Is Made in America a lofty idea suited for presidential campaign bumper stickers—or is it a sourcing strategy with staying power?
The answer may lie somewhere in the middle, according to Kearney’s 2024 Reshoring Index (KRI), released this week. The group’s 11th annual report reveals that sourcing products closer to home is likely to be a lasting objective for many U.S. brands, though the path toward that goal may not be smooth or linear.
At the center of this trend is the U.S.’ conscious uncoupling from China, which was unseated by Mexico as the nation’s most prominent trading partner this year.
Kearney found China’s imports to the U.S. declined by 20 percent, or $105 billion, in 2023. Trade tensions between the U.S. and China have been percolating for years, but escalating rhetoric from both countries’ governments in the lead up to the November election is creating even more uncertainty about the future of the relationship. As such, American companies are showing far less willingness to rely on China sourcing than they once did.
Some of that hesitancy is spilling over to China’s regional neighbors, Kearney data showed. American imports from 14 low-cost Asian countries and regions including Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka and Cambodia dropped by $143 billion in 2023.
According to Kearney Strategic Operations partner and study author Shay Luo, the supply chain slowdown that proceeded the pandemic made a big impression on U.S. firms and likely influenced their new philosophy on sourcing.
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Covid highlighted the “non-cost benefits” of doing business closer to one’s end market—”agility, responsiveness; those became more critical. It was a wake-up call,” she said. “Most of them only looked at costs for the past 30 years,” but relying on low-cost overseas markets during a time of production and logistics turmoil cost companies billions in lost sales.
Fleeing China for other Asian markets “will not solve the problem of shipping products faster to the destination,” nor will it contribute to supply chain resiliency, she said.
As such, nearshoring and onshoring have come en vogue.
Made in the U.S.A.
The U.S. manufacturing sector has picked up some of Asia’s lost market share, though manufacturing gross output decreased slightly from $7.245 trillion in 2022 to $7.236 trillion in 2023 (a difference of $9.8 billion).
There’s a likely explanation for this, Kearney’s report posits. Bureau of Economic Analysis (BEA) data shows that personal consumption expenditures (PCE) grew by only 3 percent in 2023, from $5.997 trillion in 2022 to $6.192 trillion. Between 2021 and 2022, PCE increased by 9 percent, suggesting a recent slowdown in goods and services consumption overall.
However, the group’s Reshoring Index is at its highest point in more than a decade, and 2023 saw levels twice as high as 2019—the previous high point. It was also the second consecutive year of relative movement toward the U.S., the report said.
“Most companies that are moving back to the U.S. are highly automated, and they are moving back to be closer to innovation or technology,” Luo said. While she believes conventional textile or apparel production is unlikely to move back to the U.S. in a big way due to a shortage in skilled and affordable labor, 3D printing, 3D knitting and other next-generation technologies could create major opportunities in the sector.
Mexico
Mexico has overtaken mainland China as the largest exporter to the U.S. for the first time since 2013, with U.S. imports from the country growing from $320 billion to $422 billion (32 percent) from a pre-pandemic baseline.
“When companies are considering moving their supply chain closer home to home to the U.S. or Mexico, it’s with the idea of making their supply chain more responsive and agile,” Luo said. “If the U.S. is not the perfect destination, Mexico then becomes the best choice they could possibly have.”
An affordable—and abundant—labor market that is well suited to manufacturing, Mexico trumps the U.S. when it comes to workforce, she explained.
The country is also investing heavily in the infrastructure needed to support a more robust manufacturing sector. Mexico’s leading presidential hopeful last week announced a plan to build out 100 new industrial parks with an eye toward green energy utilization and responsible water stewardship.
Meanwhile, Kearney called the rate of warehouse and manufacturing expansion close to the U.S. border “astonishing.” The report noted that one of Mexico’s leading warehousing firms reported a fourfold increase in business over the past two years.
“We do notice the ecosystem…is not there fully, so they still need to build the full vertical value chain,” from raw materials and components through production, “to be able to fully decouple from China,” Luo said. “I think we’re at the beginning of the localization journey. It takes years, and it takes a village, to have one product produced. So at this moment, we see the tail end of the value chain moving closer to home.”
Notably, Asian and especially Chinese manufacturing firms are rushing in to plant stakes in the Mexican market. While firms may be intent on moving away from China, “a lot of the global manufacturing shifts are driven by Chinese companies,” Luo said, noting that the acceleration of the trend was a “surprise.”
“We saw the trend last year, and this year it has become more obvious,” she said. “So [companies] are not really walking away from the Chinese—they’re still leveraging their production know-how, their knowledge and also their capital to find a better destination.”
Canada
The oft-unmentioned neighbor to the North, “Canada’s potential as a location for some Asian…imports to move to has jumped somewhat unexpectedly,” Kearney’s report said.
The country gained $13 billion in U.S. export volume last year, with volumes steadily increasing over the past three years. In fact, the report said Canada’s exports to the States increased across half of its export categories, the largest being transportation equipment, which grew by 30 percent in 2023. “Canada’s US imports are now close to a third of what was imported” from the 14 low-cost Asian countries and regions, Kearney wrote.
“We’re a little bit surprised by Canada, as most of the time we focus on Mexico—the southern border,” Luo said. But with many U.S. firms looking for opportunities to shorten their supply chains, the country of 38.9 million can’t be overlooked.
While labor costs are comparatively high, Canada, like the U.S., is focused on bringing advanced technology to its production sectors. “The market Canada captures is very different from the type of industry Mexico has been capturing,” Luo explained. While Mexico’s export products are labor intensive, most of Canada’s are resource-driven, like petroleum, minerals, lime and cement.
A global supply chain
While China may be losing its grip on its “World’s Factory” title, it’s not shrinking away from the scene—far from it, Kearney wrote.
“Chinese companies are still very much in the U.S. import game and quickly adapting to a global market impacted by new re- and nearshoring developments,” the report said.
Countries like Vietnam, India and Thailand are importing more from China even as U.S. imports from the sourcing superpower have dwindled. And while those countries have also lost some ground when it comes to U.S. business, “the top Asian countries’ imports to the U.S. are almost directly proportional to their imports from mainland China,” the report said.
Even if it seems like China is being replaced by these other players, “in some cases at least, they’ve become a stopover in the journey of manufactured goods from mainland China to America.”
A similar strategy may be taking shape in U.S. nearshoring locales. “Further analyses of the trade data indicate a strategic shift among Chinese manufacturers, away from assembling end products domestically toward leveraging international manufacturing hubs in Southeast Asia and, increasingly, Mexico,” the group wrote.
Luo said she believes Chinese firms are likely to continue to invest in Mexico and Central America to capitalize on the appetite for nearshoring. Some U.S. brands are even pushing their Chinese suppliers to bring their expertise, inputs, technology and capital to new locales that are closer and less developed.
“Globalization still exists,” Luo said. While the interest in reshoring and nearshoring is undoubtedly on the rise, verticalization of supply chains takes time. It’s likely that the modern value chain will see more countries working on different parts of a single product, rather than a single country, like China, taking control of the process end-to-end.
Asked for her vision of the future, Luo predicted that “Countries may be connected in a different way, with a different format for the value chain.”
“Everyone has a very specialized contribution that they could bring to the table.”