What challenges do manufacturers face when it comes to onshoring?

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US manufacturers have long relied on cheap labor in Asia, Mexico and other developing countries to make products sold in the United States. But national security concerns, risk mitigation, supply chain disruptions, high transportation costs and the potential for future pandemic lockdowns are now trumping labor costs, particularly for makers of high-value products like cars and appliances, according to Mark Jackson, executive managing director, broker, at commercial real estate services firm JLL. These manufacturers must overcome a number of challenges in order to successfully return to the United States.

What drives the trend

Monthly labor costs, which range from a high of $5,000 in the U.S. to a low of $550 in Vietnam, are still a priority for makers of low-margin consumer goods, including cosmetics, shoes, toys and electronics, Jackson says. This is because these manufacturers are more flexible and able to expand faster than manufacturers of high-value goods, which invest significant capital in production facilities and high-tech equipment, and require a highly skilled workforce.

However, due to the aforementioned factors, as well as local economic incentives and sourcing opportunities, there is currently a trend towards de-globalization of manufacturing worldwide with localized production, Jackson notes.

According to Seth Marindale, senior managing director, Americas Consulting, at commercial real estate services firm CBRE, much of the manufacturing expansion in the US is happening as a result of the drive to reduce risk. “While companies will not move production entirely overseas, I believe they are shifting some manufacturing capacity to the US to avoid potential risks such as port closures, foreign political issues, potential further COVID-19 lockdowns and increased shipping costs.” says Marindale.

The increase in manufacturing capacity in the US began before the outbreak of the pandemic. In 2018, manufacturing’s share rose to 11.39 percent of the country’s GDP, although manufacturing employment fell to just 8.51 percent of the U.S. workforce due to a shift from labor-intensive production to automation, according to the National Association of Manufacturers.

In 2020, most U.S. manufacturers halted production due to supply chain issues, Jackson notes. By 2021, however, production was picking up and there was a growing number of manufacturers looking for equipment to lease or site development to relocate or expand operations.

For example, Walmart, Intel, General Motors, Boeing, MP Material and Siemens are now collectively investing nearly $400 billion in American manufacturing at commercial real estate services firm Colliers International, according to Brewster Smith, senior vice president, supply chain solutions.

The biggest boom in high-quality manufacturing on the horizon, according to Jackson, is in electric vehicles (EVs). Five to seven EV plants and adjacent EV battery manufacturing facilities, worth between $2 billion and $7 billion, are already under construction, he notes, and the same number or double as in the planning stages.

In addition, a number of foreign manufacturers are coming to the US to gain greater access to American consumers. Chinese textile manufacturer Keer Group, for example, has opened a manufacturing facility in South Carolina, and another Chinese textile manufacturer, JN Fibers Inc., is also building a plant there, according to the National Law Review. Meanwhile, Indian textile manufacturer ShriVallabh Pittie Group is building a factory in Georgia.

Leasing in the US manufacturing sector has doubled in the last 18 months, according to John Morris, president and head of Americas Industrial and Logistics at CBRE. The overall volume of manufacturing site selection has increased significantly over the past year and a half, adds Marindale. “Our customers don’t typically tell us whether or not they are actually moving manufacturing capacity from overseas back to the United States, but I expect they are doing so on a significant scale.”

Primary Challenges

Some of the biggest challenges facing companies moving manufacturing facilities or increasing manufacturing capacity in the U.S. are labor shortages and rising electricity and transportation costs, as well as community opposition, according to Morris, who notes that some communities would prefer not to have manufacturing facilities in nearby.

“Labour shortages and rising construction costs are definitely issues, but the biggest problem we’re facing now is finding enough sites that are adequately prepared for manufacturing,” says Marindale. “This typically means large contiguous lots with extensive infrastructure already in place, including water, gas and sewerage. If any of these infrastructure components aren’t in place or don’t have sufficient capacity, it usually pushes back the schedule.” This is a problem for most companies because their goal is to increase production capacity as quickly as possible, he adds .

Decisions about which locations to choose typically involve a combination of lower costs, a business-friendly environment and available locations, Marindale notes, adding that lower-cost areas of the country that have struggled to be business-friendly do a lot had success.

“It’s true that as industry grew, some communities were less aggressive in pursuing/supporting heavy industry projects,” he says. “This comes in the form of more backlash at public meetings, sometimes projects not getting enough votes for permits or zoning changes, and reduced support from economic stimulus.”

In addition, according to Morris, the lack of gravity for manufacturing is a major problem. “Unless we find ways to improve the power grid and provide more capacity, some of these projects could become less viable.”

In different regions of the country, a lack of adequate infrastructure poses different problems — for example, water in the west and gas in the southeast, Marindale says. “But in general, it’s difficult to find locations with sufficient availability of electricity, water and other necessary infrastructure to support production growth,” he adds.

This is even more difficult in markets with an influx of large users in manufacturing and data center development, both of which consume large amounts of available power and water supplies, Marindale adds. It takes time to create new power generation or develop new water sources. The more growth there is in a market, the greater the concern.

Another major implementation challenge for companies that relocate manufacturing facilities, Smith says, is building a local supplier portfolio, since manufacturing operations are vendor-dependent for primary inputs such as raw materials, subassemblies, and semi-finished products.

The location of manufacturing facilities is industry-specific, Jackson says, pointing out, for example, that automakers are still largely based in the Rustbelt states — Ohio, Illinois, Indiana and Michigan — which have large, highly skilled workforces. But over the past decade, automakers have begun moving south to pro-business, low-tax, non-union states including Tennessee, Kentucky, Alabama, South Carolina and Georgia. Alabama, which has gained the most manufacturing jobs over the past five years, was cited by Bloomberg for low wages and an unsafe work environment.

Smith predicts an explosion in industrial real estate investment in Midwestern states in the coming years due to the availability of land, lower cost of living and relatively affordable labor. “Additionally, I expect an increase in cross-border imports from Mexico and Canada, less reliance on port-specific MSAs (Metropolitan Statistical Areas), and more emphasis on domestic manufacturing hubs — possibly in the Midwest,” he says.

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