As a country, we will persevere and adapt to the pandemic. Many viable near-term and long-term opportunities could turn in favor of U.S. economic expansion. There are many benefits of reshoring to the U.S. economy. As White House trade advisor Peter Navarro noted: “Manufacturing jobs not only provide good wages but also create more jobs, both up- and downstream through multiplier effects.” Also, reshoring ensures access to necessary drugs and other items related to our national security.
In this article, our goal is to inform you about the impacts that the coronavirus pandemic on American businesses, while also covering the benefits of manufacturing returning to the United States and how American companies can continue being successful as buy American motives increase in popularity.
Understanding the impact of the pandemic on American businesses
As we have seen throughout the past few months, many Americans have become unemployed due to lost capability for U.S. manufacturers and businesses to continue producing services and goods. Many of these issues stem from the dependency of foreign supply chain and manufacturing, namely our reliance on China. As of July, the number of unemployed individuals is well over 20 million, where the unemployment rate is at 11.1 percent, which is down from the 14.7 percent previously seen in April.
Before we can elaborate on why manufacturing should return to the U.S., we have to understand the impact that COVID-19 has had on manufacturing markets and the effects experienced from it. As we initially experienced from the early stages of the pandemic, production and importing of goods and parts used in products sold in the United States were immediately halted. This supply chain disruption altered the lead times for materials and finished goods manufactured in China. The turnaround process that would take two to four days to confirm orders turned into a process that would require 2 to 3 weeks for order confirmation.
This issue also affects the current need for medicine, medical equipment, and personal protective equipment (PPE) needed for our medical facilities and first responders. While numerous American businesses have taken the stance and changed their production lines to help meet the needs of our citizens, it is not enough. In the United States, only 28 percent of manufacturing facilities can make active pharmaceutical ingredients (API). The remaining 72 percent of API production occurs in other countries. The limited capability to produce these APIs places the U.S. in a predicament where we cannot meet the necessity or demand for essential lifesaving medications for our citizens. Various organizations and businesses have become vital suppliers of PPE, either through working to create masks and face shields using eco-friendly 3D printing technology or by changing their production lines to meet the needs of the medical community.
Ultimately, these issues have also affected many businesses in the United States. Companies that are deemed essential must decide on how to meet the needs of the business and its customers while following the guidelines and recommendations to protect their employees better. Markets that serve in major industries such as transportation and food processing have to take extra precautions not only to safeguard their employees but the people that use their service and products. As more businesses plan to reshore the manufacturing of their goods to the United States, people may be curious as to what reshoring is and what the expected trends of reshoring are.
What is the meaning of reshoring?
According to the Reshoring Initiative, reshoring is “the practice of bringing manufacturing and services back to the U.S. from overseas”. Many businesses based in the U.S. rely on outsourced manufacturing and services for various reasons, whether it is due to the availability of resources, the potential of saving money during production, or their service specialization. However, this reliance does also leave those businesses vulnerable to situations such as those seen earlier in 2020.
Conditions that change the availability of resources can impact businesses in ways that can affect the on-time delivery of products, and availability for keeping stock within reasonable margins. After experiencing this unforeseen level of increased disruption, many businesses have started building manufacturing capacity and supply networks to other countries. Other corporations have made claims regarding their reshoring initiatives to return manufacturing jobs to the U.S. In fact since 2018 many popular and well-known businesses such as Apple, Boeing, General Motors, and G.E. have begun reshoring many of their essential jobs and manufacturing processes back to the U.S. We applaud these reshoring trends and highlight benefits that are associated with reshoring.
Reshoring trends and challenges
While many manufacturers have begun reshoring and redistributing their manufacturing processes due to the impact that COVID-19, other factors have pushed U.S. businesses to consider reshoring the manufacturing of goods. One such trend that has enabled many manufacturers to reshore is the increase in automation on factory floors. With the advancement of robotic automation, many businesses, such as automotive manufacturing, have begun utilizing robots that have the visual capacity to analyze their work for imperfections. Other robots, such as those that can weld, can perform tasks that would typically require a specially trained individual.
In addition to the introduction of robotics, 3D printing has made advancements. Other businesses have also begun investing in this process to minimize their reliance on offshore manufacturing. One such company that has already started 3D printing its electronics in-house is Harris Corporation. With the ability to make specialty parts in-house at a push of a button, many American manufacturing facilities have adapted to implementing 3D printing into their capabilities.
To combat tariffs placed on American exported goods, U.S. officials have proposed incentives to encourage the reshoring of manufacturing processes out of China. The incentives offered to American companies included tax breaks and structured subsides. The goal of the incentives was to help offset the increased capital needs of establishing domestic manufacturing locations and obtain the needed technologies to continue their operations.
The global supply chain is reliant upon multiple tiers of suppliers. Many of these suppliers have aggregated demand in specific SKUs to fill the output capacity of quality products at lower prices. Manufacturers who source high volumes of these items from suppliers in different countries, such as Medtronic, would not feasibly restrict production to one country.
The Reshoring Institute points to other challenges manufacturers face when leaving foreign countries. In some cases, employees within their facilities abroad have one or two-year contracts that must be paid fully if a company withdraws production. Also, China may not allow a company to remove any machinery, tools, and molds from plants to another country, even if the company has contractual ownership rights of the equipment.
Critically important, you taught your Chinese suppliers how to make your product. As you leave your machinery, tools, and molds behind, the production of your products continues under another business name. This makes leaving extremely difficult.
Offshore manufacturing, as you would expect, is the relocation of production or assembly of goods to another country. Businesses often use offshore manufacturing for two reasons, those being due to the cost and availability of labor and resources. Compared to the rising cost of employment in the U.S., many countries such as India, China, and Taiwan have a lower cost for labor. According to information provided by Statista, Vietnam is currently the country that has the lowest labor cost per hour compared to Mexico and China.
There has been a steady increase in the cost of labor between the three countries, and many would wonder why all of the businesses that rely on offshore manufacturing have not moved their operations to one country? This falls onto the second reason, the cost, and availability of materials. Businesses that manufacture specialty goods have to absorb the cost of obtaining and transporting those materials. Instead of incurring an exorbitant cost to transport and import the materials, businesses will move production to countries where the resources are more readily available and cheaper to produce.
Offshore manufacturing is often confused when a company or business that produces its goods outside the country of origin, only to sell those goods in the country where the business is located. Businesses and companies that produce a product in another country but sell that product in the country that manufactures it are not considered offshore manufacturing. However, manufacturing businesses that produce products in a country outside of where the business is located and bring that product back to where the business is located participate in offshore manufacturing. This difference in operation is used to determine whether a business is moving its operations to expand its territory, versus those focused on benefiting from a cheaper cost for production.
When working with offshore manufacturing businesses, one fear that American companies have is the potential for theft of intellectual property. A survey of North American-based corporations on the CNBC Global CFO Council had shown that 1 in 5 of those corporations experienced theft of intellectual property from Chinese companies. Intellectual property theft costs the U.S. anywhere between $225 to $600 billion a year. While trade and intellectual property protections have improved, the potential for any business to be affected still exists.
Offshore manufacturing trends
As businesses have experienced first-hand from the initial business disruptions experienced earlier this year, companies that utilize offshore manufacturing have had to expand their supply chains, even so, to identify partners completely independent of China. This trend, while not always the most beneficial for minimizing costs, diversifies the partners within the supply chain that do not rely on China. Diversified supply chains allow manufacturing businesses to continue their operations with minimal risk of halting business operations.
Other factors affect businesses from considering offshoring, such as the price of transportation, currency fluctuation, and tariffs. Freight costs and fuel prices have decreased in recent years. Currency fluctuation has also become an issue that has pushed businesses to reconsider offshore manufacturing, as this can affect the revenue predictions that companies expect. Tariffs have also become an issue that has taken a focus on the import-export relationship between the U.S. and China. As the United States is part of the North American Free Trade Agreement (NAFTA), where Mexico, Canada, and the United States can openly trade and transport goods across the countries without tariff barriers for services, manufacturing, or agricultural products.
Tariffs are taxes set on imported and exported products and goods. Tariffs have been the center of Washington D.C. talks during the U.S.-China trade war, as these tariffs are placed on imported goods, making them more expensive for buyers. The trade war is used on both sides as China had also raised tariff prices against American made products. These taxes affect American businesses who wish to export, as well as American businesses that rely on parts to assemble into finished goods. Tariffs can level the field when inferior foreign products invade the market with discounted products, making American made products appear far more expensive to American customers.
What does it mean to be “Made in the USA”?
Many businesses will use the phrases as “An American Company” or “An American Product“, but when you look for the label or tag, you will often see Made in China. Today, many products made in the USA will have the label “Made in USA” and “Made in the USA“, which are the same in meaning.
To qualify for having a product labeled “Made In The USA“, products have to comply with the Made In USA standard. The “Made In USA” standard was created to prevent businesses from falsely claiming or marketing, that their product is or was made in the USA when the product was manufactured in a foreign country.
According to the Federal Trade Commission, “Made in USA” means that “all or virtually all” the product has been made in America. That is, all significant parts, processing, and labor that go into the product must be of U.S. origin. That is, the product should contain no, or negligible, foreign content. For example, a company that produces barbecue grills, where most of the components are made within the United States, but the knobs and wheels are made outside the United States. In this case, this product can legally have the “Made In USA” label as the majority of the parts and costs of manufacturing of those parts are based in the U.S.
Conversely, for products that use a majority of parts that are manufactured and imported from another country, but mostly assembled in the U.S., they can be legally labeled “Assembled in the USA“. Many electronics will have the label for being made in a foreign country, as the components undergo a major transformative change before reaching the United States. While making a false claim on the origin of a manufactured product can be a chargeable crime, many businesses still try to label their products as such. Nectar Brand LLC, the owner of Nectar Sleep beds, was caught labeling their mattresses having been “Designed and Assembled in USA“. Unfortunately, businesses found committing fraud are levied a steep fine, but rarely anything else. The revenue from fraud pays the penalties, and the cycle continues.
The primary reason why many Americans buy products that claim to be American made is due to the quality of the completed product. American made products are known for being held to a high-quality standard, meaning that the product will last longer and have a lower total cost of ownership because of the use of higher quality materials. Due to this association, businesses will try to imply that the product is “Made in America”, which is a deceptive tactic to encourage Americans to buy their product.
Benefits of reshoring
As more and more companies begin moving their manufacturing and supply chains to the U.S., the question of what benefits will the U.S. experience from this?
1. Shorter lead times: Depending on where overseas the product is manufactured and shipped from, the average time for another shipment of a good can take around 33 days just to reach the U.S. This is majorly due to customs checks needed, the time required to plan for transit and the time required for the goods to travel overseas to the U.S. When manufacturing returns to the U.S., the expected lead time for many products drastically shortens, where finished goods can immediately ship, cutting time on shipping estimates.
2. Higher product quality: Products that are manufactured and made in the United States have generally had higher quality when compared to those manufactured overseas. The reason why products manufactured in the U.S. are of higher quality is due to numerous factors, including the use of safe materials, like genuine hardwood and paint free from lead, availability for designers and engineers to collaborate face to face. Having an understanding of source materials up and down the supply chain, used to make the product. This allows the business to plan for production carefully, and handle issues quickly, ensuring that defective products do not become an outstanding issue.
3. Improved responsiveness to changing customer demands: The trends for what consumers need and want continuously changes. These businesses rely on manufacturers to make their products, who can quickly begin working on new products to meet the demand for customer needs. Demand can also include the need for same-day shipping and increased control of production volume, instead of bulk orders that tie up cash flow during slow turns.
4. Fewer regulatory and compliance risks: When businesses rely on overseas-based manufacturing to produce goods, organizations run the risk of intellectual property theft and product counterfeiting from foreign markets. While there are laws that help protect businesses and their products from counterfeiting and intellectual property theft, these laws have little effect on taking down counterfeiters that use websites and social media platforms to sell their products.
5. Bringing manufacturing jobs back to the U.S.: With the current state of the economy, it is unfortunate news that many have lost their jobs. With the closing of many businesses, the need for consumer products is in high demand. As more manufacturing moves back to the United States, more manufacturing jobs will become available.
How American businesses can successfully adapt during the pandemic
As American businesses adapt to meet guidelines and recommendations to protect their employees, many are wondering what companies can do to remain successful. During times such as these, we have to remember that those specific roles require employees to physically perform their functions and duties, while others can work remotely. Understanding the capabilities and limitations of your business itself can also help to identify better how the company can adapt to the need for change. With this in mind, here are some tips that companies can use to help with dealing with the changes caused by the COVID-19.
1. Develop a flexible supply chain: if your business is one that relies on a supply chain for the manufacturing or creation of parts, develop flexible supply chains that use alternative suppliers. In cases where a business is reliant for the delivery and creation of parts from a single supplier, situations, where the delivery of these parts can become limited or even halted, can severely impact overall production. Developing a flexible supply chain can help your business alleviate production crunches due to parts no longer being actively manufactured or the sales of components slowing down.
2. Perform more work in-house: With foreign supply chain members slowly returning, businesses will have to consider what responsibilities they can fulfill in-house. Responsible can mean that employees in an owned facility perform certain phases of assembly. Perform can also suggest future advances where parts are no longer made by a third-party but are made exclusively by the business.
3. Making adjustments to production and orders: For businesses that manufacture their goods in the United States, but rely on third-party suppliers for parts, we understand that it is not the manufacturing of products that is the issue, but for how long and how many orders your business can produce before supplies run out. Each company considers the limitations of how many orders they can currently fulfill, how many products they can make with the current supplies on hand, and how many orders they can fulfill while abiding by regulations asking for a reduced workforce. Businesses have had to make drastic changes to their shipping and production capacities when orders of individual products are limited by quantity and orders delayed due to availability for transportation. Finding a reasonable balance to prolong the ability to produce goods will help businesses from running out of materials and supplies while still fulfilling orders can help ensure that the company does not have to resort to more drastic measures.
As manufacturing companies invest in smart manufacturing, data analytics, web applications, and work from home models, businesses increase their exposure to loss. Leadership teams need empowering with greater certainty that their company and its employees are safe from cybercrime organizations that seek to harm.
The lack of strategy to focus on essential asset protection priorities creates much confusion for leadership teams, so time and money are misallocated. The lack of oversight means limited accountability and diminished results for the time and money invested.
As a proud supporter of American manufacturing and Made in America, Certitude Security® is working diligently to inform leaders and facilitate essential asset protection priorities for manufacturing businesses throughout the United States. If you are interested in learning about the empowerment services that Certitude Security® can offer, visit our website or coordinate a time to speak to a team member today.