization
Chris Semenuk, an expert managing the Tema American Reshoring ETF, observes that the U.S. has spent around three decades relinquishing its manufacturing dominance, but a trend towards reindustrialization is now firmly in motion. He anticipates that it will take at least another two decades to fully reinvigorate the country’s manufacturing capabilities.
“I think that companies over the years have noticed that they have vulnerabilities in their supply chain, dependencies on suppliers or maybe dependencies on certain markets,” Semenuk said. “Reshoring is a response to, or an unwinding of, some of those dependencies and we’re in the early stages and I think that it’s a long-term, durable trend that will work itself out over at least a couple of decades.”
China’s Changing Labor Landscape
China’s allure for manufacturing firms was driven by low labor costs. Nevertheless, the nation’s rapid growth has led to increased wages, altering the cost-benefit equation for businesses considering manufacturing in China. Semenuk points out that when accounting for factors like transportation costs, quality control expenses, and intellectual property theft, the advantages of globalization have diminished significantly.
Unmasking Dependencies
Two decades of globalization have inadvertently exposed vulnerabilities and dependencies among corporations. The pandemic, trade wars, and conflicts have spotlighted these issues, which have developed due to prolonged reliance on international networks. Semenuk emphasizes that while globalization brought benefits, it also led to unexpected dependencies that need addressing.
Opportunities in Reshoring
Industries related to electric vehicle batteries and semiconductors are notable beneficiaries of reshoring. However, the ripple effects extend to businesses that offer essential products and services to these major manufacturers. Semenuk highlights the potential for medium- and small-cap companies to thrive as they align with reshoring trends.
Enablers and Beneficiaries
Companies involved in waste management, like Safe Harbors, have experienced growth due to reshoring. Ingersoll Rand and Wesco, major players in compressor and electrical equipment manufacturing respectively, have also gained ground. These “enablers and beneficiaries” are primarily medium-sized, well-managed businesses poised to reap substantial benefits from reshoring.
Global Shifts and Future Prospects
Reshoring efforts are predominantly shifting production away from China, with some movement from Europe as well. European firms are capitalizing on incentives offered by initiatives like the Inflation Reduction Act and the Infrastructure, Investment and Jobs Act. Countries like Southeast Asia and Vietnam are grappling with capacity limitations, while Mexico’s attractiveness as a near-shoring destination faces logistical challenges.
In this era of dynamic changes, the U.S. manufacturing sector stands at the forefront of transformation. As reshoring gains momentum and global supply chains recalibrate, American industrial prowess experiences a resurgence that promises to shape economic landscapes for decades to come.
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