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Over 20 Years of Middle Market Investing | | | |
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MOMENTUM TOWARDS RESHORING
U.S. MANUFACTURING
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JULY 31, 2024 – Ironwood Capital has long been an investor in U.S.-based manufacturing businesses, positioning the niche as one of its core investment verticals. Ironwood invests in many types of U.S. headquartered manufacturing companies which supply critical components and products to regional, national, and global customers in diverse end markets. Since the firm’s inception, Ironwood has invested in 49 such manufacturing companies, 18 of which are active portfolio companies today. Recent examples include investments in Le Sueur, Inc., Caldera Manufacturing Group, and ICM Controls.
Spurred by labor efficiency, geopolitical tensions, governmental incentives, and numerous other drivers, overarching trends point towards increasing amounts of domestic manufacturing through the reshoring and nearshoring of traditionally offshore products. In 2020, U.S. reshoring outpaced foreign-direct investment for the first time since 2014 (Goldsberry, 2020). Additionally, in 2023, Mexico became America’s top trading partner, replacing China (Van den Bossche, 2024).
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Trends in Support of Reshoring | |
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The switch to reshoring is in large part due to the increasing labor and logistics costs associated with manufacturing in foreign countries; however, it is additionally triggered by the increasingly volatile geopolitical climate. Governmental tariffs and trade wars have increased the cost of doing business in China. We have recently seen Asian manufacturers purchasing facilities in the U.S. and abroad in order to circumvent rising supply chain costs. The gap between the cost of manufacturing in the U.S. versus manufacturing abroad is narrowing. Additionally, American companies increasingly look to protect themselves from intellectual property theft as a result of doing business abroad. Transferring knowledge overseas has real risks. This has been recently evidenced by physical raids of companies’ offices in China. Furthermore, Yemeni Houthi rebel attacks are increasing the cost of shipping insurance. The wars of today and tomorrow are threatening manufacturing operations and the natural resources needed to supply them. Additional reshoring drivers include foreign labor laws, issues with worker safety, product adulteration, and environmental violations. The above trends make reshoring a mainstay trend in American manufacturing.
In addition to concerns surrounding the current geopolitical climate, CEOs across the U.S. look to leverage reshoring and nearshoring for the purpose of margin expansion, seen through a survey of U.S. manufacturing executives and companies (all survey references herein are from the Kearney Survey published by Van den Bossche in 2024; link to survey provided below). Across all the CEOs surveyed, 63% cited increased sales as a reason for reshoring or nearshoring, 59% cited improved total landed cost, 58% cited improved fill rates, 52% cited reduced time to market, and 40% cited improved sustainability. Additionally, governmental incentives such as the CHIPS and Science Act and the Inflation Reduction Act continue to prompt executives to push for reshoring, with 50% of surveyed companies stating they have benefitted from these incentives.
These trends go hand-in-hand with the sustainable consumption, buy local, and buy American movements. American-made goods are naturally more environmentally sustainable due to decreased shipping and transportation times. Additionally, consumers often see purchasing from American manufacturers as more humane than purchasing from overseas manufacturers due to labor and working conditions regulations. As consumers look to be more ethical with what they purchase, buying from American manufacturers remains at the forefront of many consumers’ minds, evidenced by the recent outpouring of investment into American-made manufacturing.
Going forward, CEOs have positive intentions towards reshoring. 54% of CEOs surveyed who have previously partially reshored part of their operations plan to soon reshore more of their operations. Other motivators to reshore in the future include the desire to diversify their supply chain to reduce dependence on a single country or manufacturing source. Alongside this, 38% of the surveyed manufacturing executives would like to reshore or nearshore operations from mainland China, 25% would like to do so with India, and 14% would like to do so with Vietnam. In fact, this year, for the first year since 2013, countries such as Vietnam and Malaysia had decreasing exports to the U.S. These decreases were precipitated by Chinese tariffs and trade wars causing China’s share of Asian exports to the U.S. to decrease since 2018 (Van den Bossche, 2024).
For similar reasons, U.S. demand for nearshore manufacturing (Mexico and Canada) seems likely to increase. Companies may seek opportunities to manufacture in Mexico to diversify their supply chain and increase risk resiliency. Mexico has a well-established infrastructure and skilled labor force. Nearshoring would provide companies with shorter supply lines and improved security and reliability, while maintaining reduced costs through Mexico’s lower labor rates. Not only are manufacturing operations being reshored at greater rates, but entire supply chains are as well. The 2023 Kearney survey revealed that for the first time since the survey began in 2013, Mexico had surpassed China as an exporter to the U.S. Additionally, the trend of nearshoring to Canada continues to grow, with its imports to the U.S. increasing by $13 billion last year (Van den Bossche, 2024).
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Figure 1. A four-cylinder ‘V4’ engine block manufactured by Le Sueur, Inc., an Ironwood Capital portfolio company. | |
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Reshoring Considerations
Decision makers take many factors into consideration in addition to the price and quality of products with respect to the manufacturing of their goods. These include tariffs, political stability, IP protection, environmental regulations, and governmental incentives. Additionally, geographic proximity to customers and suppliers and labor availability can impact these decisions.
Challenges to reshoring include shortages in skilled workers. Many managers have indicated that it has become more difficult to find skilled labor, the causes of which are largely demographic, as more of these workers are retiring than are entering the workforce. However, Ironwood has seen through its own portfolio, increased investment into automated production to mitigate these labor challenges. Automation also further reduces the gap between the cost of foreign and domestic labor.
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Figure 2. A turbocharger manufactured by Caldera Manufacturing Group, Inc., an Ironwood Capital portfolio company. | |
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Ironwood's Experience with the Reshoring of U.S. Manufacturing
Ironwood’s investments in domestic manufacturing include Le Sueur, Inc., a Minnesota-based manufacturer supplying complex precision aluminum castings. Le Sueur operates out of two U.S.-based facilities and has recently seen customers looking to reshore their manufacturing operations.
Another Ironwood investment in this sector is Caldera Manufacturing Group, Inc., a manufacturing partner for customers seeking domestic metal fabrication services including process engineering, precision machining, fabrication, powder coating, and assembly services that serves an array of end markets including industrials, automotive, agricultural equipment, and construction. Due to rising labor costs in China and India as well as the Covid-era supply chain bottlenecks, Caldera’s strong presence in the U.S. positions it to take advantage of customers looking to reshore.
Furthermore, ICM Controls, Inc., a Syracuse, New York-based Ironwood portfolio company which manufactures a variety of control boards and similar internal electronics remains a strong choice for companies using electronic controls systems (ex. HVAC, recreational vehicle companies) that are looking to reshore their manufacturing operations. Increasing tensions in the Taiwan Strait are causing eroding trust in the ability of Taiwanese-based electronics manufacturers to remain conflict-free, leading companies to look to diversify their supply chain into less risky and more friendly locations via reshoring, nearshoring, and friendshoring.
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Figure 3. Controls manufactured at ICM Controls, Inc., an Ironwood Capital portfolio company. | |
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Conclusion
Overall, there are several drivers that support the continuing reshoring trends, including increasing labor dynamics, geopolitical tensions, governmental incentives, and numerous other drivers. During Ironwood’s 20+ years of junior capital investing, we have invested in 49 manufacturing companies. Ironwood looks to continue to support companies providing domestic manufacturing which are well positioned to reap the benefits of reshoring over the coming years.
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To learn more, please visit our website and reach out to one of our manufacturing leaders: | |
The information contained herein has been obtained from sources believed to be reliable, but the accuracy of such information cannot be guaranteed. Views expressed are as of the date provided. Ironwood is under no obligation to update this information or to advise on further developments relating to the investments discussed herein. References to a particular investment is not a recommendation to buy or sell such investments. The information contained in this document is prepared for general circulation and is circulated for general information only. Past performance is no guarantee of future results. Any investment contains risk including the risk of total loss. There is no assurance that the investment objectives will be achieved or successful. Please refer to the firm’s Form ADV 2A Brochure for more information about the firm, services and fees on file with the SEC, www.adviserinfo.sec.gov. Firm CRD #321642. You may also contact us at 860-409-2100 or visit our website for a complete list of investments at www.ironwoodcap.com. | | | | |
