Why reshoring—bringing manufacturing back to the U.S.—is so hard

The supply-chain disruptions over the past few years have put a lot more focus on the idea of bringing manufacturing back to the U.S.

Investors, customers, regulators and the general public have all voiced a desire for it. So has the Biden administration, which has emphasized the importance of making critical products such as semiconductor chips in the U.S. and is offering incentives for companies to reshore and create more manufacturing jobs in the U.S.

Some 1,800 U.S. companies intend to reshore at least parts of their business operations this year, and reshoring activities created 261,000 jobs in 2021, according to a report issued by the Reshoring Initiative, an advocacy group. More executives are singing the homeward-bound song, too: In the first eight months of 2022, 106 corporate earnings calls mentioned reshoring, up from six in the same period in 2019, according to our analysis of Capital IQ Transcripts data.

Despite the angst about supply chains, and the professed desire for reshoring, the effort faces some considerable challenges. We have identified some of those challenges, as well as some potential solutions.

Recouping the cost of reshoring isn’t easy

Some sectors, such as electric vehicles, vaccines, semiconductors and renewable-energy industries, are eligible for government support for their reshoring efforts. Industries that don’t get those incentives, however, might find the cost of reshoring outweighs the benefits due to the higher cost of labor, among other things, as well as the need for new infrastructure.

Consider personal protective equipment, or PPE. All of the hospital executives we spoke with throughout the pandemic said they care about supply-chain resilience and prefer American-made products. This sentiment, along with the severe shortages of N95 masks in the U.S. in the months following March 2020, prompted U.S. mask manufacturers to invest in domestic production. But the demand for domestically made PPE was short-lived after low-cost Chinese masks flooded the market after April 2020.

This ill-fated reshoring attempt resulted in layoffs and financial strains on companies. It sounds good to say we want domestic suppliers of PPE, but the reality is that healthcare institutions and consumers often choose the cheapest suppliers, and U.S. manufacturers aren’t competitive in terms of cost.

One potential solution is for reshored manufacturers to use their proximity to clients and end users to sense and respond to domestic demand for niche products, which is often driven by short-term trends. For example, instead of producing common N95 masks domestically, U.S. companies might focus on developing innovative masks that are reusable, recyclable, better fitted to different facial structures and biodegradable. Customers generally are more willing to pay a higher price for products with innovative features.

 U.S. manufacturers’ business model doesn’t mesh with reshoring

Over the past three decades, building a business case for moving manufacturing abroad was easy because of the lure of low-cost labor. Making a case for reshoring is difficult, but the following steps can help a company develop a reshoring-based business model to create and capture differentiating value:

of CEOs and other executives of American manufacturing companies express positive sentiments toward reshoring


of executives who have manufacturing operations in China have either already moved part of their operations to the U.S. or plan to do so inthe next three years


of executives are evaluating similar moves


Source: Kearney 2021 Reshoring Index

—First, make it possible for customers to keep their inventories lean. In recent years, many U.S. retailers and manufacturers had to abandon “just in time” inventory models (in which they work closely with their suppliers to meet fluctuating demand with little inventory) in favor of a “just in case” strategy (where they keep large inventories on hand to minimize the risk of running out during a demand surge). The downside of the “just in case” strategy, of course, is higher storage costs and potentially getting stuck with products that don’t sell as expected.

By locating closer to their U.S. customers, manufacturers can more accurately detect and swiftly respond to demand fluctuations, making just-in-time supply chains a real possibility again for U.S. clients. This value—reliable and responsive delivery performance supported by reshoring—should become their main selling point rather than traditional cost-based contracting. These manufacturers could even offer subscriptions that guarantee just-in-time and hassle-free supply-chain performance, in much the same way Amazon guarantees faster deliveries to consumers who have Prime subscriptions.

—Second, as Chinese manufacturers rush to embrace robotized factory floors, American manufacturers must capitalize on the technological advantage that the U.S. maintains over China by drastically automating their operations. Automation can reduce labor costs, aid in preventive maintenance to reduce equipment breakdowns and other disruptions at factories and warehouses, and shorten the time it takes from custom orders to production to delivery.

—And third, an inward-looking reshoring operation makes little sense, especially when the U.S. has a cost advantage over much of Europe and has the potential to become an export powerhouse. Serving a large and diverse global market would enable U.S. manufacturers to pivot to different geographical marketplaces as consumer trends shift, without having to constantly hire and fire workers or stop and restart production.

A lack of supply-chain visibility

Today’s global supply-chain operations are so complex and opaque that only 2% of companies in a 2021 McKinsey survey said they had any visibility beyond their second-tier suppliers, or those that supply materials and parts to their direct suppliers. This lack of transparency occurs even in highly sensitive industries in which reshoring is absolutely essential, such as medical supplies and defense equipment.

Without supply-chain visibility and transparency, manufacturers cannot prove the extent to which their products are domestically made. That could make it harder for them to justify charging higher prices or to receive recognition for their growing reshoring efforts. Buyers also need supply-chain visibility to evaluate supply-chain risk based on the origin of products, while investors need it to understand a firm’s ESG (environmental, social, and governance) performance.

One technology that shows promise in this area is blockchain. Its most distinguishing characteristic is that it is tamper-proof, meaning it could be used to create an incorruptible digital record of transactions at each link of the supply chain. Whether it is blockchain or something else, the momentum of the reshoring movement ultimately depends on more practical and reliable supply-chain transparency solutions.

U.S. firms worry that reshoring will hurt their financial performance

For decades, Wall Street has convinced investors that asset-light business models are superior. This belief is deep-rooted enough that many U.S. companies are reluctant to reshore by investing in fixed assets such as factories, machines and infrastructure.

Semiconductors, for example, were invented in the U.S., and yet many companies focus on integrated-circuit design and outsource chip manufacturing to businesses in Taiwan. This trend dovetails with Wall Street’s broader embrace of asset-light companies whose intellectual property and brands offer potentially spectacular returns on minimal capital. Consequently, valuations of firms with tangible assets such as factories and equipment have suffered, which can make it harder for executives to commit to reshoring.

If we want to expedite the reshoring movement, regulators, investors and academics need to challenge the superiority of asset-light business models, and request that company valuation take supply-chain risks into consideration.

Company valuation also should take into account an organization’s ability to rapidly develop, design, test and deliver new products. Reshoring can facilitate faster learning and product development because customers, manufacturers and research-and-development teams are located in the U.S. In addition, reshoring will attract engineering, technology and quality-control professionals, fostering an environment conducive to innovation.

If these two strategic values of reshoring are incorporated into the way company valuations are traditionally calculated, executives and Wall Street are more likely to embrace reshoring, giving the movement a boost.