Over the past 20 years, China has grown to become the manufacturing plant for the world. Currently, more than one-third of everything is manufactured in China.1 In the span of just over two decades, China has moved from an agriculture-focused economy to a manufacturing superpower.
While America still holds the lead in manufacturing in many industries, such as paper products and pharmaceuticals, China now holds the lead in 16 of the 22 manufacturing categories tracked by the United Nations and comes in second in six others.2
And that prominence seems to be staying, despite the challenges brought on by the COVID-19 pandemic. When the global supply chains were put to the test, they did become more dispersed and less China-centric. However, no other country in the world has as large a skilled workforce and efficient infrastructure system as China.
And while it once made financial sense to outsource manufacturing production overseas to take advantage of the lower cost of labor, more relaxed environmental rules, manufacturing efficiency and scale, and other benefits, this model, although efficient, is based on a just-in-time and lowest landed cost model. Now, trade barriers, a global pandemic, and geopolitical dynamics are forcing American companies to rethink where they need to manufacture. So, does that mean manufacturing will come back to the United States? And to what extent will we see companies reshore?
In late 2022, projections showed a record 350,000 jobs added back to the U.S., and bringing these jobs back to the U.S. has long been a goal of the U.S. government.3 Now, due to the world events mentioned earlier, that trend is taking hold.
But reshoring is easier said than done. It cannot happen overnight. It’s a long-term play. In addition to the challenges noted above, several additional factors have accelerated the reshoring narrative and what is talked about as an American Manufacturing Reshoring Renaissance. These drivers include:
- Inflation Reduction Act of 2022 (IRA) – The IRA was monumental in creating incentive for companies to bring manufacturing back to the U.S. What does this mean?
- More Jobs – The IRA promised an estimated 9 million jobs over the next decade. For the first time, Congress gave clean energy tax incentives to create more jobs and build what it calls “a clean energy economy.”
- Clean Energy – The overwhelming focus and goal of the IRA is to help spur growth and accelerate the transition of our economy’s reliance on fossil fuels. This is a massive long-term undertaking and will require the whole rethinking, rebuilding, (and rewiring) of the energy infrastructure, manufacturing, and distribution processes.
- Made in the U.S.A. – To build the new (more) sustainable infrastructure, key provisions to incentives provide benefits to American Made products such as steel and use of American labor.
… And who is bringing the chips?
- Yes, the manufacturing renaissance party started before the IRA. Not to be overlooked, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS) was passed on August 9, 2022. Its aim is to sponsor and incentivize reshoring manufacturing production for key high tech and componentry such as semiconductors. The key details of the CHIPS Act that further promote U.S. domestic manufacturing production include:
- The CHIPS Act – invests nearly $250 billion in semiconductor and scientific research and development (R&D) and authorizes the largest publicly funded R&D program in the country’s history. The CHIPS Act also authorizes funds needed to implement the USA Telecommunications Act of 2020, help secure the global telecommunications supply chain, and limit the involvement of telecom companies that have close ties to China.4
- Focus on Strategic and National Security – The U.S. has lost the ability to manufacture critical semiconductor products and componentry due to being outsourced for lower-cost labor. Most of the world’s cutting-edge chips are made in Taiwan, where China claims territorial rights, causing fears that semiconductor supply chains may be disrupted in the event of a conflict and leave America at a technological disadvantage.
- High-Cost, Long-Term Investments in the U.S. – Per Intel,5 it takes about three years, $10 billion, and 6,000 construction workers to build a Fab, or fabrication plant, where semiconductors are manufactured. But building a plant is just the first piece. Building the manufacturing ecosystem includes establishing a new supplier base, building warehousing, distribution, and transportation infrastructure, which will eventually need to be created to support these new high-tech manufacturing investments.
Toward the end of 2022, three new chip manufacturing sites were announced in the U.S.: Columbus, Ohio; Syracuse, New York; and Phoenix, Arizona. Over the long term (on paper), they will influence the U.S. reshoring landscape.
So now that the IRA and CHIPS Act are here, have they provided enough to add to the critical mass needed to bring manufacturing back to the United States? We’ll see. Behind the supply chain challenges of the past few years and legislation aimed to accelerate reshoring, several critical questions must be answered:
How long will it take?
It’s a lot easier said than done when talking about unwinding 20-plus years of the U.S.’ manufacturing supply chain. As noted above, high-tech semiconductor manufacturing will not happen overnight. Likewise, building a new grid to be able to handle and manage our new sustainable, yet electric, demands will take decades. In the interim, how will global supply and demand pressure semiconductor markets and the degree to which new capacity/overcapacity could impact speed of development?
Have we lost our ability to manufacture?
There’s a big assumption made when we talk about bringing manufacturing back to the United States. Critical to this assumption is that we have the right skill sets and labor and can manufacture at the same capacity, quality, and cost effectiveness as the source of where products have been manufactured at scale for the past 20 years. Have we lost our “manufacturing muscle memory”? Will reshoring create additional inflationary pressure on the consumer?
Are we still going to be reliant on others?
Critical parts are scarce and vital manufacturing inputs are still part of our manufacturing ecosystem. To some degree, critical commodities such as copper and lithium will become more important to our clean energy ambitions. Is our pivot away from fossil fuel (and the geopolitical and sustainable issues that come with it) creating a new set of challenges?
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- 1“China at Least 30 Years Away From Becoming Manufacturing ‘Great Power’: Former Minister,” reuters.com, March 7, 2021
- 2“China Is Leading the World on Manufacturing, But the Race Isn’t Over,” barrons.com, August 31, 2022
- 3“US Manufacturing ‘Reshoring’ Faster Than Ever: The Good News and the Bad (but Fixable) News, brightlysoftware.com, October 12, 2022
- 4“What Is the CHIPS and Science Act of 2022?”, investopedia.com, updated April 10, 2023
- 5"What Does It Take to Build a Fab?" intel.com, September 16, 2021.