Introduction

What’s the Story? China has long been an important sourcing destination, earning itself the moniker of “the world’s factory.” Pandemic-led lockdowns and ensuing factory shutdowns, widely documented port congestion and sky-rocketing inflation, however, have revived the debate around sourcing diversification across nonfood categories, favoring the onshoring of sourcing and manufacturing to the US. In this report, we examine onshoring as a sourcing strategy for US brands and retailers and what it would take to bring sourcing to the US for categories such as apparel and footwear, furniture and furnishings, and other general-merchandise products. We also discuss nearshoring as an alternative approach. Why It Matters Businesses have long strived for sources with optimal competitive advantages and economies of scale—and sometimes an exclusive supply. The pandemic, however, highlighted that US businesses’ dependence on overseas suppliers is extremely risky and can lead to inventory delays and very high costs. Reconsidering a sourcing mix is not straightforward and requires thorough examination of myriad factors.

• The US has historically been a net importer for several decades—pandemic-led disruptions have imposed tremendous costs on the nation, locking away supplier countries and congesting ports.
• Some 90.2% of US retailers faced disruptions to their supply chain—a greater share than businesses in other sectors, according to a September 2021 survey of US businesses conducted by the Federal Reserve Bank of Richmond. The high share means that US retail’s international supply network is deeply embedded and intertwined with sources in other nations—making it more challenging to bring manufacturing back to the US.
• US prospects on growing manufacturing quickly look bleak: its goods-trade balance (the difference between its goods imports and exports) has consistently been in deficit, exceeding $400 billion since 2002. It surpassed $1.0 trillion in 2021—the highest level in the last two decades, according to the US Census Bureau, as shown in Figure 1.

Considering the complexity of these factors, onshoring at a national scale appears challenging. However, we have identified several key ways that US brands and retailers can diversify sourcing and bring manufacturing closer to domestic US markets.

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Figure 1. US Goods Trade Deficit (USD Bil.) [caption id="attachment_144784" align="aligncenter" width="700"] Source: Census Bureau/Coresight Research[/caption]  

Onshoring Retail Sourcing in the US: Coresight Research Analysis 

Most brands and retailers use a combination of the three primary sourcing strategies: onshoring, nearshoring and regionalization. Onshoring sourcing in the US will allow brands and retailers to procure goods for sale from domestic manufacturers or set up in-country manufacturing units. Nearshoring comprises sourcing from markets close to the US, including Canada, Mexico and countries in Central America. Regionalization involves sourcing from countries close to the consumer market; for the US, this would look similar to nearshoring in practice. For US retailers selling outside the country, regionalization would mean sourcing closer to the markets where they sell. In this report, we focus on onshoring and nearshoring. 1. Onshoring Sourcing: Advantages While sourcing from China and other Far East locations presents several cost advantages—the major driver for brands and retailers using these sourcing destinations—supply chain disruptions over the past two years have led to price rises across the board. This may well offset some of the pricing disadvantages of manufacturing onshore, particularly when considered alongside the advantages of onshoring retail sourcing to the US, which we present below.

• Reduced logistics costs

Onshoring sourcing can be a positive move for cutting down shipping fees, import tariffs and associated transport costs. Sourcing from multiple destinations means complying with their various laws, as well as US regulations and tariffs on importing from each location. Shipping from overseas presents a substantial cost within international sourcing, particularly as the pandemic upended global supply chains and threw global shipping into chaos. Since October 2020, shipping a forty-foot container from China to the US West Coast has soared by 400% to over $19,000 as of September 2021, ahead of the holiday season. Over the past several months, shipping fares have fallen, to $15,898 per container as of February 2022, but are still well above 2020 rates.

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Figure 2. China/Eastern Asia to US West Coast: Average Weekly Freight Rate per Forty-Foot Container [caption id="attachment_144751" align="aligncenter" width="700"] Source: FBX.com[/caption]    

• Reduced lead to market times

Time involved in moving samples back and forth can significantly delay an item’s time to market. This is most significant in the apparel sector but also can also impact the home sector. For brands and retailers that have not adopted digital sampling, physical samples have to be sent to them from suppliers to finalize styles before mass production. This practice is not only time consuming as there are often multiple iterations of a sample before approval, but also generates additional transport emissions, increasing a product’s carbon footprint. Local sourcing removes some of these issues as brand representatives can visit suppliers nearby to avoid samples being shipped multiple times over long distances. Onshore sourcing cuts lead time to market by several weeks, helping brands and retailers get goods to shelves quicker. This strategy also builds in more time to respond to supply chain disruptions.

• Reduced travel for quality control

Quality inspection personnel from brands and retailers are often required to travel to countries where production is based to verify quality standards. While this can be a positive experience for some, many brands and retailers would benefit from removing the cost, time and stress of visiting long-haul manufacturing destinations. 2. Onshoring Sourcing: Hand-in-Hand with Local Manufacturing  To successfully onshore sourcing to the US, businesses must consider how to address manufacturing capacity, skilled labor requirements and employment costs, among other factors. China, Mexico and Canada are the US’s top three import partners, according to the US Census Bureau. We discuss five metrics below to compare how the US stacks up against these countries in terms of suitability for retail manufacturing.

• Manufacturing output in the US is second only to China—the global manufacturing leader, with an output of $3.9 trillion in 2020. The US comes in second at $2.7 trillion. Other nations pale in comparison to these two countries in terms of manufacturing output, meaning the US is in a stronger position than many other countries looking to onshore or scale domestic manufacturing.

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Figure 3. Top 15 Countries Globally: Manufacturing Output (2020; USD Bil.) [caption id="attachment_144752" align="aligncenter" width="700"] Source: World Bank/Bureau of Economic Analysis/Government of Canada[/caption]  

• China’s supply of suitable labor far exceeds other countries—perhaps unsurprisingly given the scale of China’s manufacturing capabilities. As of 2018 (latest data) China has 41.7 million people working in the manufacturing sector, according to the National Bureau of Statistics (NBS). Interestingly, Mexico ranked second among our comparison group, with 14.2 million workers in industry as of 2019 (data specifically for manufacturing is not available), according to the International Labor Organization (ILO), surpassing the US and Canada, which have 12.3 million and 1.7 million manufacturing workers, per latest government data as of 2021.

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Figure 4. US and Top Three Trading Partners: Employees Working in Manufacturing (Mil.) [caption id="attachment_144753" align="aligncenter" width="700"] Data are latest available: China (2018), Mexico (2019), Canada (2021), US (2021)
Source: NBS/ILO/BLS/StatCan/Coresight Research [/caption]  

• Labor cost in China and Mexico is a fraction of that in the US. Along with a surplus labor supply, China and Mexico trump the US in terms of labor costs. As of 2021, average manufacturing weekly wages in Mexico are $116, we calculate, based on average hourly wage data from the National Institute of Statistics and Geography (INEGI). Average manufacturing weekly wages in China are $230.70, as of 2020, according to NBS while those in Canada and the US were multiple times higher, based on 2020 government data.

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Figure 5. US and Top Three Trading Partners: Average Manufacturing Weekly Wages [caption id="attachment_144754" align="aligncenter" width="700"] Source: NBS/INEGI/BLS/StatCan/Coresight Research[/caption]  

• Factory rents in Mexico and China are cheaper than in the US. As well as wages, rent and utility payments are a substantial component of operating expenses and businesses endeavor to keep these costs low. Industrial rents in Canada are higher than those in the US by at least $1.00 based on the latest data from real estate companies JLL and CBRE, making it unviable to set up a large-scale unit for many companies. In reality, rates vary based on the location of the facility in each country.

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Figure 6. Quarterly Rent per Square Foot US Manufacturing Sector and Its Top Three Trading Partners [caption id="attachment_144755" align="aligncenter" width="700"] For Canada, the US and Mexico, rent is as of the fourth quarter of 2021. For China, rent is as of the first quarter of 2020.
Source: NAI Mexico/Knight Frank/JLL/CBRE/Coresight Research [/caption]    

• The US ranks top in the World Bank’s “ease of doing business” rating among our comparison group. On a global scale, the US ranks sixth followed by Canada at 23, China at 32 and Mexico at 60, among 190 ranked countries. The ranking considers numerous factors, including opening a business in the country, employing workers, dealing with construction permits, getting electricity, registering property, paying taxes, enforcing contracts and other processes typically involved in incorporating a business.

The US outshines its top trade partners in the ease of doing business metric and ranks very highly in manufacturing output. While the supply of suitable manufacturing labor is not a factor that can be scaled quickly, there is scope for automating manufacturing processes; businesses looking to onshore in the US should consider how they might use automation within their new establishments. Wages and rent are also key considerations as costs are high in the US. However, as businesses scale, these costs tend to be recovered over the long term. 3. Onshoring: An Ongoing Process  Identifying suppliers and honing healthy working relationships takes time, and brands and retailers must be committed to establishing local sourcing as part of a long-term process. Brands and retailers can look to Walmart’s moves toward local sourcing over a period of time as a playbook. Walmart announced in 2013 plans to begin sourcing more US-made goods and earmarked $50 billion for those efforts over the 10 years through 2023. This kicked off with its first “Made in the USA” open call pitching event for some 500 suppliers in 2014. This focus has scaled over the years and the company is set to hold its latest version of the event this June, called “Open Call,” featuring 2,000 suppliers of US-made products. Walmart announced in March 2021 that it will invest a further $350 billion over the decade to come on items grown, made or assembled in the US. Its six priority areas of focus are plastics, textiles, small electrical appliances, food processing, pharmaceutical and medical supplies, and goods not for resale (GNFR). Moreover, the US government is resolute on its ambitions to secure domestic supply chains. In February 2021, President Joseph Biden signed an Executive Order on supply chains, which includes:

• Securing supply chains, reviving domestic manufacturing capacity and creating jobs
• New investment in research, innovation, training and university partnerships
• Work on shielding the economy from potential shortages of critical imported products and components, such as semiconductors, minerals and materials, pharmaceuticals and their ingredients, and advanced batteries such as those used in electric vehicles
• A long-term review of six sectors of the economy to identify policy recommendations to fortify the supply chain

Since the signing of that order, the US government has implemented several initiatives related to the supply chain, including:

• A freight information exchange system called Freight Logistics Optimization Works (FLOW), which consolidates data from private businesses, warehouses, logistics firms, ports and other stakeholders, to help improve the movement of goods and ease congestion
• Senate and House approval to fund the CHIPS for America Act to build semiconductor production capacity in the US

As the US government is committed to making the nation less reliant on foreign imports, businesses should look to using government incentives to onshore their sourcing incrementally. 4. Nearshoring: An Alternative to Onshoring? Nearshoring production in Mexico presents a viable opportunity for businesses not looking to make the leap to US onshoring. It has a healthy labor supply as well as feasible wage and rental rates for businesses setting up new facilities. Its proximity to the US and accessibility by road offer reduced transport times compared to China and cut out the risks associated with ocean freight. In its March 2022 earnings call, Gap stated that it is reallocating some of its sourcing to Mexico and Central America in the current fiscal year. As the company is expecting longer lead times for some of its inventory sourced from Vietnam and the Far East it hopes to balance this out through nearshoring, which should cut weeks off its time to market. Williams Sonoma stated on its November 2021 earnings call that it is considering Mexico and Brazil very strongly as potential sourcing destinations. Furniture retailer La-Z-Boy has also been expanding its production in the US and Mexico in various phases since early 2021, according to the company. As companies increasingly consider the US and its nearby countries for sourcing, we believe economies of scale stand to deliver cost savings in the long term. We expect brands and retailers to consider onshoring and nearshoring strategies specific to their sectors and the stakeholders they are dependent on. Despite the costs, given its production capabilities and ongoing government efforts regarding domestic manufacturing, there is no better time to begin bringing sourcing back to the US.

What We Think

Disruptions brought about by the pandemic and the Russia-Ukraine war have underscored the need for diversification in supply chains. For many brands and retailers in the US, this has shone a spotlight on the importance of reducing reliance on foreign imports through onshoring. Despite several factors that set the US at a cost disadvantage for sourcing it appears that there is no better time for US businesses to incrementally begin reshoring sourcing and manufacturing. The US already ranks highly for the ease of doing business in the country among its global counterparts, which means incorporating a new firm is relatively smoother than the process in other countries. The US government is also implementing several initiatives to ensure the nation’s supply chain is insulated against global shocks, including helping businesses reshore successfully. Implications for Brands/Retailers

• Companies must look to revamp their sourcing mixes and use this time to negotiate favorable contracts with local suppliers in the US who are looking to grow their business.
• Honing supplier relationships takes time. Brands and retailers must invest to build long-term relationships that are mutually beneficial.
• Brands and retailers should look to invest in domestic manufacturing facilities as a way of integrating their supply chains and helping local suppliers scale their manufacturing.

Implications for Real Estate Firms

• Industrial real estate providers should provide help to businesses looking to onshore manufacturing. Businesses will already have significant upfront investment in terms of facilities, technology and labor, so real estate providers could seek pay outs over a longer period to help ease some initial cost burdens.

Implications for Technology Vendors

• Supply chain technology vendors that have a specific focus on suppliers in the US can help brands and retailers identify vendors they can work with.
• Technology solutions that can provide local supplier equivalents with typical overseas suppliers can help expedite the onshoring process.