Major economic undercurrents, like the development of electric power or the microprocessor, often build and come to the surface as megatrends, subsequently playing out over several decades. Reshoring is one such trend. This blog explores what reshoring is, what it means for US firms, and how to invest behind it.
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Reshoring is the process of firms bringing production back to US shores. This multi-year megatrend is unfolding with far- and wide-reaching implications.
Starting in the 1960s, American industrial firms began to move production overseas. Their chief motivation was lower costs of production, primarily labor. This era of globalization and trade liberalization was spurred by two major events - the creation of the World Trade Organization (WTO) in 1995 and the accession of China in 2001. China benefitted more than any other country from offshoring, as the world’s supply chains took advantage of their rapid industrialization and abundant low-cost labor.
The world today is changing, as firms face a barrage of supply chain issues. The question for executives is where to build or move productive capacity?
They could take production to another country that is closer – termed “nearshoring”. This closeness can be defined as either geographical or political (sometimes referred to as “friendshoring”). An example of the former would be moving production to Mexico, which has geographical proximity to the US and is also part of the North American Free Trade Association (NAFTA2). An example of the latter would be moving production to India, a country perceived as politically and economically closer.
Alternatively, they can bring production back to their home country – defined as “reshoring”. There are many examples of this already happening in the United States from Boeing to Micron.
Relations between nations are always in flux. We are potentially entering into a new era of de-globalization, which is forcing companies to adapt.
One key driving force is the disruption of established supply chains. This is the result of several major economic processes:
“If this analysis is correct, it should be clear that the American protectionist turn has been taken for a long time and will last long, as one doesn’t see the main forces that provoked it changing direction, starting with the desire to push China back.”
Pascal Lamy, ex World Trade Organization director general, March 2023
According to the Kearny Reshoring Index4, 92% of executives surveyed consider reshoring a part of their strategy5. Announcements abound as exemplified in the map below.
Interestingly, most recent reshoring activity has included products now deemed “essential” by the US government and include electric vehicle batteries, semiconductors, pharmaceuticals, and rare earth metals.
Reshoring firms gain several advantages:
“This allows us to rapidly respond to changing customer demand and helps manage our carbon footprint”
COO Carsten Rasmussen, WSJ
Together, we believe these improvements should bring durable competitive advantages to firms and potentially lead to sustainably higher growth outlooks.
Large pools of end demand are also driving this reorientation. Walmart has announced $350 bn of investment to support suppliers in making “made in America” goods to put on its shelves6. Companies are responding, from bicycle maker Kent International to nutritional supplement company Vireo Systems7. Walmart estimates that their investment will create 750,000 jobs and save 100m tons of CO2 emissions8.
Reshoring is also addressing a legacy infrastructure deficit. For 19 straight years, the US has been awarded a D grade for its infrastructure by its own American Society of Civil Engineers (ASCE)9. The US lags best-in-class countries in terms of percentage of GDP spent on infrastructure – a gap that today amounts to 0.7% of its GDP.
Signs of an impact are already evident. US manufacturing job growth in 2022 was at its highest level since 198410. Although it isn’t all about jobs. Reshoring firms, when building new production capacity, are focused on automation, which is a key sub-theme. Automation, though it means less jobs, drives labor productivity, which contributes to economic growth.
“You’ve gone from a situation where if you did a power tool assembly in China or Mexico, you might have 50 to 75 people on a line … the automated solution that we’ve created in North Carolina, current version, has about 10 to 12 people on that line because of the high level of automation, and the 2.0 version looks like it’s going to get down to two to three people on the line”
Donald Allan Jr, CEO of Stanley Black and Decker, Investor Event quoted in WSJ
Reshoring is primarily benefiting the industrial sector, which currently represents just 8% of the S&P 50011, down from 14% in the 1990s12. However, to get precise exposure to reshoring requires a more targeted approach . Why? First, expert analysis is needed to dissect the landscape of firms and identify true reshoring companies. Second, it is not just industrials that stand to benefit, so creative analysis is required to uncover “under the radar” companies in other sectors.
The Tema American Reshoring (RSHO) is the first ETF solely focused on the relocation of manufacturing and supply chains back to the United States. RSHO seeks to provide long-term growth through investment in the enablers and beneficiaries of this ongoing American industrial renaissance.
RSHO focus is to identify three categories of reshoring firms. The first is manufacturers that are reshoring their own operations and gaining the advantages described above. The second is facilitators, that provide products and services to facilitate reshoring, for example automation, inspection, and construction. The final category are beneficiaries who broadly benefit from reshoring happening, for example logistics firms.
The renaissance of American manufacturing is accelerating. Companies are making record job announcements related to reshoring and inward investment. Last year alone 364,000 such job announcements were made according to the Reshoring Initiative13.
Companies are mentioning “reshoring” on their earnings calls at a record rate. Citing both how they plan to move production but also the impact it is having on revenue streams.
Construction spending related to manufacturing, i.e. new factories, has also taken a step up, amounting to $108 Bn last year.
Whereas the confluence of factors described above is driving the trend, it is being supported by America’s most significant industrial government policy for decades.
In total, $1.85 Tn of funding has been allocated across three major bills:
There are several risks for investors to consider:
Reshoring is a multi-year trend. Its drivers are intensifying, supported by government initiatives. Evidence suggests a potential industrial revival in the United States is in the cards.