December 2023 E-News: Reshoring and Nearshoring Rise Amidst China Trouble
Reshoring Initiative 1H 2023 Report
1H2023 reshoring + foreign direct investment (FDI) job announcements continued their record-breaking run. 1H2023 announcements were in line with 2022’s record rate. Q3 announcements have slowed some. We expect to see upwards of 300,000 jobs announced by year-end. EV battery and chip investments and other essential product industries supported by Bidenomics including solar, clean energy, and pharmaceuticals account for most of the announcements.
Several factors have come to light that substantiate the strength of U.S. reshoring and FDI trends. In the first quarter of this year, average spending on U.S. factory construction was more than double the average from the past 17 years. See also US manufacturing boom unlocks ‘once-in-a-lifetime’ opportunity for construction firms. Reshoring Initiative data parallels the magnitude and focus of the construction investments. Independently conducted surveys on companies’ reshoring actions correlate very closely with Reshoring Initiative data on jobs announced over the past 12 years (Exhibit 1).
China is the epicenter of two powerful forces driving reshoring. Geopolitical concern is the #1 factor. ESG is increasingly important and China creates the most emissions due to its reliance on coal. Thus, we continue to focus on reasons companies should reshore from China.
“The regime's cutting of local police stations due to high local governments debts amid unrest resembles the signs of collapse of former Communist Bloc regimes.”
“The outflows show interest rates, U.S. tensions and a weak economy are sapping China’s investment appeal, with foreign companies pulling more than 160 billion USD in total earnings from China during six successive quarters through the end of September. The outflow underlines China’s weakening attraction for foreign capital.” For an even-handed full report see also: China's Economy After the Pandemic.
How exposed are U.S. supply chains to China? A new working paper published by the National Bureau of Economic Research suggests the exposure is far greater than it would first seem. “Taking account of the Chinese inputs into all the inputs that American manufacturers buy from other foreign suppliers …we see that US exposure to China is almost four times larger than it appears to be at face value.” A great reason to reshore now!
“China’s economy is having serious problems. After the 2008 financial crisis, Chinese leaders pivoted from exports to real estate. … China’s authoritarian politics may make the process worse, with global implications in everything from energy to currencies.” See also, Another brick wobbles in China’s Great Wall of debt.
Here are some more details on China’s triple plunge of IPOs, FDI, and PMI:
Key indicators of economic health and vitality are trending steeply downwards in China:
Tech IPOs have plunged in Shanghai as regulators tighten oversight over who’s allowed to list, with the Financial Times citing public records showing 126 firms suspending or cancelling IPO applications in the Shanghai Star Market so far this year. (IPOs that are apparently faring better: those of “little giants,” which now make up half of the listed companies (link in Chinese) on the Beijing Stock Exchange.) FDI into China has sunk, dropping 34% year on year in September, according to an FT analysis. Quarterly direct investment liabilities, a gauge of foreign capital inflows, are at a two-decade low.
China has a declining share of US imports, so where are China’s still-substantial exports going? And more important, what are its growth markets? The chart below shows the year-over-year percentage change in Chinese exports to various countries and regions.
Bringing manufacturing back from far offshore to Mexico or Canada is nearshoring. The Initiative’s priority is reshoring to the U.S. If a product is so labor intense that it can not be economically reshored, better to have it nearshored than stay offshore. Products coming from Mexico to the U.S. have, on average, 40% U.S. content. Products from China have 5% U.S. content. Also, loading Mexico with work will raise Mexican wages, reducing loss of U.S. jobs to Mexico.
The decision to regionalize should take into consideration the manufacturing footprint, established supply chain and other factors. Author writes “nearshoring” but clearly means “regionalization”: “reshoring” and “nearshoring.”
Synopsis: The United States is being bombarded with cyber-attacks. From the surge in ransomware groups targeting critical infrastructure to nation states compromising the software supply chain and corporate email servers, malicious cyber activities have reached an all-time high. Russia attracts the most attention, but China is vastly more sophisticated. They have a common interest in exploiting the openness of the Internet and social media—and our democracy—to erode confidence in our institutions and to exacerbate our societal rifts to prevent us from mounting an effective response. Halting this digital aggression will require Americans to undertake sweeping changes in how we educate, organize and protect ourselves and to ask difficult questions about how vulnerable our largest technology giants are.
A new California law could be the beginning of the end of greenwashing. The current rules call for companies to report Scope 3 emissions (those in their full supply chains) by 2027. Scope 3 generates the vast majority of emissions. Very difficult to measure, especially when offshore. The Reshoring Initiative is promoting a simple alternative, at least for the interim. Companies report where their components and products are made and sold. We already provide tables for 9 products, including steel, aluminum, paper and apparel to compare the emissions for sourcing in other countries and shipping to the U.S. vs. producing here. Domestic sourcing reduces emissions by 25 to 50% vs. sourcing from China. China’s emissions are especially high due to its uniquely high dependence on coal powered electricity, as documented above. We are trying to get the organizations that grade companies on ESG to use our simple but effective methodology. The calculations will be built into our revised TCO Estimator.
“Taxing imported goods is unpopular with economists, but it could help the U.S. lower the trade deficit, strengthen its industrial base and safeguard national security.”
China was already highly competitive with prices averaging 70% of U.S. prices. It is gaining more competitiveness via its lower currency, down about 6% from its average in 2021 and early 2022. The U.S. needs to take the 20 to 30% reserve currency premium out of the USD.
Ed D’Agostino // Publisher & COO, Mauldin Economics and Jacob Shapiro // Partner, Cognitive Investments, make an argument for not wanting the dollar to be the global reserve currency. This change would make U.S. manufacturing massively more competitive
Excellent video on the history of offshoring, the importance of manufacturing and the reshoring and nearshoring trends. Ed D'Agostino also interviewed Harry for a later segment.
Automakers are exploring gigacasting and other more efficient ways to make parts, pulling more of their supply chain in-house and switching factories to produce electric powertrains. But the drop in demand for internal combustion engines and fuel and exhaust systems -- which require many more components compared to EV systems -- is shuttering some smaller manufacturers that aren't able to pivot, per a 2023 Deloitte Automotive Supplier Study Suppliers faced with declining order books could try the Reshoring Initiative’s Import Substitution Program (ISP). ISP can identify companies importing products the suppliers can make.
An Accenture survey of 1,230 operations across 11 industries in 14 countries shows several things:
Sole sourcing is dying. 72% of respondents plan multi-sourcing strategies in the next three years, up from 42% now.
Proximity is paramount. 65% are shifting to regional sourcing, up from 38% currently.
Investments are growing. The survey found that the average investment in resilience — relocating, automating, digitizing — was $1 billion, with almost half of that being reshoring.
From Bloomberg: “Whether it’s the Infrastructure Act, the Inflation Reduction Act, the Chips Act — there are a lot of compelling reasons, along with geopolitical instability and affordable and reliable energy, to make the US a very compelling place to be.” -Ed Elkins
Leadership focus on sustainability, nearshoring and DE&I (diversity, equity and inclusion) is critical to manufacturing’s future, writes the CEO of Chicago-based grid manufacturer S&C Electric.
Why Reshore Reshoring is an efficient way to increase corporate profits, reduce imports and regain manufacturing jobs in the United States. It's also the fastest and most efficient way to strengthen the U.S. economy.
