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BLOOMBERG COMMENTARY ... June 30th 2023
Brooke Sutherland: What is a reshoring boom anyway?
BLOOMBERG COMMENTARY ... June 30th 2023
Brooke Sutherland: What is a reshoring boom anyway?
Original article:
Peter Burgess COMMENTARY
This newsletter is very interesting and very annoying.
In some ways reporters have an impossible job, because there are some many facts and datapoints in the modern economy that a story can be created in support of almost any point of view. At the same time there are a large number of reporters who are writing stories that are rather poorly supported by the data, ir at all.
Bloomberg is a financially successful news organization and as such gets 'good' reporters ... but it is not at all clear that these 'good' reporters are 'unbiased' reporters rather than being 'pro-business hacks'!
When I was young, I was very 'pro-business', and to a great extent I still am. But I want to see 'a level playing field' where there is more 'free market' rather than excess concentration of economic power and monopolistic behavior. It is an unfortunate reality of history that a certain corporate laziness in the United States in the 25 years post WWII left US business organizations seriously unfit for global competition by around 1970. By that time a lot of European business had become more productive than US business, and the weakness of the US economy was aggravated by the productivity and quality of Japanese manufacturers. US business had had a big benefit from very low energy prices in the early post war years relative to everywhere else and had completely failed to modernise and improve energy efficiency ... including US automobiles. When the OPEC oil cartel got control of internatinal trade in petroleum in 1973 the US economy was forced into free fall and a slump that lasted a long time and was only partially resolved.
Post WWII the US economy thrived for around 25 years paying high wages and using low cost energy to deliver decent profits for investors. After 1973 energy costs increased substantially and otehr high costs resulted in a dramatic reduction in corporate profits. With the Reagan administration in the early 1980s the profit problem started to be resolved with a massive amount of production outsourcing to low wage countries ... not to mention low regulation countries as well! By the end of the 1980s much of the high wage economy of the United States had been eviscerated.
High wages in the US industrial heartland that were once protected by union contracts were replaced by relocation of production to non-union factories in 'Right to Work' States mainly in the South of the United States. US wages have 'flat-lined' for the past 40+ years even though productivity for that time period has imprvved substantially together with corporate profitability.
While corporate productivity and profits have increased signoificantly during the past 40 years enabled in part by business investment and tax breaks, social investment in the United States has been relatively low as well as investment in infrastructure like roads and bridges. To his credit President Biden has signed more major legislation in the past 2+ years to increase essential public investment in America than was done in the administrations of Eisenhower and Johnson combined ... the last time when such investment was done at scale.
From my perspective the Republican agenda for social and infrastructure investments is completely out of touch with reality and will severely weaken the United States if it were to be enacted. It is far from clear if the people who write news stories understand the risk of 'balancing' the (government) budget by cutting back on essential government investment. To my mind, if there is a need to 'balance the budget', then it should be done by raising taxes on profits especially where the marginal business 'return on investment' is unusually high.
Peter Burgess
What is a reshoring boom anyway?
Brooke Sutherland
Jun 30, 2023, 1:41 PM
President Joe Biden has made a revival of US factory jobs and industrial prowess a key pillar of his economic agenda. Thanks in large part to the scarring circumstances of the pandemic and a bazooka of government money aimed at encouraging companies to play along, this latest attempt at fostering a revitalization of America’s manufacturing might appears to have gained more traction than the myriad other iterations of reshoring policies over the past decade. But the degree to which this long-awaited US manufacturing renaissance actually manifests in increased sales for industrial companies and more jobs for Americans remains murky.
First, some history. In 2010, President Barack Obama laid out a plan to double US exports in five years. That didn’t happen, although there was a boost. In 2015, a survey of manufacturing and distribution company executives by AlixPartners found that 40% of North American respondents had recently nearshored production close to the ultimate end market or were in the process of doing so. A separate report later that year from another consultant, A.T. Kearney, found that “the reshoring phenomenon appears to have been more a one-off aberration than an inexorable trend.”[1]President Donald Trump also pledged to bring manufacturing work back to the US and launched a trade war with China to force the issue. There was some improvement in factory investment and employment, but then the pandemic happened. The US International Trade Commission, a bipartisan independent agency, found recently that American importers bore almost the entire burden of tariffs placed on $300 billion of Chinese goods.
Now we have Biden’s economic doctrine — called “Bidenomics” and defined in part by billions of dollars of government largesse meant to fund investments in infrastructure and increase domestic production of semiconductors and clean-energy technologies. Bidenomics “means the industries of the future are going to grow right here at home,” the president said this week during a speech in Chicago. The policy “is working,” he said.
Executives at large established companies don’t tend to restructure their businesses based on whatever the economic theme of the month might be. This may not be a politically convenient conclusion, but credit for whatever reshoring, nearshoring or friend-shoring phenomenon is underway seems logically due to the cumulative effect of stubborn geopolitical tensions; the rise of local-for-local production strategies; a need to rewire global supply chains to bolster resiliency; the collapse of the Asian labor arbitrage as local wages rise and automation technology becomes more capable; and the impact of the monumental amount of stimulus floating around. In other words, we’re more like 13 years into the reshoring process rather than three. “I think that that’s sort of a long cycle thing that we’re going to look back 10 years from now and say it happened or it didn’t happen,” Daniel Florness, chief executive officer of industrial distributor Fastenal Co., said of reshoring last July. “I don’t know how you identify that in a given quarter or frankly even a given year that that trend is in place.” Nevertheless, manufacturing investments have exploded.
In January 2022, the Census Bureau’s gauge of construction spending on manufacturing facilities reached the highest monthly level in data stretching back to 2002. The metric has set records every month since except for three. Adjusting for inflation, construction spending on manufacturing has doubled since the end of 2021, with the majority of the growth being driven by facilities to support computer, electronic and electrical production, according to a Treasury Department analysis published this week. Melius Research has tabulated some $550 billion of “mega-projects” — defined as an investment greater than $1 billion — announced cumulatively since January 2021 with around 60% of those planned facilities already breaking ground. Examples include electric vehicle and semiconductor plants but also airports, hospitals and wastewater projects. Employment in the US manufacturing sector has inched up toward 13 million this year, the highest level since 2008, according to data from the Bureau of Labor Statistics.
Technically, this is evidence of a spending boom, not a reshoring boom. As you might imagine, those airports, hospitals and wastewater projects are not being relocated from China. Even when manufacturing companies have announced new plants or factory lines — and to be clear, a lot of this has been happening — it’s rare to see an accompanying shutdown of a facility elsewhere in the world. As Rockwell Automation Inc. CEO Blake Moret has often said, what’s happening is more of a “shoring” phenomenon. Industrial manufacturers are adding North American capacity to respond to demand growth in that region and to build more resiliency into their supply chains, a process that often entails persuading smaller parts providers to also set up shop in multiple geographies. “It’s not so much that factories are being shuttered in another part of the world, it’s that the US is an outsized beneficiary of new spend,” Moret said in February at the Barclays Plc industrial conference.
For the purposes of politicians, this distinction doesn’t make much difference. But it’s helpful in thinking through why some of the data sets that might be expected to show the benefits of reshoring aren’t supporting that thesis and in understanding the degree to which US companies will be beneficiaries of this trend.
Trade data, for example, don’t indicate that the US has made much progress in increasing the amount of goods it exports relative to the amount that it imports, Barclays analyst Julian Mitchell wrote in a June 12 report. Domestic manufacturing growth outpaced the increase in imports from low-cost Asia Pacific countries in 2022, resulting in a positive reading for Kearney’s reshoring index. But there was an even starker positive reading for the reshoring index in 2019, which then reversed in 2020 and 2021, so it’s not clear how sustainable this is. Mexico was expected to be a prime beneficiary of manufacturers’ pivot away from China, but as Bloomberg Opinion’s Eduardo Porter noted earlier this month, there’s little evidence of any recent surge in foreign direct investment, and the country hasn’t seen much growth in its share of imports to the US market. Still, occupancy hit a record high in Mexico’s industrial parks last year. At least part of that is connected to Chinese suppliers setting up shop in the country and building out a North American ecosystem to protect their business.
Automation equipment companies are expected to be the other big winner from a North American manufacturing revival as their technologies are what make the economics of such a shift work, but growth in robot installations in the US in 2021 was a fraction of the pace seen in China and also trailed Japan and the combined European market, according to the International Federation of Robotics. Rockwell hasn’t seen outsize growth in North America relative to other regions, Mitchell of Barclays wrote. “We do a little over half of our business in the US and Canada, which is to say almost over half of our business is not in the US and Canada,” Rockwell CEO Moret said in an April interview. “As we talk about creating more ways to win, geographic growth is an important part of that.”
US factory activity has contracted for seven consecutive months through May, the longest streak of shrinkage since 2009, according to data from the Institute for Supply Management released earlier this month. A gauge of order backlogs also slid to the lowest level since 2009 as improving supply chains helped manufacturers boost output and customers focused on reducing inventory stockpiles.
Daily sales growth slowed to 5.2% in May at Fastenal, whose results are often a good bellwether for the sector. The deceleration occurred across product lines, markets and geographies and happened despite easier comparisons with results a year earlier, suggesting a broader softening industrial economy, Bloomberg Intelligence analyst Christopher Ciolino wrote in a note.
It’s possible that this is all just the pause before the boom that industrial firms will see as stimulus money starts to filter through and some of these announced projects get further along in the construction process. A semiconductor company doesn’t need to buy air conditioners, lights, manufacturing equipment, industrial robots or even all of the building materials on the same day it breaks ground on a new facility. But while a surge of factory investment might be a rising tide that lifts all boats, it will not lift all of those boats to equal degrees, nor will it lift them on a set timeline. While real spending on construction for computer, electronics and electrical production has almost quadrupled since the beginning of 2022, inflation-adjusted outlays for other kinds of manufacturing construction “are largely consistent with long-term levels,” according to the Treasury Department analysis of the Census data. None of these factory expansions are written in stone should economic conditions warrant a pullback or a delay.
On an individual company level, outside of the wind turbine and power grid supply chain, the impact from the US Infrastructure Investment and Jobs Act and Inflation Reduction Act should be an incremental positive “(worth a very low single digit % tailwind to sales) but may not be ‘game changing’ in terms of domestic manufacturing,” Mitchell of Barclays wrote. For example, nVent Electric Plc has said those two stimulus packages create a combined potential sales opportunity for the company worth as much as $350 million, which Mitchell estimates translates to a 2.5% boost to the company’s overall annual revenue. “I wouldn’t point to business that we can say unequivocally wouldn’t have happened without the money, but it’s certainly a factor,” Rockwell’s Moret said of the US stimulus in the April interview.
The problem with the terms “reshoring” and “boom” is that there is no consensus on what either actually means. Is it reshoring if a manufacturer adds a production line in Ohio but also expands in Asia and Europe? Does a 2.5% sales boost count as a boom?
Quote of the Week ... “The FAA frankly failed us.” — United Airlines Holdings Inc. CEO Scott KirbyKirby made the comments in a message to employees initially reported by the Wall Street Journal after the airline had to cancel or delay thousands of flights starting June 24. Bad weather was a factor, but in the memo, according to the Journal, Kirby said that storms hadn’t historically led to such severe levels of disruption and that the problem was exacerbated by the Federal Aviation Administration cutting arrival rates by 40% and departure rates by 75% on Saturday. JetBlue Airways Corp. President Joanna Geraghty echoed these comments in a separate message to that airline’s employees reported by Bloomberg News. “We are working with the FAA to better understand what led to the significant and unexpected [air-traffic control] restrictions this week that affected thousands of flights across carriers,” Geraghty said. “The severity and lengthy duration of the latest programs were worse than we have seen in the past with similar weather.” The FAA has pushed back against these characterizations, and Transportation Secretary Pete Buttigieg took aim at United with a tweet showing the airline’s cancellation rate was higher than its peers.
Either way, this isn’t the start that the aviation industry was hoping for as we get into the peak of the summer travel season. As much as travelers hate delays and cancellations, remember that these disruptions cost the airlines, too. They only make money when the planes are flying, so we’re all in this unhappy summer of travel hell together. If you’re planning to fly somewhere for the Fourth of July holiday in the US, it’s best to plan on arriving early to the airport and mentally prepare yourself for some speed bumps. If you’re over air travel altogether, the sleeper train is having a bit of a revival in Europe.
Deals, Activists and Corporate Governance
Spirit AeroSystems Holdings Inc.’s factory employees are heading back to work. Members of the International Association of Machinists and Aerospace Workers voted to ratify a new four-year contract with Spirit on Thursday, ending a six-day strike that started after the union rank and file voted down a previous deal backed by its leaders. There may be some ripple effects on the rest of the aerospace supply chain, but the ultimate damage to Boeing Co. and Airbus SE production from the strike is likely fairly limited. This is the latest potential labor crisis in the industrial sector that’s been narrowly avoided after West Coast dockworkers finally came to a tentative agreement with the Pacific Maritime Association earlier this month, ending an almost yearlong stretch without a contract. All eyes now turn to United Parcel Service Inc., which is trying to reach an agreement with the Teamsters union. 3M Co.’s dividend aristocracy looks increasingly tenuous. The maker of Post-it notes and automotive adhesives agreed earlier this month to pay as much as $12.5 billion over 13 years to settle lawsuits from cities across the US that contend their drinking water supplies were polluted by per- and polyfluoroalkyl substances (PFAS) made by the company. CEO Mike Roman hailed the deal — which 3M says isn’t an admission of liability — as “an important step forward” for the company. He’s right: The uncertainty over 3M’s myriad legal headaches has been a chief driver of the more than $50 billion rout in the company’s stock price during Roman’s tenure. But this settlement will soak up a significant amount of 3M’s cash flow, particularly after the company spins off its health-care unit later this year. 3M now offers a $1.50-a-share quarterly dividend and last year paid out $3.4 billion to shareholders. If the health-care unit takes on a proportionate share of the dividend upon its separation, the remaining 3M businesses won’t have enough cash left over after the expected front-loaded water settlement payouts to support keeping the overall payout whole, Wolfe Research analyst Nigel Coe wrote in a note. And this is likely just the first of several multibillion-dollar settlements that 3M needs to put its legal challenges behind it. Numerous PFAS issues are still outstanding as are complaints from military veterans that 3M’s earplugs were defective and left them with hearing problems. Analysts estimate the company’s liability in the latter matter could be in the ballpark of $10 billion.
Circor International Inc., a pump and valve maker that traces its roots to 1860, is at the center of the year’s fiercest industrial bidding war. Circor rebuffed a takeover offer from rival Crane Co. in 2019 that a large number of its shareholders would have liked to see the company accept after years of lackluster performance, and it has officially been looking for a buyer since March 2022. Its growth outlook is fine but nothing special. And yet for some reason, this $1.1 billion company is suddenly a hot commodity. Circor agreed late Thursday to sell itself for $56 a share to funds managed by KKR & Co., which boosted its public offer for a second time after fellow private equity firm Arcline Investment Management LP made a competing bid. KKR is also offering a ticking fee of up to $1 a share in the event the transaction doesn’t close by Oct. 31; a $125 million reverse termination fee payable if antitrust regulators thwart the deal; and a full equity backstop on the purchase — meaning the buyout firm is prepared to follow through even if it can’t secure financing in volatile credit markets. The laundry list of sweeteners is reminiscent of what JetBlue had to dangle to wrest Spirit Airlines Inc. away from Frontier Group Holdings Inc., but that deal, if it can overcome a Justice Department lawsuit, is likely the last big merger for an already heavily consolidated airline industry.
It’s highly unusual for a private equity firm to go to such lengths, but that may be the way to get deals done right now. Far from bowing out of the pursuit of bite-sized industrial assets as some CEOs had hoped, the last-minute bidding war over Circor underscores private equity firms’ current preference to deploy their vast piles of cash on more digestible targets as rising interest rates and an uncertain economic outlook make larger purchases challenging. Whether or not you believe a reshoring “boom” is at hand, the rewiring of global supply chains and a revival of industrial policy around the world should give manufacturing businesses some degree of resiliency in a downturn, making them attractive targets for buyouts. Read more here.
Bonus Reading
- If chemical giants are warning of Lehman II, pay attention
- Road trip woes: EV chargers are still scarce at hotels, inns
- Waiting for the Godot Recession
- Deals are coming back in the car market
- The US military has a recruiting problem
- What happened to California’s budget surplus?
- Nestle dropping carbon neutral pledge for KitKats is a good thing
- Delta CEO says company can ride out “near-normal recession”
- Trucks are hard to electrify, even if you don’t get ghosted by Foxconn
- What’s at stake in the UPS labor talks
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What do you think? Is a US factory renaissance finally here?
Have thoughts or feedback? Anything I missed this week?
Also a programming note: There will be no Industrial Strength next Friday. Look for the next regular issue on July 14.
Email me at bsutherland7@bloomberg.net with your thoughts.
- Read more: Are U.S. Manufacturers Coming Home or Not?
- Read more: Industrial Order Slowdown Perplexes Investors
- Read more: Manufacturers Find There’s No Place Like Home