Consensus views on a U.S. manufacturing resurgence have largely centered on rising labor costs in markets such as China as the key driver of re-shoring back to the U.S. However, a new PwC US report, A Homecoming for U.S. Manufacturing?, reports that while rising labor costs are part of the story, a range of factors could drive a sustained manufacturing renaissance in the U.S. beyond any cyclical recovery, potentially improving investment, employment, production output and research & development (R&D).
These seven factors—including transportation and energy costs; currency fluctuations; U.S. market demand; labor costs; U.S. talent; availability of capital; and the tax and regulatory climate—are the primary catalysts influencing manufacturers' decisions to establish production facilities domestically and produce products closer to their major customer bases.
With regard to transportation costs, the report states that the bull market in energy commodities over the last decade has contributed to a major increase for manufacturers with global supply chains. Manufactured goods with lower value-to-weight ratios are generally less able to absorb higher transportation costs related to manufacturing overseas and shipping to the United States.
The report cites Caterpillar and AGCO as examples of manufacturers that are now producing more in the United States for sale to the North American market. Besides saving energy costs it can also cut down on lead times (e.g., design changes can be implemented more quickly), reduce required inventory levels, mitigate some currency risks, and give more control over intellectual property.
Concerns over transportation costs that motivate companies to alter supply chains can also cause a commensurate reduction in supply-chain risk, the report states. A PwC study on resilience of United States manufacturers—based on their disclosures of financial impacts from supply chain disruptions over the last 10 years—found these companies are experiencing more financial consequences due to recent natural disasters in Asia than in other parts of the world. While the United States has had its share of supply chain events, this finding suggests the merits of geographically diversifying supply chain risks and reinforcing the “China plus 1” model.
The report concludes that for manufacturers, the United States is emerging as a more attractive market for their production in the long term.