As reshoring gains steam in North America, distributors based in the region may expect a slight bounce despite continuing inventory excess concerns.
Reshoring is back on the manufacturing menu for electronics OEMs, contract manufacturers and component suppliers based in North America and their foreign counterparts looking for cost-effective production solutions for the competitive region. Ahead of the installation of the new US administration, and in response to stiffening challenges making their products outside the region, manufacturers had begun exploring new manufacturing centers globally but are believed to be increasingly favoring centers in North America to be closer to the consuming centers. Geopolitics, rising economic rivalry and nationalism are triggering this move, observers said.
Courtesy of the intensifying geopolitical tussle between China and the United States, the transfer of production activities from the Far East (especially China) to locations in the US, Canada and Mexico is expected to increase this year, according to industry executives. “The global supply chain has undergone significant disruptions in recent years, from trade wars to the pandemic and geopolitical tensions,” said Michael Bernstein, a supply chain expert and CEO of MutualWin Supply Chain, LLC, in a LinkedIn post. “These challenges have exposed the vulnerabilities of over-reliance on distant, offshore manufacturing — particularly in China. As a result, friendshoring and reshoring have become not just buzzwords but crucial strategies for companies seeking resilience, efficiency, and growth.” The Reshoring Initiative, an organization dedicated to increasing US manufacturing jobs, said in a recent report that “reshoring and foreign direct investment (FDI) trends are demonstrating strength and longevity, driven by risks associated with global politics, and climate change, and by supportive U.S. industrial policies.”
The reshoring activities cut across all segments of the economy. FTI Consulting last year conducted a survey that indicates a growing adoption of reshoring by many sectors of the US manufacturing economy. The factors influencing this include economic considerations, geopolitical tensions, and technological advancements, such as automation and robotics, which are helping to make “domestic manufacturing more competitive,” according to FTI. Companies also want to improve their impact on the environment in compliance with strict corporate social responsibility (CSR) terms. Locations in North America are likely to be easier to manage with CSR as a major focus, they said. The result is that “in 2023, Mexico overtook China to become the largest trading partner of the United States, accounting for 15.7% of total trade; China and Canada accounted for 15.3% and 11.0%, respectively,” FTI said, in a report. “This reshoring wave is reshaping the industrial landscape and presenting both challenges and opportunities for supply chain leaders.”
Still, a reshoring flood is not expected right away. Shifting manufacturing plants, processes and even labor will be difficult enough but moving the entire supply chain structure is even more complex, observers said. Many manufacturers are moving gingerly, prodding contract manufacturers for information on the cost and advantages of shifting production. The trend has shifted the dynamics of the market from one where electronics makers moved in droves to China to a situation where the communist nation is no longer the first or preferred production location. In fact, many companies that have operated production facilities in China for decades are now seeking alternate locations in other Asian centers and even in North America. Government incentives are encouraging the shift. For electronics manufacturers, especially companies in the semiconductor market, the passing of the Chips Act has been a big game changer. It led to an increase in the number of new fabs being built in the United States, a major change in a market where fab constructions had stalled for decades. “Government initiatives have played a crucial role in accelerating the reshoring trend,” said FTI Consulting. “The Chips and Science Act of 2022 allocated $52.7 billion to boost domestic semiconductor manufacturing and research over a 5-year period from 2022 to 2027.”
Apple Inc. is one of the big high-tech companies that have become aggressive in the search for production centers outside China. The company was in the vanguard of enterprises that once insisted on producing its mobile phones and PCs in China. CEO Timothy Cook even once said it would be difficult for other locations to be as competitive as the facilities operated for Apple by contract producers like Foxconn in China. Today, though, Apple is diversifying its manufacturing centers, adding locations in India and Vietnam. MutualWin’s Bernstein is convinced that the incentives for relocating manufacturing from China are strong and increasing. “Friendshoring/Nearshoring and reshoring are no longer optional—they are strategic imperatives for companies that want to remain competitive and resilient,” Bernstein said. “By bringing manufacturing closer to home, businesses can reduce risks, meet customer demands, and enhance operational efficiency.”
Other industry observers say the trend will only intensify because of rising nationalism and a groundswell of opposition to China’s domination of the global manufacturing economy. Rising labor costs in China, combined with concerns about Chinese actions in response to Western sanctions imposed on enterprises operating in the country, have triggered the wave of reshoring, experts said. “Reshoring efforts will likely gain momentum as new facilities come online, partly powered by government incentives,” said Adam Fleischer, a communications strategist who contracts with Arrow Electronics, in a report for Altium, the EDA firm acquired last year by Renesas Inc. “Geopolitical tensions will most likely continue to threaten supply chain stability, making diversification a critical element of risk management.”
Supply chain implications
The East-West shift in electronics production has impacted Western component distributors both positively and negatively. China’s rise initially expanded their total available market (TAM) as the country opened and with improvements in purchasing power of the middle class. The country’s growing economic influence also resulted in an expansion of the electronics industry, which benefited the West’s biggest distributors, including Arrow Electronics, Avnet, Digi-Key, Future Electronics, Mouser Electronics, TTI and others. Having consolidated the European and North American distribution market, the survivors were able to leverage their expertise and relationships with OEMs as China’s transition evolved. Distribution sales in China have surged since but this has in recent years also resulted in the rise of Taiwanese players and the advent of thousands of small, mom-and-pop distributors in the country.
Restrictions on what distributors, component suppliers and Western OEMs can sell in China and other sanctions will accelerate the reshoring shift. Many of the products made in China are meant for domestic consumption although substantial portions of these also get shipped overseas. With sanctions increasing, companies are reconsidering their manufacturing strategies and concluding it may be better to produce their devices closer to the North America consumers and enterprise buyers. This may be a boon to distributors based in the West since they are entrenched in North America and can regain the leverage they had lost in recent years, and which resulted in WTMicroelectronics and WPG Holdings overtaking Arrow and Avnet to become the world’s Top 2 component distributors.