Rebirth of the North American chemicals and materials market: Industrial reshoring

In preliminary findings for a study I am leading – “Total Reinvention of North America Manufacturing”– revealed that over $1 trillion of new manufacturing capacity investment can occur in North America (NA) over the next ten years, after an estimated $161 billion decline over the past 5 years for the industries surveyed (Figure 1, following text)[1]. This means that chemicals domestic demand can grow by 4.3% per year to 2032 – a big change from the -0.8 % per year over the previous ten years.?This is not driven by consumers spending more, but by consumers, suppliers and governments being exasperated with shortages, supply chain delays, supply security, and higher costs, which are forcing manufacturers to look near or on-shore for their next big investment.?

Companies like Lego, Stanley Black & Decker, Intel, GM, US Steel, Thermo Fisher Scientific, and First Solar are investing significantly to increase domestic capacity, enabled by the latest manufacturing technologies[2].

North America takes the lead over China in new manufacturing projects

Disruptive events and changing geographic risk caused NA manufacturers to rethink their next wave of investments - geographically and technologically. About 95% of manufacturing respondents to our (Accenture Research) survey say their organizations are planning to invest near-shore or on-shore.

World manufacturing investment has been shifting from China to primarily NA and other Asia (especially South Korea, India, and Taiwan) since early 2020, spurred by US tax incentives and tariff policies, followed by Covid supply chain disruptions, and increasing geopolitical risks. The risk profile of US import partners has also been increasing (Figure 2), as measured by credit default swaps.?

New investment into NA is primarily by local manufacturers, followed by Japan/South Korea/Taiwan[3] and Western Europe especially in the areas of semiconductors, auto parts, batteries, food, and other products.

The shift of manufacturing investment has been enabled by China’s wage costs rising by a factor of four since 2000 and the decline of automation costs by 60% in the same period. Low wages in Mexico and the abundance of natural resources in Canada and the US are also noteworthy NA competitive advantages.

Most NA manufacturers’ investment strategies are to serve the domestic market to avoid lost revenue opportunities and meet customer demand for quality domestic-made goods. Not only that, but over 90% indicated onshoring manufacturing is critical to the innovation of processes and new products.

Over the past four quarters ending 3Q 2022, new world manufacturing investment project announcements (by number) have been dominated by chemicals, batteries, and food manufacturing (Figure 3). Close behind are industrial equipment, pharmaceuticals/medical equipment, and mining/basic metals.?Much of this has to do with supply security and the energy transition, which will require chemicals, batteries, and metals.

Almost 40% of all new world manufacturing investment announced over the past year is targeted for NA (Figure 4), primarily in food manufacturing, followed by other industrial equipment and batteries. The construction of these facilities and the growth of many other industries will also boost chemicals and materials demand.

What about future investment projects?

According to our survey, NA B2B chemical consumption will have strong growth, led by the manufacturing of auto/truck parts, food, specialty chemicals, computers, and medical devices (Figure 5).?

Specialty chemicals are linked to other high growth markets, like the manufacture of motor vehicles (driven by greater electric vehicle investment), solar and wind power, and food, as well as the construction of all these facilities. Hydrogen, an industrial gas which can be large scale, is consider a specialty chemical in our study.

Our commodity chemicals survey participants included fertilizer and inorganic base chemicals as well as the large-scale gas-based chemicals manufacturers.?Commodity chemicals are a bit on the conservative side in their outlook, especially with some oversupply and an already large domestic base capacity with exports that can be diverted to serving domestic needs – perhaps for a higher value.

How can manufacturers be competitive in North America?

Along with the $1 trillion in new investment, potentially up to 7.2 million manufacturing jobs would be created.?This could bring with it an additional 25 million[4] indirect jobs, elsewhere in NA economy.??

NA has many advantages versus other regions of the world.?In our survey, we explored 29 high level location factors (and many additional subfactors) per industry.?Topping the list for selecting NA as an investment location are highly skilled or educated labor, electricity, basic raw materials, and fresh water (Figure 6).

Just having a strong resource base is not enough.?Digital technology is currently underutilized, representing a large opportunity for boosting manufacturing competitiveness. Currently, only 27% of NA manufacturers are using AI and machine learning extensively and only 10% of NA manufacturing labor is virtualized.?This represents a significant opportunity to increase efficiency.?

To make new investments competitive in NA, manufacturers will employ the latest technologies in robotics and automation to reduce costs by 6% (between 3% to 11%, depending on the segment) and employee numbers by an average of 14% (between 7% and 24%, depending on the segment) for a given output.?This increases efficiency to allow more capacity investment for greater output and employment. ??Employing “state of the art” technology can save NA manufacturing $324 billion in operating costs (based on the projected 2032 asset levels).

Additive manufacturing (3D printing) will also gain steam over the next ten years, as it moves from printing single material parts to multi-material systems, saving on assembly and material costs in certain applications. Only about 11% of manufacturers are now using 3D printing for more than 10% of parts. This is expected to expand to 52% of manufacturers by 2027 and 69% by 2032.?In fact, 18% of manufacturers expect to 3D print greater than 50% of parts by 2032.

Leading segments expected to use 3D printing by 2032 include semiconductors, electric motors, HVAC equipment, wind power blades and turbines, storage batteries for electric vehicles, medical devices, household furniture and auto/truck parts.

North America as an industrial alliance

NA has a consuming population of almost 500 million and about 20% of the world’s manufacturing base[5]. ?While the US has the largest labor pool in NA, Canada and Mexico account for nearly half (46%) of manufacturing employment.

Mexico will represent a key area of growth (one-third of new employment), particularly in automobile and food manufacturing. This high level of economic activity may reduce immigration pressures and create income for the Mexican economy, making it a stronger industrial partner for the US.?Going forward, investments may shift further towards Mexico, more than currently projected, based on available labor relative to the US.

Imperatives for manufacturers

About 43% of survey respondents indicated that their organizations will struggle to move manufacturing to near/on-shore locations in the near-term.?Aside from “staying close to customers”, manufacturers must take a holistic and cooperative approach to fostering regional manufacturing, with some specific approaches below:

Foster a North America manufacturing alliance. NA must be viewed as a wider, interdependent, manufacturing cluster of the US, Canada, and Mexico – orchestrated, commercially and governmentally, with the broader intent of secure, efficient supply chains serving the NA population. This includes nurturing a cooperative, entrepreneurial, and innovative environment as well.

Readjust global networks.?The world is changing as manufacturing goes local, worldwide.?That does not mean the world will be less “globalized”.?Inter-regional exchange will be more about investment funds than about merchandise imports/exports. ?That is, companies will invest to supply local markets.?For instance, Merck recently opened a new secondary packaging facility and broke ground on an inhaler facility in Singapore to serve customers across the Asia Pacific region[6].

Companies must be prudent in where they place regional investments for their respective local markets.?For instance, in Asia, strong manufacturing investment growth is currently apparent in India, South Korea and Taiwan.?Companies must still be selective about new emerging economies that may have high risk or alliances with high-risk countries.

Solve for labor. The biggest choke point is labor.?About 47% of survey respondents agreed that the greatest hurdle their organizations face to near/on-shoring is solving workforce challenges.?They also indicated that automation and robotics technicians, which are one of the largest employment disciplines in manufacturing (at about 10% according to our survey), are the hardest to fill.

While 94% of manufacturers are willing to upskill workers, they should participate in worker development programs early on, especially near current/future factory sites and utilize apprenticeship programs.?They should also engage with state level governments on tax, training, and other incentives beneficial to workers (including indirect employment) and the greater community.

Adopt new technology aggressively. Companies must view this as an opportunity to innovate new game-changing technologies and processes for competitive advantage. About 53% of respondents indicated that large scale digital transformation in their operations will enable them to near-shore or on-shore. The use of AI, machine learning, virtual factory working, robotics/automation and other technologies will be needed to build competitive assets in NA.

?Notes:

Opinions are my own and not the necessarily the views of my employer

About the Accenture Research study:

Approximately 900 NA supply chain and production executives in manufacturing and 210 in retail were surveyed on reshoring topics from July to September 2022. This covered 32 industries.?In addition, we interviewed several dozen manufacturing executives in July and August 2022.?

Global new manufacturing expansion announcements were analyzed from 1Q 2010 to 3Q 2022, based on the GlobalData Construction projects database. This includes only publicly announced projects over $25 million in value.

Cross-dataset calculations were performed utilizing multiple sources, such as Oxford Economics, the US Bureau of Economic Analysis, the US Bureau of Labor Statistics, S&P Capital IQ, and the IHS Global Trade Atlas.

Footnotes:

[1] Represents about 75% of manufacturing. Missing are construction, energy, utilities, refining, and some smaller segments. Any declines in other segments may offset the projection.

[2] https://www.lego.com/en-us/aboutus/news/2022/june/the-lego-group-to-build-us-1-billion-carbon-neutral-run-factory-in-virginia-usa

?https://mexicoindustry.com/noticia/stanley-black--decker-llega-a-nuevo-leon

?https://investor.firstsolar.com/news/press-release-details/2021/First-Solar-Breaks-Ground-on-new-680m-3.3-GW-Ohio-Manufacturing-Facility/

https://www.intel.com/content/www/us/en/corporate/usa-chipmaking/home.html

https://www.freep.com/story/money/cars/general-motors/2022/01/25/gm-investment-michigan-lansing-orion-electric-vehicles/6619862001/

?https://www.industryweek.com/leadership/growth-strategies/article/21213870/us-steel-to-build-new-steel-mill-in-osceola-arkansas

https://endpts.com/thermo-fisher-opens-site-in-utah-as-part-of-single-use-spending-spree/

[3] Japan, South Korea, and Taiwan are treated as a group here.

[4] Based on the Manufacturers Alliance for Productivity and Innovation factor of 3.4 jobs created for every 1 manufacturing job in the US, applied to all NA.

[5] As a share of value-added output in 2022, per Oxford Economics data

[6] https://www.merck.com/stories/breaking-new-ground-in-singapore/