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What is Reshoring?
“Reshoring” refers to bringing manufacturing and production back to the company’s country of origin, from overseas. The megatrend of reshoring manufacturing has gained momentum with an increase in US companies reshoring, reversing decades of “offshoring”.
Offshoring involved relocating manufacturing operations to countries abroad, to save on labor costs. This has been a popular trend over the last few decades, with production and manufacturing happening in countries like China.
Reshoring manufacturing aims to bring manufacturing and production back to the home countries and create efficiencies such as shorter lead times, better quality control, and more resilient supply chains.
CNBC reports that mentions of “reshoring” in S&P 500 earning transcripts increased by 128% in Q1 2024 year-on-year, which was higher growth than mentions of “AI”.
Key Factors Behind the Reshoring Movement and Importance of reshoring
The megatrend of reshoring is driven by many key factors and the benefits of reshoring can provide a company with a competitive advantage in the market.
One of the main reasons for originally offshoring production and manufacturing was labor costs being cheaper abroad. Increased labor costs in countries like China reduce the cost advantages of offshoring. Companies that are reshoring support local economies by creating jobs and stimulating earning and spending power.
Reshoring manufacturing also offers greater control for supply chains, with shorter lead times leading to increased customer satisfaction, better quality control leading to higher quality products. It also helps protect intellectual property from theft, which has been a major problem for global businesses since offshoring.
Manufacturing abroad also opens the possibility of unpredictable geopolitical strains that trade wars and political instability can create. Reshoring manufacturing can offer reassurance and improve security and self-reliance, especially in strategic industries such as healthcare and semiconductors.
Technology is crucial in the transition from offshoring to reshoring, with the introduction of automation, robotics, and AI in the manufacturing and production process. These technologies make domestic production more efficient and cost-effective.
Economic and Market Impacts of Reshoring
What are the advantages and disadvantages of reshoring when it comes to the economy? As mentioned, there is a positive economic impact, boosting local economies and creating jobs. In this section, we will dive deeper into the economic and market impact reshoring can have.
Reshoring has many advantages for the local economy and market, it means more investment at home, rather than abroad. This includes modernizing local facilities, equipment, and resources. It also positively impacts unemployment levels, with companies making record job announcements driven by reshoring and inward investment. In 2023, it was reported that 287,000 jobs were created in the US from reshoring.
Reducing importing also has many advantages. There is less need and dependence on global supply chains which stabilize the economy, shorter lead times for customers, simplified and cost-effective operations, and is more sustainable with reduced emissions.
While reshoring boosts competitiveness and economic resilience, it also requires significant investment. This includes reshoring manufacturing investment in manufacturing sites, infrastructure, and employment skill gaps.
Various Investment Opportunities in Reshoring
The investment opportunities in reshoring manufacturing is broad, giving investors access to a variety of sectors and industries. Generally, the universe of reshoring companies can be categorized into three types:- Reshoring manufacturers: companies gain an advantage by moving production back home. These efficiencies can be from upgrading plants with automation and robotics to building advanced facilities that are more sustainable.
- Reshoring facilitators: companies who gain direct revenues from the reshoring megatrend. This could be companies helping build manufacturing facilities.
- Reshoring beneficiaries: Companies who are broadly exposed to higher activity as a result of reshoring. For example, transportation or waste management companies.
Reshoring manufacturing is primarily targeted at the industrial sector which currently represents 8% of the S&P 500. This is down from 14% in the 1990’s. Therefore, there is potential for value creation should the tide turn. This requires more targeted reshoring investment fund to gain exposure to this megatrend.
As the trend evolves it is likely to touch many sectors of the economy. Evolving from industrials to electronics to even healthcare and pharmaceuticals Therefore, creative analysis and active management are key to uncovering companies exposed to reshoring.
Opportunities in Domestic Manufacturing Companies
Reshoring can offer domestic manufacturing companies opportunities such as enhancing competitiveness in the market and creating efficiencies in costs and resource use. Reshoring can offer enhanced quality, reduced costs, improved sustainability, and more innovation, while also contributing to the local economy.
There is also the factor of consumer preferences and brand loyalty to domestic brands. There is a growing consumer demand for products made at home. This is often associated with better quality goods using high-quality materials, ethical and sustainable production. Domestic companies can capitalize on this , gain brand recognition, and customer loyalty.
Domestic manufacturing companies may also be able to benefit from government incentives. Financial support including tax breaks, grants, and subsidiaries designed to encourage reshoring can significantly reduce costs and encourage companies to transition back to domestic manufacturing. In the US, the Infrastructure Investment and Jobs Act (IIJA) has allocated $1.2 trillion into critical infrastructure areas such as logistics and transportation, data, energy, and people. Reshoring is accelerated by other Acts – such as the Inflation Reduction Act (IRA) and the CHIPS Act. Together these three acts are estimated to provide $1.85 trillion of bi-partisan support.
There may also be incentives for sustainability and environmental impact. Reshoring manufacturing provides opportunities to be greener and reduce emissions by using local materials and domestic supply chains. This aligns with regulatory and customer expectations for sustainable and environmentally friendly practices.
Opportunities in Raw Materials and Supply Chain Solution
Reshoring manufacturing presents opportunities in supply chain solutions which are crucial for improving domestic manufacturing in terms of efficiency and competitiveness.
The local sourcing of raw materials reduces dependency on a global supply chains, mitigating risks from importing. The lower transportation costs and tariffs provide a cost-effective alternative to importing goods. Domestic logistics means better quality control and consistency in materials that are used in the manufacturing process. This higher standard of quality control is not something you can guarantee with global supply chains.
Domestic logistics also drives economic growth, establishing local supplier networks which creates jobs and boost local earnings and spending. A shorter and more economic supply chain will also lower carbon emissions and be eco-friendly compared to a stretched global supply chain.
The investment in these local supply chains will allow technological advances and innovations such as automation and advanced logistics solutions. These could be driven by robotics or AI such as real-time logistics tracking, automated adjustment of stock levels, and the accurate tracking of carbon emissions.
Governments may offer incentives for local businesses and develop domestic supply chains, encouraging businesses to source materials and manufacturing/production resources closer to home. Policies favoring local sourcing and domestic logistics further encourage these changes and the transition to reshoring.
Opportunities in Industrial Real estate
Creation is the process by which Authorized Participants (APs) introduce additional shares to the secondary market. During this process, APs deliver the underlying securities to the fund sponsor in return for ETF shares. For redemptions, the reverse happens.
This ability to continually issue and withdraw shares in on the secondary market (thereby creating a liquid ‘primary market’), means the true measure of an ETF is not in its on-screen liquidity, but is instead predominately determined by the liquidity of its underlying holdings. If the underlying holdings are liquid enough, the AP can create/redeem shares easily.
This process ensures that the price of the ETFs stay as close to NAV as possible. If a secondary market order would result in a discount/premium to NAV, the AP creates or redeems shares to ensure the ETF can absorb large buy or sell orders while continuing to trade at a price close to the NAV of the underlying securities. As a result, it is the liquidity of the underlying securities that matter.
Key Considerations for Investors
Considerations for investors include researching the investment and the alternatives available, assessing the goals and objectives of the investments and whether they align with personal goals and objectives. It also involves appreciating and understanding the risks involved.
Research and analysis are essential before entering into any investment. Investors should understand what is under the bonnet of the investment, the fees, the previous performance, and the expected returns. It is a good idea to look at similar alternative investments as part of this research and analysis to compare and contrast.
Risk management is also key. Get to know your fund manager, their active management approach, and whether your risk appetite matches that of the fund. Your investment goals and objectives are important to determine what type of investment you enter into, so ensure that the investment goals and objectives are align with yours.
Key Considerations for Investors #1: Market Research and Analysis
Investors should do their own research and analysis before investing in reshoring manufacturing. All investments should be well-informed, no matter what type.
Market viability is a key consideration. Investors need to conclude whether there is sufficient demand for the product or goods invested in. In this case, are domestically produced items and the reshoring trend sustainable in the long term? To answer this question, research is needed on the products and services compared between domestic vs international providers. In a world where everything is online and accessible, this is more relevant than ever.
Supply chain stability is another factor to consider. The reliability of logistics and supply chains and the availability of local materials are important here. Any weaknesses and the supply chain could slow, which impacts your investment.
Understanding regulatory environments is another factor to consider. Government policy and incentives can vary from region to region, and misjudging these can lead to losses and impact investments.
Reshoring manufacturing takes time, resources, and significant investment. Infrastructure, and potentially advanced manufacturing technologies, are necessary for reshoring, as well as the upskilling of workers to use such technologies. This is another area to research before investing.
Key Considerations for Investors #2: Risk Management
Risk management is essential in reshoring investments. It involves complex factors such as supply chains, economic and political risks, the labor market, and market risk. Risk management helps mitigate any challenges in any of these factors and increases the chance of long-term success. In-depth research in these areas leads to better-informed investment decisions when investing in complex investments such as reshoring.
If local supply chains break down, disruptions can cause production delays and increased costs. Likewise, labor market risks pose a similar threat. A shortage of skilled and qualified local workers can lead to operational challenges and higher costs. It is reported that 58% of companies believe that they need more specialized training to support the efforts of reshoring manufacturing the US.
Economic and political risks can impact the viability of reshoring, such as a change in government, policies, trade agreements, or political stability could all impact the investment landscape. Investors should keep up-to-date on any potential regulatory or geopolitical changes or events to avoid investing when these risks are high.
Market risks should be assessed, including consumer demand, competition from both domestic and international operations, consumer preferences and trends, and any potential economic downturn. Market research can help investors navigate any market risks and act appropriately with their investments.
Key Considerations for Investors #3: Long-Term Perspective
There are a few things to consider when investing for the long term. Long-term investing is a strategic yet sensible approach that focuses on sustainability, scalability, adaptability, and longevity. Investors should ensure that they understand the approach and strategy of the investment and that it aligns with their investment goals and objectives. Research and analysis can be carried out on whether the fund and a long-term approach are in line with market realities and potential returns.
Sustainability is a key consideration that investors should prioritize. Investments that minimize environmental impact and use eco-friendly methods, such as energy-efficient manufacturing and using renewable energy sources align with consumer demand for greener products and can provide a competitive edge over time. Companies that have this approach may also have an advantage when it comes to new green government regulations and policies. Market sustainability is also a factor and analysis of whether demand for the industry or product is short or long-term.
Scalability is also a key consideration that investors should analyze when it comes to reshoring manufacturing. Factors such as the availability of labor, resources, and facilities could affect a company's ability to scale. All of these factors involve significant investment in the operational side of the company and should be considered, with future growth in mind if it is to be a long-term investment.
Adaptability is another key consideration when investing for the long term. Markets are constantly changing and evolving, as are consumer's wants and needs. Factors of this could include technological advancements and innovation, regulatory changes, or changes in the landscape of the market. Investors should consider how reshoring manufacturing could be impacted by technology and innovation. For example, new manufacturing systems including robotics and AI. This would mean adapting the production process and upskilling workers to operate such machines. This also requires significant investment, however, would make the manufacturing and production process more efficient and cost-effective in the long term.
Long-term investment strategies also rely on strong partnerships and business relationships. These could be with local business groups, governments, materials suppliers, and educational or labor institutions. These relationships are essential for any business to thrive at a local level and should be taken into consideration when looking at reshoring manufacturing investments.
Government Policies and Incentives Supporting Reshoring
Government policies and incentives play a crucial part in reshoring manufacturing to home countries, offering investment and incentives for companies to move their manufacturing from global to domestic. There can be many advantages of reshoring manufacturing for businesses including tax incentives and grants, regulatory support, and investment into infrastructure and workforce training.
Tax incentives and grants can lower operating costs for moving or expanding manufacturing and production, making reshoring manufacturing more feasible for businesses. This could include tax credits, deductions, or exceptions, and grants and subsidiaries, commonly offered to specific industries or regions to help boost the economy.
Regulatory support is also a key factor when talking about policies and incentives, with governments making it easier for companies to move to domestic manufacturing, reducing bureaucratic processes and delays. Governments can also offer schemes to prioritize goods made on home soil, promoting domestic products and services to boost local economies. For example, The Chips and Science Act has invested $280 billion in chip manufacturing in the US, leading to a new chip plant from Micron, Intel and TSMC on US soil.
Investment is key for reshoring manufacturing, whether that is in the infrastructure or workforce for companies who are moving their manufacturing back to their home country. Governments can help support by improving domestic logistics networks, real estate and facilities, reliable energy supplies, and technology and innovation resources. This can enhance efficiencies and reduce operational costs for companies.
Why choose Tema's RSHO ETF?
The benefits of reshoring are apparent, but how can one invest in the megatrend? One way investors can capitalize on this is through the Tema American Reshoring (RSHO) fund, which seeks to invest in companies that enable manufacturing to return to the US. The RSHO fund is managed by employing a consistent investment process.
The RSHO fund is focused solely on reshoring. It is actively managed by a veteran stock picker, Chris Semenuk, who has over 30 years of experience in US and global equity markets.
The investment process includes bottom-up fundamental security selection, and systematic portfolio construction, with a risk-managed approach. The fund aims to provide long-term growth by only selecting businesses that stand to see the benefit of reshoring.
Tema's RSHO ETF growth potential due to new era of manufacturing
The Tema American Reshoring (RSHO) fund has pure exposure to the reshoring manufacturing megatrend. That means that all investments benefit from the rise of reshoring in every aspect, from industrials, materials, transport, technology, and business and consumer services. The long-term outlook is already leading to the transformation of domestic supply chains, reindustrialization, and investment into local and domestic economies.
Reshoring manufacturing is a secular trend, bringing operations back to home soil from abroad, with the underlying structural driver being deglobalization. This is the reality of the business climate faced by multinationals. It can be described as insecure supply chains, ongoing trade wars, and increased geopolitical tensions and pressures.
The US government is already investing heavily in reshoring manufacturing, with initiatives and spending amounting to over $1.85 trillion. With such bipartisan support large growth opportunities are being presented to companies who wish to transition to US-based manufacturing and production.
Early movers in the reshoring manufacturing trend could reap the rewards of more efficient and cost-effective operations, with more control over the manufacturing and production process and more resilient supply chains.
Finally, upgrading the infrastructure in the US has a knock-on effect on industrial technology and efficiencies, which is a key sub-theme of reshoring manufacturing. Investors can gain returns from this sub-theme as part of the wider megatrend through a specialized reshoring fund such as the Tema American Reshoring (RSHO) fund.
Conclusion
Reshoring manufacturing is a multi-year megatrend that investors can benefit from in the long term. With momentum building, it is estimated that 93% of manufacturers plan to shift to reshoring manufacturing and increase their domestic efficiencies for their supply chains. Investors can capitalize on reshoring manufacturing by strategically focusing on investment opportunities that give exposure to industries and sectors that are growing through this transnational period. There is significant US government investment in reshoring manufacturing and through bills such as the Infrastructure Investment and Jobs Acts, the megatrend has accelerated and is already stimulating domestic growth.
FAQ
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