The pandemic clearly spotlighted how easy it is to break even the most well-connected supply chains. As China and other Asian countries shut down due to quarantine enforcements, many manufacturers scrambled to find alternative domestic suppliers to finish their products. Companies like Apple and Microsoft had to delay their new product release dates as their offshore manufacturing plants halted production. Reshoring by bringing manufacturing and services back to the U.S. from overseas may seem like a prudent decision for these companies to avoid being caught off-guard again.
The Shifting Tides of Reshoring
Many companies started reshoring even before the pandemic hit. According to the United States International Trade Commission and Department of Commerce-Bureau of Economics, 2019 had the strongest reverse import ratio since 2008. A survey conducted by Thomasnet.com asked more than 1,000 of North America’s manufacturing and industrial suppliers about this topic, and nearly two-thirds indicated that they are likely to bring production and sourcing back to North America.
It’s Time to Ride the Wave
The pandemic has accelerated the reshoring process, making the search for where to relocate operations imminent. The U.S.-China trade war, which began in 2018, started the process as U.S. manufacturing imports from China declined by 17% in 2019, a total fall of $90 billion, redirecting U.S. trade to other parts of the world.
Some companies looked to move some of their operations to other Asian countries while others preferred alternatives within North America. Instead of relying on offshore factories, many are keen to reduce their dependency on international deals and long-distance shipping by shifting production to pockets of locations across North America.
Catching the Peak of the Wave With the Right Resources
There are many factors when deciding where to relocate. The objectives could range from proximity to existing operations, access to e-commerce logistical fulfillment, ease of technology automation implementation, and ultimately greater supply chain control. For manufacturers, the access to a cost-effective, efficient and proximate workforce and public or quasi-public incentives they can tap into are often the deciding considerations for reshoring.
Labor: Workforce Strategy That Propels Sustainability
Manufacturers will locate their facilities where they can attract the skilled workforce they need within commutable distance to the site selected.
In response, state governments in Michigan, California and Florida implemented career and technical education programs and vocational education for their residents to both attract companies and revitalize their communities. Companies with a robust workforce strategy can identify what talent can be nurtured locally to decide where to reshore.
For instance, the state of Maryland offers tax credits for 10 years incentivizing technology and advanced manufacturing companies to set up facilities in one of 149 distressed communities to create jobs in old steel mill and mining towns.
Incentives: Tax, Economic Rebates and Grants
Most states also offer myriad incentive programs to lure new corporate and manufacturing facilities into their communities. The property tax abatements and economic development incentives may offset the costs of moving, real estate investment, and equipment purchase, and even positively impact the company’s financial reporting.
Prior to the 2017 Tax Cuts and Jobs Act, U.S. tax policy penalized companies for bringing earnings back into America generated in other countries, i.e., they were double taxed on these funds. The tax structure has evolved, making reshoring a more attractive move. The tax was restructured whereby the top corporate income tax rate was reduced from 35% to 21%, bringing the U.S. rate below the average for most other countries part of the Organization for Economic Co-operation and Development.
While many of these incentives predated the COVID-19 pandemic, federal agencies and many state and local governments have already responded to the crisis with additional programs designed to ensure that businesses survive so as to increase employment opportunities. These programs will likely continue. Many tax breaks are negotiable with state and local economic development teams, but tax credits for creating jobs are set by law. Rebates and incentives are offered based on the number of new jobs a new operation will create. Companies should investigate and take a multidimensional and analytical approach to determine where to reshore. It is crucial that companies review their incentive commitments for their projects, consider capital and headcount pledges, determine incentives at risk, and strategize ways to combat clawback exposures, if any.
Riding the wave: Where do we go from here?
Reshoring is not something new that companies are just starting to do. According to Paul Tostevin, director of Savills World Research, who recently conducted the Savills Global Market Sentiment Survey, the U.S.-China trade war had already started re-shaping global manufacturing and supply chains and boosted trade in other parts of the world, such as Mexico and Vietnam. But under the COVID-19 cloud, companies evaluating their global supply chain footprint are accelerating their reshoring plans and looking domestically. This crisis has added challenges that companies need to take into consideration to identify the most suitable real estate spaces. Depending on the industry and type of operational needs, the real estate needs will be different. The decision made will underpin the success or failure of the business in the years to come. Planning how to ride the wave, and pinpointing which way the wave will break, will ultimately help you come ashore successfully.
Ann Marie Collins is the executive vice president leading the workforce and incentives advisory for Savills. Ann Marie provides top-of-the-line consulting services to her clients, including market research, financial analysis, site selection, energy negotiation and workplace strategy. Also, a national expert in business and tax incentives negotiation and implementation, Ann Marie helps her clients obtain the best locations for the lowest operating and talent costs for their businesses.