From microchips to canola oil, manufacturers want to build factories in North America
May 24, 2023
May 24, 2023
What’s driving the demand for reshoring manufacturing and what do new factories need to succeed?
A version of this blog appeared as “We want factories and we want them now,” in Design Quarterly Issue 17.
Until recently, the story of manufacturing in North America has been one of decline and relocation. Many in the business community considered moving manufacturing to developing countries with lower labor costs a sure route to greater profits for North American brands. Absolute manufacturing output for the United States grew during the 21st century, but the US share of global manufacturing gross domestic product (GDP) and gross sales fell. Much has changed recently. Today, manufacturers are keen on bringing production back to North America. They want new factories, right now.
In many cases, North American companies are bringing production back to the countries where they’re based or adding more domestic manufacturing capacity.
So, what’s driving the demand for factories in the US and Canada? Factors include resiliency, sustainability, cost, legislation, and quality control.
The COVID-19 pandemic showed society just how dependent we are on a delicate global supply chain. Manufacturers “optimized” the supply chain to its limit but didn’t sufficiently account for global crises. We learned that disruptions such as extreme weather, conflict, or a deadly virus could bring it to a shuddering halt. We felt it when the shortage of semiconductors disrupted automobile manufacturing and pushed up vehicle prices. Thus, manufacturers are increasingly looking for simpler supply chains. For many that means building factories to meet customer demand without crossing oceans or international borders.
Every physical product made overseas and destined for North America gets put on a ship. Those ships use oil and create a carbon footprint. To reduce that footprint, companies want to shrink the gap between the consumer and factory. If they can make it closer to its destination, they add less to the carbon bill for that product. Lowering their carbon appetite helps meet government regulations, vendor requirements, and responds to shareholders’ interests by minimizing risk.
Shipping and logistics are more fragile than we realized. They have become far more expensive. These rising costs, along with volatile oil prices, hit manufacturers in their bottom line.
Meanwhile the cost of labor in many developing countries is rising, making offshoring less enticing. This also means increased demand in emerging markets. Many companies aren’t planning to move existing factories back to North America, but rather add new net capacity there. Companies want to build factories in their consumers’ markets. They want both a factory in North America to serve that market and a factory in Asia to make products for consumers there. Expect to see production of everything from ibuprofen to food staples returning to North America (toilet paper is already domestically produced, by the way).
Companies aren’t just reshoring, they’re looking to build factories in their consumers’ markets.
For years, there was a trend toward brands using an original equipment manufacturer and putting their sticker on a product someone else produced. Brands pushed various aspects of production out of their building to subcontractors. But to paraphrase an industry axiom, “The only way to get your suppliers to care as much about your product as you do is to (over) pay them to or buy them outright.” Right now, the cycle is swinging back toward making things in-house to achieve quality control and simplify the supply chain. Companies want to ensure they can continue production in the face of climate shocks or shortages. Many want to do more under one roof.
Many policymakers have come around to seeing robust manufacturing as key to a resilient economy, with positive economic and social effects. Recent analysis by the McKinsey Global Institute suggests that “transforming the US manufacturing sector could boost GDP by $275 billion to $460 billion while adding up to 1.5 million jobs.” Governments are writing laws to promote more domestic manufacturing. The United States passed the CHIPS law to boost domestic manufacture of microchips and established the Supply Chain Disruptions Task Force to strengthen the supply chain. Plus, the Inflation Reduction Act boosts domestic manufacturing.
The government’s efforts to build at home are already bearing fruit. The CHIPS funding encouraged Intel to break ground on a $20 billion factory in Ohio. While Ford, GM, and others have announced new US plants for the battery cells required in electric vehicles.
Canada promotes domestic manufacturing through a wide range of grants and loans to support strategic growth projects. Groups such as Canadian Manufacturers and Exporters and Ontario 360 are encouraging Canada to do more to promote manufacturing during economic recovery.