Is the U.S. Manufacturing Industry Experiencing a Renaissance?

If you follow the U.S. manufacturing industry, you have probably heard the terms reshoring and foreign direct investment (FDI). These two terms can be confusing, so let’s take a minute to better understand them.

Let’s start with reshoring. Reshoring is used to describe moving all or part of a business previously moved to a foreign country back to its home of origin.

In the 1980s, many manufacturing companies came under pricing pressure due to higher labor costs in the U.S. To combat the cost disadvantages, some companies moved jobs to low-cost labor countries, eliminating jobs in the U.S.

Over time, circumstances changed and companies learned that low-cost labor is not the be-all and end-all of growth and profitability. Pandemic-related shutdowns and extended supply chain disruptions have made the cost benefits even less of a factor.

Companies started looking to have better control of costs, improve customer service, reduce delivery times, and create a better supply chain. Reshoring jobs back to the U.S. has become a key strategy.

In 2020, about 110,000 U.S. manufacturing jobs came back. In 2021, the number climbed to over 260,000, and in 2022, that number was 350,000. 

Here are some key benefits of reshoring:

• Better control of inventory, capacity, and lead times
• Lower risk of supply chain disruption
• Reduced cost
• Increased customer response and satisfaction
• Potential of better-quality product
• Increased innovation and competitiveness
• More U.S. manufacturing jobs
• Growth of small and local suppliers

There are also risks associated with reshoring:

• Cash-strapped companies may need to reduce investments in other key areas
• The loss of knowledge and skill on how to make the product could cause delays in production
• Additional strain on an already aged and fragile U.S. infrastructure
• Lack of skilled employees

Companies that are considering reshoring business operations back to the U.S. can use the free Total Cost of Ownership Estimator tool on the Reshoring Initiative website: https://www.reshorenow.org/resources/.

As U.S. companies reshore jobs, it impacts foreign direct investment (FDI). FDI refers to when international companies build facilities within the U.S., hire U.S. workers, and create products for the U.S. and the global market here in the states.

This is a positive side effect, and many experts say it will help the U.S. maintain global leadership as many of the products manufactured by those foreign companies will be exported out of the U.S.

Four types of FDI:

• Horizontal FDI—Foreign investment into companies that are like the foreign company’s key industry competency.
• Vertical FDI—Foreign companies invest into the supply chain for a similar industry.
• Conglomerate FDI—Foreign investments are made into a completely different industry segment from the company’s core competencies.
• Platform FDI—Covers investments made into industries for the primary purpose of exporting to a third-party country.

I believe reshoring and FDI are two key strategies for the U.S. to maintain a leadership role as a powerhouse in manufacturing and worldwide new product development and research.