Reshoring and Nearshoring: Is it Real This Time?

By Keith Prather

Since the end of the Great Recession in 2009, the discussion has focused on the prospects of U.S. manufacturing returning to the U.S. (reshoring) or near it in neighboring countries (nearshoring). For years, speculation was rampant that the trend was happening, but there was little proof of it from a data perspective. But the pandemic changed corporate thinking and approaches to risk management and since 2021, data is providing proof that companies are legitimately diversifying how they source products worldwide.

Several trends have fueled the need for some reshoring of the global supply chain. During the pandemic, U.S. officials learned that many critical supply chains ranging from defense materials to food, pharmaceuticals, technology, and raw materials were critically deficient and exposed to systemic bottlenecks and disruption. They exhibited too much exposure to single-sourced markets, and any disruption in those markets led to a ripple effect sweeping global distribution systems. The government has led a push to encourage many critical supply chains to build risk contingencies using U.S. or USMCA (U.S., Mexico, Canada) markets.

Some firms in selected industries have been forced to consider reshoring because the U.S. government has begun mandating that companies that it sources products from illustrate their sourcing exposure. This began under the Trump administration but has continued during the Biden administration, and there are no signs that this focus on supply chain continuity will change with any changes in government leadership, regardless of which party ultimately controls each branch of the government.

But many corporate governing boards have also encouraged or mandated executives to work on supply chain continuity, or the ability to withstand future shocks to distribution and sourcing. Coupled with risks from trade wars and geopolitical issues, environmental events have exposed supply chain vulnerability. From flooding to earthquakes, drought, hurricanes, and even volcanoes, natural phenomena are also forcing diversification of sourcing. From the Rhine River in Germany to the Mississippi River in the U.S., Yangtze River in China, and the Panama Canal, drought conditions and a lack of water have created as much disruption to freight movement and supply chains as larger scale hurricanes and typhoons.

All these factors have led to an urgency for executives to create a diversified sourcing approach. As opposed to single-sourcing products as in the past, today, diversification across geographies, political systems, and natural constraints is the trend driving much reshoring activity. Firms can shift sourcing to many different countries but having at least a percentage of sourcing in the U.S. (so that they can control the impact and duration of disruptions) is a key factor.

Whereas it was an interesting idea prior to the pandemic, improvements in automation, technologies, and logistics/ distribution intelligence have enabled these sourcing shifts to take place more quickly.

Is It Real This Time?
Over the past two years, construction spending in manufacturing has surged (Figure 1). This year alone, private enterprises are on pace for $201 billion in total annual construction spending according to the Census Bureau focused on 1) the development of new manufacturing facilities and 2) expanding existing ones. Even when adjusting for inflation, this level of spending is nearly four times the average of $50 billion in annual spending prior to the pandemic.

One factor to consider is that there is a significant delay between manufacturing construction activity and actual manufacturing output. Manufacturing output may be delayed for two to three years or more (in some instances) before actual product volumes begin to increase in the U.S. That may create a slight lag between construction activity and an uptick in powder coating demand.

Construction projects that expand manufacturing capacity in the U.S. are also stretched across many different sectors, and very few sectors are being left out of the trend. But the top five sectors that are experiencing increases in reshoring activity are obvious: semiconductors, pharmaceuticals, batteries, food processing, and advanced manufacturing (aerospace, automotive, medical devices, defense sector equipment, etc.). Chemicals, electronics, and even textiles are also seeing some reshoring activity. The opportunities are broad-based.

Not to be left out, the nearshoring trend is also gaining momentum and could play a role in the powder coating industry. Mexico will continue to be a benefactor of the trend and the cost differentials of sourcing in Mexico have now helped it become the number one import market for the U.S., surpassing China in the process (Figure 2). According to data from the U.S. Bureau of Economic Analysis, Mexico began to supplant China as the largest import partner starting in February of 2023, and that trend has continued since. There is some speculation that imports of raw materials from Mexico (especially petroleum-based products) may be helping push imports from Mexico higher, and inflation is certainly a factor to a degree. Weaker U.S. consumer discretionary spending and heavy inventory loads in many U.S. firms (65% of U.S. wholesale, retail, and manufacturing firms are overstocked relative to their pre-pandemic 10-year averages) have slowed down reorders of traditional consumer products sourced globally from low-cost manufacturing centers like China. Those factors could certainly be slowing Chinese imports at this time.

But long-term foreign direct investment into Mexico (focused on facility expansion and real estate) has hit a record over the past two years and Foreign Direct Investment (FDI) into China is down.

In a similar fashion, FDI into the U.S. has also remained high and among the second highest periods in history with more than $340 billion in annual investments made in the U.S., a significant portion of that in new facilities and expanding manufacturing capacity. This FDI trend is expected to continue as geopolitical tensions continue to build in at least two global theaters, the Black Sea and South China Sea region.

It was mentioned that shifting production to multiple countries was a way of reducing risk, and very few countries are simply moving 100% of their sourcing back to the U.S. if they were buying from global markets prior to the pandemic. In Asia, Vietnam is picking up a significant share of new sourcing activity, but executives learned during COVID that the country has distribution challenges and limits on how much it can physically take on. It will continue to be a primary alternative to other markets in the region, but there are other areas that are also experiencing some increases in activity.

India is arguably the largest beneficiary of this trend on a global basis; its manufacturing sector is the fastest growing in the world and has been for most of 2023. Markets across Europe, Asia, and the U.S. are finding India to be stable and politically neutral on most issues, have good labor availability, and generally lower costs. The war in Ukraine has also provided an interesting scenario pushing more manufacturing in the country. India was one of the countries that has largely remained neutral in the conflict and countries on both sides are working with them on trade.

How Would It Help the Powder Coating Industry?
In the simplest of terms, the more products that are made in the U.S. or near the U.S., the more opportunities for U.S.-based powder coaters. Although current projections are difficult to make, it will be noticeable that powder coating demand in the U.S. will exceed all prior “normal” economic cycles as manufacturing activity matures.

The defense sector ramping up demand should continue to operate with urgency and to the degree that the industry supports defense-related products, there should be some immediate increases in activity as a result. Other advanced manufacturing industries will also see some early demand for planning and development of assembly line operations that could come into play in the coming years. But over the next two to five years, expect total volumes of powder coating opportunities to grow as U.S. sectors grow.

Even for firms that are using a nearshoring strategy in Mexico to improve their sourcing risk, there are opportunities for powder coating that may come either in a cross-border application or for final assembly in U.S. plants.

Concluding, data shows that the reshoring trend is real as corporate investment hits the street as construction activity, and a significant increase in manufacturing activity and powder coating demand should follow shortly. Most estimates would suggest that this manufacturing capacity would start to materialize into real assembly line activity starting in 2024 and ramping up throughout the next five years.

Keith Prather is managing director at Armada Corporate Intelligence.