Investment into US manufacturing surges, but labour and space prove to be tricky to acquire

Large-scale investments into US manufacturing have exploded in the last year reports the FT, but companies are coming up against capacity constraints as they look to reshore

Research by the Financial Times (FT) has found that the number of large-scale investments into US high-tech and clean energy sectors have climbed dramatically in the last three years, with a huge acceleration of commitments following on from the Inflation Reduction Act.

The FT looked at semiconductor, electric vehicle, battery, and renewable energy component facilities, covering 75 manufacturing projects worth at least $100 million, and found that investment had risen nearly 20-fold since 2019.

Many of these are extremely large production facilities that promise thousands of jobs and significant outputs. The research detailed only four projects in the above sectors that were valued above $1 billion in 2019, but that had risen eight-fold to over 31 by August 2022.

Furthermore, this trend shows no signs of stopping and may even be accelerating. The research said that more than $40 billion in planned capital spending had been committed by a variety of companies since the start of 2023 alone and that this brough the total of large-scale capital spending committed to the US to $204 billion by mid-April.

Calling closer to home

This is part of a wider trend of reshoring and nearshoring that is increasingly being seen in other research.

For example, recent Reuters Events, Supply Chain research found that 67% of retailers and manufacturers in a global survey have already shifted where they source goods, components and materials from.

Furthermore, among those shifting locations, 58% said that it was a high priority or the very top priority for their organisation.  

Critically, many of most popular destinations being considered for sourcing and manufacturing moves were within or close to Europe and North America. The United States was the fifth most popular destination selected by respondents for sourcing, nearshoring and reshoring movements, while Mexico was the seventh most popular, underlining the move for many companies to head back to locations within, or near, the US.

Similarly, Kearney’s annual Reshoring Index found that 96% of US CEOs are committed to reshoring, which is 18% more than in the 2022 index.

Inflation Reduction Act inflates interest in US

A large part of this surge can be attributed to the US Inflation Reduction Act (IRA). The hugely ambitious piece of legislation sets aside hundreds of billions in tax credits for clean energy projects and associated manufacturing. This is not the only piece of pertinent legislation, however. There is also the CHIPS Act, which is another multi-billion-dollar incentives package designed to increase domestic semi-conductor production.

These measures have helped to attract companies both domestic and international, with many more now searching for manufacturing capacity within the US, but the pandemic has also played a key role.

While the IRA was passed in August 2022, it was already becoming clear to a variety of industries beyond the tech and electronics sectors that a reconfiguration would be necessary to reduce the vulnerabilities revealed by the pandemic and to move away from centralising manufacturing in various locations far from end markets.

For instance, the Reuters report found that two thirds of FMCG companies were looking to shift sourcing, as were 58% of respondents from healthcare and life sciences sectors.

Location, location, no location?

However, space and labour are at huge premiums across many economies, the US included. These issues could prove to be difficult hurdles in this generational shift in industrial strategy.

A Reuters article from April 13 interviewed experts and companies searching for new locations and found that there was considerable difficulty in finding and developing optimal sites.

The article noted that the biggest disparity was in finding so-called “megasites”, e.g those that are large enough for a major production facility, but also tied to transport, good energy grid connections, and a nearby supply of skilled labour.

The article says that “One site selection executive, Gregg Wassmansdorf, a senior managing director of global strategy consulting with Newmark Group Inc., estimates fewer than two dozen true megasites are still available across the country at widely varying stages of development.”

This sits in opposition to a growing demand, with analysis of a database from fDi Markets finding that the number of industrial projects valued at over $1 billion and with estimated job creation of over 1,000 positions had risen from eight in 2019 to 20 in 2022, reinforcing the FT’s research.

Furthermore, much of the premium locations may, have already been snapped up with CBRE noting that global commercial real estate investment volume hit an all-time high in 2021, with investment in the Americas totalling $354 billion in Q4 2021 alone, from which it has declined.

Therefore, it seems that while we are undergoing a profound shift in global production and sourcing strategies, there will be noticeable physical constraints that may push the timeline back on getting many projects up to their intended output.

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